INVESTMENT SCREENING ON NATIONAL

SECURITY GROUNDS AND INTERNATIONAL LAW: .

THE CASE OF JAPAN

Tomoko Ishikawa*

Abstract: Against the background of rising security concerns over foreign

direct investment (FDI), several major economies including the European
Union (EU) have begun to tighten FDI screening processes. At the same
time, such close scrutiny of FDIs has to be compatible with their investment
liberalisation commitments under the General Agreement on Trade in
Services (GATS) and international investment agreements (IIAs). Taking
Japan as a case study, this article examines the efforts made to avoid conflicts
between FDI screening and investment liberalisation obligations. In this
regard, security exception clauses in the GATS and IIAs are of particular
relevance. This article discusses the controversies over the justiciability and
the standard of review of the so-called self-judging security exception clauses,
and proposes incorporating a precautionary approach in interpretation of
these clauses. This article argues that the current legal framework lacks a
cooperation mechanism to address international security issues, as a result
of which states rely heavily on security exception clauses for the protection
of “national” security interests against security threats, generating the risk
that they may use this clause to pursue protectionist goals. This warrants the
establishment of a global cooperation mechanism to deal with the tension
between economic globalisation and security issues.

Keywords: Foreign direct investment screening; international investment

agreements; security exception clauses; GATS Article XIV bis; self-judging
wording; Foreign Exchange and Foreign Trade Act of Japan.

I. Introduction

A. Liberalisation of FDI and security concerns

In the period following the General Agreement on Trade in Services (GATS) and
the North American Free Trade Agreement (NAFTA), many countries took an

* Tomoko Ishikawa, LLM (Cantab), PhD (UCL). Associate Professor, Graduate School of International
Development, Nagoya University, Japan. mane@tkc.att.ne.jp. This work was supported by JSPS
KAKENHI Grant Number JP19KK0029. I thank Professor Yarik Kryvoi, Director of the Investment
Treaty Forum, British Institute of International and Comparative Law, London, Lance Baynham of City
Law School, City, University of London, and the anonymous reviewer for their indispensable feedback
and comments. Any remaining errors are mine.
[(2020) 7:1 JICL 71–98]
72 Journal of International and Comparative Law

active interest in investment liberalisation. The GATS encompasses an element

of investment liberalisation through mode 3 of trade in services, which concerns.
the provision of services through commercial establishment.1 The investment
chapter of the NAFTA was one of the first international investment agreements
(IIAs) that extended its scope from traditional investment protection to investment
liberalisation, and this approach has been followed by many subsequent IIAs.
Consequently, an increasing number of IIAs provide obligations concerning not
only traditional investment protection but also liberalisation of investment flows,
including national treatment and most favoured nation treatment obligations that
cover the phase of the establishment of foreign investment (investment liberalisation
commitments).2
Foreign direct invetment (FDI) plays a significant role in economic
development3 and generates greater tax revenue, creates employment opportunities
and enhances skills and technology development.4 At the same time, foreign
investors have been increasingly investing in essential infrastructure industries that
were once in the public domain5 and in sensitive technology areas. This has led to
a growing recognition of potentially negative impacts of FDI on public interest in
the recipient state.6
An emerging and intensifying concern about FDIs relates to security threats
associated with foreign investment. The need for restricting FDI on public order

1 Tomer Broude, “Investment and Trade: the ‘Lottie and Lisa’ of International Economic Law?” in Roberto
Echandi and Pierre Sauvé (eds), Prospects in International Investment Law and Policy (Cambridge:
Cambridge University Press, 2013) pp.139, 147. See also Mitsuo Matsushita, Thomas J Schoenbaum,
Petros C Mavroidis and Michael Hahn, The World Trade Organization: Law, Practice, and Policy
(Oxford: Oxford University Press, 3rd ed., 2015) p.481.
2 UNCTAD, “International Investment Arrangements: Trends and Emerging Issues, UNCATD Series
on International Investment Policies for Development” (2006) UNCTAD/ITE/IIT/2005/11, 25–28;
UNCTAD, “Press Release: Investment Liberalization and Promotion Feature Prominently in New
Investment Policies” (2016) UNCTAD/PRESS/PR/2016/015.
3 Foreign direct investments (FDI) is the largest external source of capital to developing countries, second
only to personal remittance. Organisation for Economic Co-operation and Development (OECD),
“Non-ODA Flows to Developing Countries: Foreign Direct Investment”, available at http://www.oecd.
org/dac/stats/beyond-oda-fdi.htm (visited 3 February 2020).
4 See, eg, Peter Kusek and Andrea Silva, “What Matters to Investors in Developing Countries: Findings
from the Global Investment Competitiveness Survey” (2017) Global Investment Competitiveness Report
2017/2018: Foreign Investor Perspectives and Policy Implications 19, 31; Marcel Kordos and Sergej
Vojtovic, “Transnational Corporations in the Global World Economic Environment” (2016) 230 Procedia
– Social and Behavioral Sciences 150, 153.
5 Michael K Addo, “Human Rights and Transnational Corporations — an Introduction” in Michael K Addo
(ed), Human Rights Standards and the Responsibility of Transnational Corporations (The Hague: Kluwer
Law International, 1999) pp.3, 7.
6 See, eg, Nicola Jägers, Corporate Human Rights Obligations: In Search of Accountability (Intersentia,
2002) p.9; Todd Weiler, “Balancing Human Rights and Investor Protection: A New Approach for a
Different Legal Order” (2004) 27 Boston College International and Comparative Law Review (2004)
429, 433; Julien Cazala, “Le respect des droits de l’homme comme justification de la violation d’un
traite d’investissement” in Walid Ben Hamida, Frédérique Coulée (dir) Convergences et contradictions
du droit des investissements et des droits de l’homme : une approche contentieuse (Paris: Pedone, 2017)
pp.333, 334.
 Investment Screening on National Security Grounds in Japan 73

and security grounds was recognised in the 1961 OECD Code of Liberalisation of
Capital Movements (art.3),7 and rapidly growing Chinese investments in strategic.
technology firms, including several high-profile cases,8 have drawn renewed
public attention to security risks of foreign investment.9 This has led to a shift in
FDI policies in several major economies, including the EU, as examined in the
following section.

B. Policy shift towards tightening FDI review process

In tandem with several countries adopting trade restricting measures (allegedly)
based on security grounds,10 major economies including the EU have begun to
tighten FDI review processes.
In the United States, the Foreign Investment Risk Review Modernization
Act (FIRRMA)11 became law in August 2018. FIRRMA reforms the investment
review process conducted by the Committee on Foreign Investment in the United
States (CFIUS) on national security grounds.12 In particular, FIRRMA expands
the scope of transactions that CFIUS has authority to review, which is to be
determined by the CFIUS regulations implementing FIRRMA.13 It also introduced
a requirement for mandatory declarations for certain “covered transactions”, ie,
transactions where a foreign government is acquiring a “substantial interest”

7 OECD, “OECD Codes of Liberlaisation of Capital Movements and of Current Invisible Operations”,
available at www.oecd.org/investment/codes.htm (the current version of the texts) (visited 3
February 2020).
8 Eg, takeover of German robotics company KUKA in 2016 and the failed attempt to takeover chip
equipment maker Aixtron. See Frank Bickenbach and Wan-Hsin Liu, “Chinese Direct Investment in
Europe — Challenges for EU FDI Policy” (2018) 19(4) CESifo Forum, ifo Institut — LeibnizInstitut für
Wirtschaftsforschung an der Universität München, 15, 17.
9 Michael Brown and Pavneet Singh, “China’s Technology Transfer Strategy: How Chinese Investments
in Emerging Technology Enable a Strategic Competitor to Access the Crown Jewels of U.S. Innovation”
(2018) Defense Innovation Unit Experimental, available at https://admin.govexec.com/media/diux_
chinatechnologytransferstudy_jan_2018_(1).pdf (visited 3 February 2020) 7–10.
10 See Tania Voon, “The Security Exception in WTO Law: Entering a New Era” (2019) 113 AJIL Unbound
45, 46–47. In July 2019, the Japanese Government announced that it would apply new licensing policies
and procedures on the export and transfer of semiconductor-related raw materials and related technologies
to South Korea on the ground, inter alia, that “certain sensitive items have been exported to the ROK with
inadequate management by companies” (Ministry of Economy, Trade and Industry (METI)), “Update
of METI’s licensing policies and procedures on exports of controlled items to the Republic of Korea”,
available at https://www.meti.go.jp/english/press/2019/0701_001.html (visited 3 February 2020).
11 “Title XVII — Review of Foregin Investments and Export Controls”, available at https://home.treasury.
gov/sites/default/files/2018-08/The-Foreign-Investment-Risk-Review-Modernization-Act-of-2018-
FIRRMA_0.pdf (visited 3 February 2020).
12 For the functions of Committee on Foreign Investment in the United States (CFIUS), see Congressional
Research Service, “The Committee on Foreign Investment in the United States” (updated 16 December
2019), available at https://fas.org/sgp/crs/natsec/IF10177.pdf (visited 3 February 2020). Foreign
Investment Risk Review Modernization Act (FIRRMA) states that CFIUS “should continue to review
transactions for the purpose of protecting national security and should not consider issues of national
interest absent a national security nexus” (s.1702(b)(9)).
13 See in particular s.1703 of the FIRRMA.
74 Journal of International and Comparative Law

in specified types of US businesses, subject also to the CFIUS regulations.14

In October 2018, CFIUS issued interim regulations to conduct a pilot programme.
to implement FIRRMA provisions, which became effective on 10 November
2018 and remained in effect until 12 February 2020.15 The pilot programme
covered 27 industries where “certain strategically motivated foreign investment
could pose a threat to U.S. technological superiority and national security”.16
The proposed CFIUS regulations to implement FIRRMA17 were issued on 17
September 2019, and became effective on 13 February 2020.18 Specifically, the
new regulations determine the scope of CFIUS’s jurisdiction under FIRRMA to
include covered investments19 by a foreign person in an unaffiliated US business
that “produces, designs, tests, manufactures, fabricates, or develops one or more
critical technologies”,20 “owns, operates, manufactures, supplies, or services
critical infrastructure”21 and “maintains or collects sensitive personal data of
U.S. citizens that may be exploited in a manner that threatens to harm national
security”.22

14 Section 1706 of the FIRRMA.

15 Department of the Treasury, Office of Investment Security, “Determination and Temporary Provisions
Pertaining to a Pilot Program to Review Certain Transactions Involving Foreign Persons and Critical
Technologies” (11 October 2018) 31 CFR Part 801 RIN 1505–AC61, available at https://home.treasury.
gov/system/files/206/FR-2018-22182_1786904.pdf (visited 3 February 2020); US Department of
the Treasury, “Press Releases: Treasury Releases Interim Regulations for FIRRMA Pilot Program”
(10 October 2018), available at https://www.millerchevalier.com/sites/default/files/resources/General_
Alerts/2018-10-10_FIRRMA-Pilot-Program_Treasury-Announcement.pdf (visited 3 February 2020); US
Department of the Treasury, “CFIUS Regulations”, available at https://home.treasury.gov/policy-issues/
international/the-committee-on-foreign-investment-in-the-united-states-cfius/cfius-regulations(visited 3
February 2020).
16 US Department of the Treasury, Office of Public Affairs, “Fact Sheet: Interim Regulations for FIRRMA
Pilot Program” (10 October 2018), available at https://home.treasury.gov/system/files/206/Fact-Sheet-
FIRRMA-Pilot-Program.pdf (visited 3 February 2020). The list of the industries is available at https://
www.whitecase.com/publications/alert/cfius-firrma-pilot-program-mandates-notification-certain-
critical-technology (visited 3 February 2020).
17 Office of Investment Security, Department of the Treasury, “Provisions Pertaining to Certain Investments
in the United States by Foreign Persons” (11 September 2019) (Proposed CFIUS Regulations), available
at https://home.treasury.gov/system/files/206/Proposed-FIRRMA-Regulations-Part-800.pdf (visited 3
February 2020).
18 US Department of the Treasury, “CFIUS Regulations” (n.15).
19 “Covered investment” is explained as:

an investment by a foreign person in certain types of U.S. businesses that affords the foreign
person certain access to information in the possession of, rights in, or involvement in the
decisionmaking of certain U.S. businesses but that does not afford the foreign person control over
the U.S. business”.

Proposed CFIUS Regulations (n.17) 13 and defined specifically in s.800.211 of the Proposed
CFIUS Regulations.
20 Proposed CFIUS Regulations (n.17) 15.
21 Ibid., 16.
22 Ibid., 19.
 Investment Screening on National Security Grounds in Japan 75

In the United Kingdom, s.23 of the Enterprise Act 2002 was amended in 2018
by the Enterprise Act 2002 (Turnover Test) (Amendment) Order 2018, which came.
into effect on 11 June 2018.23 The government identified security concerns as the
reason for being behind this amendment:

[Since 2002] [t]here have been considerable technological advances,

developments in local, national and global economic structures, and
changes in the national security threat facing the UK … The businesses
that are driving the development of innovative goods and technological
advances are not necessarily those with large turnovers … The Government
wishes to ensure that it has sufficient powers to address national security
threats that may arise from mergers involving these businesses.24

Under the Act, as amended, the jurisdiction threshold for the Competition and
Markets Authority to review transactions on competition grounds — which is a
condition for the government to intervene on national security grounds — was
lowered in relation to changes in control over “relevant enterprises”.25 “Relevant
enterprises” are defined by the Enterprise Act 2002 (Share of Supply Test)
(Amendment) Order 201826 as enterprises the activities of which consist in or
include certain activities concerning restricted goods,27 computer processing units,
quantum computing or simulation, quantum imaging, sensing, timing or navigation,
quantum communications and quantum resistant cryptography.28
One month after the entry into force of this amendment, the UK Government
published a security and investment white paper setting out specific proposals

23 “The Enterprise Act 2002 (Turnover Test) (Amendment) Order 2018”, available at http://www.legislation.
gov.uk/uksi/2018/593/made (visited 3 February 2020). Department for Business, Energy and Industrial
Strategy, Competition and Markets Authority, and Richard Harrington MP, “Press Release: New Merger
and Takeover Rules Come Into Force” (11 June 2018), available at https://www.gov.uk/government/
news/new-merger-and-takeover-rules-come-into-force (visited 3 February 2020).
24 Department for Business, Energy and Industrial Strategy, “Enterprise Act 2002: Guidance on Changes
to the Turnover and Share of Supply Tests for Mergers” (11 June 2018), available at https://www.gov.
uk/government/publications/enterprise-act-2002-guidance-on-changes-to-the-turnover-and-share-of-
supply-tests-for-mergers (visited 3 February 2020).
25 “Relevant enterprises” are defined as goods and services that can be used for military or military and
civilian use, computing hardware and quantum technologies. The Secretary of State for Business, Energy
and Industrial Strategy, “National Security and Investment A Consultation on Proposed Legislative
Reforms” (July 2018), available at https://www.gov.uk/government/consultations/national-security-and-
investment-proposed-reforms (visited 3 February 2020), para.48.
26 “The Enterprise Act 2002 (Turnover Test) (Amendment) Order 2018” (n.23).
27 “Restricted goods” are defined as:

goods, software or information the export or transfer of which is controlled by virtue of their
being specified in the relevant export control legislation but excluding any goods, software or
information which are controlled only to the extent that they are prohibited from being exported
or transferred to one country only. (art.4(2) of the Enterprise Act 2002 (Share of Supply Test)
(Amendment) Order 2018).
28 Article 4(1) of the Enterprise Act 2002 (Share of Supply Test) (Amendment) Order 2018.
76 Journal of International and Comparative Law

for a stand-alone FDI screening system, reforming the government’s power “to
protect national security from hostile actors using ownership of, or influence over,.
businesses and assets to harm the country”.29
In Germany, the Foreign Trade and Payments Ordinance
(Außenwirtschaftsverordnung, “AWV”)30 was amended in July 2017 (by the
9th Ordinance) and December 2018 (by the 12th Ordinance) in order to further
strengthen the screening of FDI of non-EU-investors in German companies.
The amendments include, inter alia, the extension of the review period from
two to four months; expansion of the scope of business areas that are subject
to review to include particularly security-sensitive business sectors (2017
amendment);31 and lowering of the threshold for FDI to be reviewable from
a (direct or indirect) acquisition of at least 25 per cent of the voting rights
of a German company to 10 per cent with respect to “particularly sensitive
areas, in particular in the case of critical infrastructure, other security-related
infrastructure and defence-related companies”.32 It is reported that what
prompted these amendments was the growing concern over “the acquisition
of high-tech companies and critical infrastructure by [primarily government-
related] Chinese investors”.33
In France, Décret n° 2018-1057 du 29 novembre 2018 relatif aux investissements
étrangers soumis à autorisation préalable,34 which entered into force on 1
January 2019, expanded the list of business sectors that are subject to screening,
specifically, “enterprises in the aerospace and civil protection sectors or those who
conduct R&D activities concerning cybersecurity, artificial intelligence, robotics,
additive manufacturing, semi-conductors, as well as the hosts of certain sensitive

29 Secretary of State for Business, Energy and Industrial Strategy, “National Security and Investment:
A Consultation on Proposed Legislative Reforms” (24 July 2018), available at https://www.gov.uk/
government/consultations/national-security-and-investment-proposed-reforms (visited 3 February
2020). It is observed that “[i]t is unlikely that this (the enactment of white paper proposals) will happen
before 2020”. Global Legal Group, “The International Comparative Legal Studies and International
Business Reports”, available at https://iclg.com/practice-areas/merger-control-laws-and-regulations/
united-kingdom (visited 3 February 2020).
30 “Foreign Trade and Payments Ordinance”, available at https://www.gesetze-im-internet.de/englisch_
awv/index.html (visited 3 February 2020).
31 Federal Ministry for Economic Affairs and Energy, Press Release, Minister Zypries, “Fair Competition
and Better Protection in Corporate Acquisitions” (7 December 2017), available at https://www.bmwi.
de/Redaktion/EN/Pressemitteilungen/2017/20170712-zypries-besserer-schutz-bei-firmenuebernahmen.
html (visited 3 February 2020).
32 Federal Ministry for Economic Affairs and Energy, Press Release, “Strengthening Our National Security
via Improved Investment Screening” (19 December 2018), available at https://www.bmwi.de/Redaktion/
EN/Pressemitteilungen/2018/20181219-staerkung-unserer-nationalen-sicherheit-durch-verbesserte-
investitionspruefung.html (visited 3 February 2020).
33 Akin Gump, “Germany Tightens Rules on Foreign Direct Investment” (3 January 2019), available
at https://www.akingump.com/images/content/1/0/v2/100285/International-Trade-Alert-Germany-
Tightens-Rules-on-Foreign-Di.pdf (visited 3 February 2020).
34 https://www.legifrance.gouv.fr/eli/decret/2018/11/29/ECOT1816712D/jo/texte (visited 3 February 2020).
 Investment Screening on National Security Grounds in Japan 77

data”.35 The security rationale for this amendment was explained by the Minister
of Economy and Finances as the protection from hostile acquisitions of French.
companies that engage in “ Research & Development activities in certain future
technological sectors which present real defense or public security implications”.36
In the EU, a new EU-wide cooperation mechanism with respect to inward FDI
screening was established by Regulation (EU) 2019/452 (the EU FDI screening
regulation) which entered into force on 11 April 2019.37 Under this mechanism,
member states other than the FDI recipient state may make comments, and the
European Commission may issue an opinion, with respect to the investment, in
particular on the ground that such an investment could affect security or public
order.38 While the Commission’s opinion is not legally binding, the recipient member
state should take “utmost account” of the opinion and provide an explanation to
the Commission if it does not follow the opinion, in line with its duty of sincere
cooperation under art.4(3) of the Treaty on European Union (Maastricht Treaty).39
Behind this development lay two concerns. First, that within the EU single market
security threats to one member state may affect several or all of the member
states. Second, that the EU’s decentralised and fragmented system of inward
FDI screening may not adequately address the potential threat of FDI inflows to
security or public order.40 Regulation (EU) 2019/452 identifies the factors that
may be considered when determining whether a particular investment is likely to
affect security or public order. They include the potential effects of a proposed FDI
on critical infrastructure, critical technologies and dual-use items, and supply of
critical inputs, including energy or raw materials, as well as food security.41
It is clear that in all of the cases described above, security concerns, including
protection of cutting-edge technologies against theft and the prevention of
foreign control over strategic infrastructure assets,42 are behind the FDI rule

35 Ministere de l’Economie et des Finances, La Direction générale du Trésor, “Les investissements étrangers
en France” (le 12 Septembre 2019), available at https://www.tresor.economie.gouv.fr/Articles/2019/09/12/
les-investissements-etrangers-en-france (visited 29 December 2019) (translation by author).
36 Le portail de l’Économie, des Finances, de l’Action et des Comptes publics “La France renforce
son dispositif de contrôle des investissements étrangers dans les entreprises sensibles” (le 4 janvier
2019), available at https://www.economie.gouv.fr/dispositif-controle-investissements-etrangers-dans-
entreprises-renforce (visited 3 February 2020) (translation by author).
37 Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing
a framework for the screening of FDI into the Union, OJ L 79I, 21.3.2019, 1–14.
38 Articles 4, 6, 7 and 8 Regulation (EU) 2019/452 (n.37).
39 Recitals 17 and 19 Regulation (EU) 2019/452 (n.37).
40 European Parliament Think Tank, “EU Framework for FDI Screening” (17 April 2019), available at http://
www.europarl.europa.eu/thinktank/en/document.html?reference=EPRS_BRI(2018)614667 (visited 3
February 2020).
41 Article 4 Regulation (EU) 2019/452 (n.37).
42 Strategic infrastructure assets include “energy production and supply, water supply, transport,
telecommunication, mineral resources or media”: UNCTAD, Investment Policy Monitor “National
Security-Related Screening Mechanisms for Foreign Investment: An Analysis of Recent Policy
Developments” (December 2019), available at https://unctad.org/en/PublicationsLibrary/
diaepcbinf2019d7_en.pdf (visited 3 February 2020) 2.
78 Journal of International and Comparative Law

reforms, and the concept of national security has been employed to justify this
policy shift. As will be discussed in Section II below, Japan is no exception to.
this trend.

C. Tension between FDI screening and investment liberalisation

commitments under international law
All the countries identified above, together with the EU, are subject to investment
liberalisation obligatious under the GATS and IIAs they have concluded. Since
the conclusion of the Japan–Singapore Economic Partnership Agreement (EPA) in
2002, Japan has undertaken investment liberalisation commitments under 15 EPAs
with investment chapters43 and ten Bilateral Investment Treaties (collectively,
“liberalisation model IIAs”).
The trend of tightening FDI screening processes, together with the intensifying
trade war and continuous decline of global FDI flows,44 strongly suggests that
the tension between economic globalisation and security issues will continue
to increase. Undoubtedly, this situation can be addressed only through political
initiatives to create a mechanism for dialogue and cooperation. This is made
difficult by the current backlash against economic globalisation, together with the
political tension observed throughout the world (as discussed in the Conclusion).
Meanwhile, an examination of the legal consequences of this policy shift in the
current framework of international law is required. This examination needs to take
account of the rapidly changing circumstances surrounding security issues, as well
as the current political climate — in particular the backlash against globalisation
and the spread of protectionism.
Against this background, this article examines the international law
implications of the tightening of FDI review processes on security grounds,
taking Japan as an example. The aim is to address potential conflicts that may
arise and provide guidance for future domestic and international policymaking.
Regarding the FDI review mechanism, the analysis focuses on the substantial
amendment in 2017 and 2019 of the Foreign Exchange and Foreign Trade Act
(FEFTA), which is at the centre of Japan’s inward FDI screening due to its provision
for cross-sectoral regulations on inward FDI (Section II). It then examines the
relationship between Japan’s new FDI screening mechanism and its international
investment liberalisation commitments, focusing on the efforts made to avoid
possible inconsistencies between them. In this regard, the provisions in Japanese
IIAs on “reservations” with respect to non-conforming measures and security
exception clauses (collectively, “carving-out clauses”) are especially relevant
(Section III).

43 The EU-Japan Economic Partnership Agreement (EPA), which entered into force on 1 February 2019,
does not include an investment chapter.
44 UNCTAD, “World Investment Report 2019” (2019) UNCTAD/WIR/2019 at x.
 Investment Screening on National Security Grounds in Japan 79

Whether or not specific screening proceedings under domestic law meet

each of the requirements included in these provisions needs to be assessed on a.
case-by-case basis and is, therefore, outside the scope of this article. Rather, this
article examines the approach to interpreting these carving-out clauses.
In particular, this article focuses on the controversial question of the
interpretation of the “self-judging” wording adopted in all the security
exception clauses in Japanese liberalisation model IIAs,45 as well as art.XIV
bis of the GATS (Section IV). This question is examined against the backdrop
of two competing factors: (i) There is the urgent need to address new types
of security threats brought about by rapid technological and social changes,
including military threats, espionage and terrorism risks, which cannot be
controlled by traditional, state-centred mechanisms;46 (ii) We are witnessing
a historic backlash against globalisation and a spread of protectionism in the
political arena, which raise the risk that states may use the concept of national
security to pursue populist protectionist goals while avoiding their international
obligations. This article proposes incorporating a precautionary approach
in the assessment of self-judging security exception clauses and analyses
the question of what such a precautionary approach specifically requires in
this context.

II. FEFTA and Its Amendments

A. FDI screening under FEFTA

As we have seen immediately above, it is FEFTA47 which provides cross-sectoral
regulations on inward FDI, while individual laws governing certain business
sectors also provide restrictions. After the Second World War and up until quite
recently, the history of the Japanese FDI screening mechanism was one of gradual
investment liberalisation. Before 1992, inward FDI screening under the FEFTA
was based on the principle that all inward FDI had to go through advance screening,

45 Japan–Singapore EPA (art.4), Japan–Malaysia EPA (art.10), Japan–Thailand EPA (art.10), Japan–
Indonesia EPA (art.11), Japan–Brunei EPA (art.8), Japan–India EPA (art.11), Japan–Mongolia EPA
(art.1.10), Japan–Australia EPA (art.1.10), Japan–Mexico EPA (art.169), Japan–Chile EPA (art.193),
Japan–Peru EPA (art.11), Japan–Switzerland EPA (art.95), CPTPP (art.29), Japan–South Korea BIT
(Article 16), Japan–Vietnam BIT (Article 15), Japan–Cambodia BIT (art.18), Japan–Laos BIT (art.18),
Japan–Uzbekistan BIT (art.18), Japan–Myanmar BIT (art.19(1)), Japan–Peru BIT (art.19), Japan–
Colombia BIT (art.15), Japan–Kuwait BIT (art.17) and Japan–Mozambique BIT (art.18). Japan–
Argentina BIT (not yet in force) (art.16). Although not a liberalisation model, the Energy Charter
Treaty also includes a “self-judging” security exception clause. Its scope of application is limited
(art.24(3)).
46 UNCTAD, “The Protection of National Security in IIAs” UNCTAD/DIAE/IA/2008/5 (2009) 7–8.
47 https://elaws.e-gov.go.jp/search/elawsSearch/elaws_search/lsg0500/detail?lawId=324AC0000000228
(visited 3 February 2020) (in Japanese).
80 Journal of International and Comparative Law

but the 1991 amendment of the law replaced this principle with the principle of
post-reporting,48 under which a foreign investor must report to the Minister of.
Finance and the minister having jurisdiction over the business (collectively, the
relevant ministers), the content and the time of making the inward FDI.49 However,
even under this principle, an FDI going into certain business sectors and activities
(collectively “businesses”) is subject to the obligation of advance notification and
to screening by the relevant ministers.50 These businesses include, inter alia, those
“(a) which are likely to impair national security, disturb the maintenance of public
order or hinder the protection of public safety;51 and (b) which Japan has reserved
pursuant to the provision of Article 2-b [of the OECD Code of Liberalisation of
Capital Movements]”,52 and they are specified by the ministerial order and public
notice of the cabinet office. Where the relevant inward FDI is subject to advance
screening, those who give notice to the government cannot make an inward FDI
pertaining to the notification for a specified period of time. If the relevant ministers
conclude that there are certain circumstances relating to a notified inward FDI,
they may recommend, and eventually order, that the person who submitted the
notification modifies, or even discontinues, the proposed investment.53 These
circumstances include that the proposed FDI “is likely to cause any of the
following situations: (a) national security is impaired, the maintenance of public
order is disturbed, or the protection of public safety is hindered; or (b) significant
adverse effect is brought to the smooth management of the Japanese economy”.54
Having said that, there has only been one case, dating back to 2008, in which the
relevant ministers recommended the discontinuance of a proposed investment by

48 For the history of gradual investment liberalisation in Japan’s FDI screening mechanism, see Koji Miura,
“Japan’s Industrial Policy after the Second World War: On the Application of the Foreign Exchange
and Foreign Trade Control Law and the Foreign Investment Law” (1990) 15(1) Hitotsubashi Kenkyu
(Hitotsubashi University) 75–96 (in Japanese, title translation by author); Rikako Watai, “Development
of Foreign Direct Investment Regulation in Japan” (2018) 91(1) Hogaku Kenkyu: Journal of Law,
Politics, and Sociology (Keio University) 97–120 (in Japanese); Misao Tatsuta, “Restrictions on
Foreign Investment: Developments in Japanese Law” (1981) 3 University of Pennsylvania Journal of
International Law 357.
49 Article 55-5(1) of the Foreign Exchange and Foreign Trade Act (FEFTA).
50 Article 27(1) of the FEFTA.
51 Article 3 of the OECD Code of Liberalisation of Capital Movements provides that:

The provisions of this Code shall not prevent a Member from taking action which it considers
necessary for: i) the maintenance of public order or the protection of public health, morals and
safety; ii) the protection of its essential security interests; iii) the fulfilment of its obligations
relating to international peace and security.
52 Article 3(2) of the Cabinet Order.
53 Article 27(5) of the FEFTA.
54 It is therefore observed that, insofar as the businesses that are subject to the requirements of advance
notification and screening are concerned, the screening mechanism is effectively equivalent to requiring
an approval, in the sense that the relevant inward FDI cannot be made if it does not pass the screening by
the relevant ministers. Keiko Sakurai, “Gyouseihou Kouza 37: Gaishi Kisei” (2008) 47(10) Jichi Jitsumu
Seminar 11 (in Japanese).
 Investment Screening on National Security Grounds in Japan 81

a foreign investor by applying FEFTA,55 which confirms Japan’s generous attitude

towards investment liberalisation. .

B. Amendments to FEFTA to tighten FDI screening

Despite Japan’s hitherto generally favourable approach to investment liberalisation,
in 2007, against the background of the rising threat of terrorism, the ministerial
orders and the public notice which supplement FEFTA were amended so as to
expand the scope of the businesses subject to the requirement of advance notification
to include certain manufacturing and software activities dealing with goods and
technologies that have the potential for military use.56
In 2017, a more fundamental reform aimed at tightening inward FDI screening
took place,57 this time also involving the amendment of FEFTA itself. The
amendments included, inter alia, the following:

(a) the scope of “foreign investors” was expanded to include certain foreign
persons who make a “specified acquisition”;58
(b) the Finance Minister and other relevant ministers became authorised to
order a foreign investor to sell shares in Japanese companies or deal with
them in a certain way when the investor has acquired them in breach of
regulations on direct inward investments or specified acquisitions, such as
the failure of advance notification;59 and
(c) the scope of businesses that are subject to the requirements of advance
notification and screening was substantially expanded to include
manufacturing and other business sectors which have technologies related
to specific designs and manufacturing that may be diverted to military use.60

55 The case concerns a proposed investment by a Cayman investor in a Japanese wholesale power company
which was planning to construct a nuclear power plant with the a nuclear fuel recycling system. For a
summary and assessment of this case, see Noboru Kashiwagi, “Foreign Direct Investment, Public Order
and National Security: Lesson from the Case of J Power” (2009) 6 University of Tokyo Journal of Law
and Politics 45. It should be noted that, in 2018, CFIUS disapproved the sale of the shares of Italian
architectural unit Permasteelisa held by Japanese building supplies maker Lixil to Chinese construction
group Grandland Holdings on the basis of national security. Subsequently, Lixil and Grandland Holdings
terminated the share purchase agreement. Lixil Press Release, “Agreement to Terminate the Share
Purchase Agreement”, available at https://www.lixil.com/jp/news/pdf/181127_pisa_J.pdf (visited 3
February 2020) (in Japanese, title translation by author).
56 See Yuki Kanamoto, “Review of Regulations on Inward FDI” (28 September 2007) Daiwa
Institute of Research Report, available at https://www.dir.co.jp/report/research/law-research/law-
others/07092801law-others.pdf (visited 3 February 2020) (in Japanese, title translation by author).
57 The amendments entered into force on 1 October 2017.
58 “Specified acquisition” is defined as the transfer of shares in an unlisted Japanese company from one
foreign investor to another (art.27(3) of the FEFTA).
59 Article 29 of the FEFTA.
60 The business sectors include manufacturing, designing and other technical services concerning the items
and materials specified in the Export Trade Control Order and Foreign Exchange Order, such as certain
machine tools, power semiconductors and carbon fibre. The relevant public notice is available at http://
www.meti.go.jp/press/2017/07/20170714002/20170714002.html (visited 3 February 2020) (in Japanese).
82 Journal of International and Comparative Law

The background to and the reasons for the 2017 amendment were explained by the
Minister of Economy, Trade and Industry in the following terms: .

Cutting-edge technologies of private origin such as advanced

communication technologies, new high-tech materials and precision
machining have come to be used for defence equipment, and to affect the
global security strategy. Also, the security environment surrounding Japan,
including the progress in nuclear and missile development by North Korea
and the increasing tension in the South China Sea, has become increasingly
severe. In order to cope with such changes in the situation, this proposed
amendment bill seeks to apply stricter management of national security-
sensitive technologies and to strengthen the effectiveness of regulations
concerning import and export.61

In August 2017, the Ministry of Finance and other ministries issued a press release
in which they identified the elements they would consider when screening FDI
under the amended FEFTA. Among these, the elements that apply both to inward
FDI and specified acquisitions are as follows:

(a) Maintenance of the production and technology infrastructure for

security-related industries (weapons, aircraft, space development and
nuclear power).
(b) Prevention of leakage of sensitive technologies important for security
purposes.
(c) Attributes, financial plans and past investment behaviour/performance of
foreign investors and affiliated companies, etc.62

These strongly suggest that behind the 2017 amendment was the need felt by the
government to protect sensitive technologies concerning security against theft.

61 Statement by the Minister of Economy, Trade and Industry at the House of Representatives Committee
on Economy, Trade and Industry on 14 April 2017, available at http://www.sangiin.go.jp/japanese/joho1/
kousei/gian/193/pdf/k031930411930.pdf (visited 3 February 2020) (in Japanese, translation by author).
As of October 2018, the Ministry of Defence identified the following as the “security environment
surrounding Japan”: Recent Missile & Nuclear Development of North Korea; China’s Activities in
East China Sea, Pacific Ocean, and Sea of Japan; China’s Activities in the South China Sea (China’s
development activities on the features and trends in related countries); and Development of Russian
Armed Forces in the Vicinity of Japan, see http://www.mod.go.jp/e/d_act/sec_env/index.html (visited 3
February 2020).
62 In addition, they identify the following elements that apply only to inward FDI: maintenance of public
activities etc., during peacetime and in time of emergency; maintenance of public safety; regarding the
industries reserved under art.2 (b) of OECD Code, considerations from the viewpoint of the smooth
operation of the Japanese economy. Joint press release by the Ministry of Finance and 11 other
government agencies/ministers, “Factors to Be Considered in the Examination Process” (2 August
2017), available at https://www.mof.go.jp/international_policy/gaitame_kawase/gaitame/recent_revised/
gaitamehou_20170802.htm (visited 3 February 2020).
 Investment Screening on National Security Grounds in Japan 83

In 2019, the rules on investment screening under FEFTA were further

tightened by the announcement of public notices,63 enactment of orders64 and the.
amendedment of FEFTA. The bill to amend FEFTA was adopted by the House of
Councilors on 22 November 201965 and the amendment is expected to enter into
force within six months after the date of promulgation of the amendment
(29 November 2019) (2019 FEFTA amendment).66 Public notices which were
published on 27 May 2019 expanded the scope of businesses that are subject to
the requirements of advance notification and screening. Twenty types of business
concerning manufacturing of information processing equipment/parts and
software related to information processing, as well as information and
communication services, were added to the list.67 On 26 September 2019,
amendment orders expanded the concept of inward FDI that is subject to
notification68 to include the following activities: (a) acquiring 10 per cent or more
of the total voting rights of listed companies, etc.; (b) exercising proxy voting
rights held by other shareholders and holding 10 per cent or more of the total
voting rights of listed companies, etc.; (c) obtaining consent for the joint exercise
of voting rights between foreign investors after acquisition of voting rights of
listed companies, etc.69 Last, the amended FEFTA tightens inward FDI screening
in particular by: (a) reducing the threshold for acquiring shares of listed companies
subject to prior notification (from 10 to 1 per cent); (b) adding actions that could
exert influence on management after the acquisition of shares (eg, taking office as
an officer or tabling important businesses proposals, etc.) to the list; (c) expanding
the definition of inward FDI to include: (i) agreement on matters that have a
significant effect on the management of the company and (ii) transfer of a business
from a resident corporation, succession of a business through absorption-type splits

63 https://kanpou.npb.go.jp/old/20190527/20190527g00019/20190527g000190000f.html (visited 3
February 2020) (in Japanese).
64 Cabinet Order to amend Cabinet Order on Inward Direct Investment, etc., available at https://kanpou.npb.
go.jp/old/20190926/20190926h00099/20190926h000990000f.html and Order to amend Order on Inward
Direct Investment, etc., available at https://kanpou.npb.go.jp/old/20190926/20190926g00121/20190926
g001210000f.html (collectively, amendment orders) (both in Japanese) (visited 3 February 2020).
65 https://www.sangiin.go.jp/japanese/joho1/kousei/gian/200/meisai/m200080200013.htm (visited 3
February 2020) (in Japanese).
66 http://www.cistec.or.jp/service/zdata_gaitame_kaisei2019/kaisetu_2019kaiseian.pdf (visited 3 February
2020) (in Japanese).
67 Joint press release by the Ministry of Finance, Ministry of Economy, Trade and Industry and Ministry of
Internal Affairs and Communications (27 May 2019), available at https://www.mof.go.jp/international_
policy/gaitame_kawase/gaitame/recent_revised/20190527.htm (visited 3 February 2020) (in Japanese).
The amendment entered into force on 1 August 2019. The list of added businesses is available athttps://
www.mof.go.jp/international_policy/gaitame_kawase/gaitame/recent_revised/kokuji.pdf (visited 3
February 2020) (in Japanese).
68 As noted before, prior to this amendment an inward FDI that was subject to prior notification was the
acquisition of 10 per cent or more of the total number of issued shares of Japanese companies in a specific
business category.
69 See https://www.mof.go.jp/international_policy/gaitame_kawase/gaitame/recent_revised/gaitamehou_
20190926_1.pdf (visited 3 February 2020) (in Japanese).
84 Journal of International and Comparative Law

and mergers; and (d) expansion of the definition of “foreign investors” to include
investment limited partnerships, etc., in which the total amount of investment by.
non-resident individuals, etc., is 50/100 or more of the total amount. At the same
time, as a means to further promote inward FDI “conducive to sound economic
growth”,70 the amended FEFTA law introduces a system for exemption of portfolio
investment from the requirement of a prior notification of inward FDI.71
As background to the 2019 FEFTA amendment was a recognition of the
development in Europe and the United States of a tightening of inward FDI
screening after the 2017 FEFTA amendment. On 8 October 2019, the Subcommittee
on Security Export Control Policy under the Trade Committee of the Ministry
of Economy Trade and Industry’s Industrial Structure Council issued an interim
report on the amendment of FEFTA.72 Specifically, the interim report observes that
“[t]he unsystematic incorporation of China into the capitalist system … has
produced concerns over state-led economic policies including ‘military-civil
fusion’, protection of state-owned enterprises and wrongful acquisition of
intellectual property rights”.73 The interim report then describes recent movements
towards strengthening inward FDI screening in the EU, Germany, France, the
United Kingdom, and the United States, and concludes that:

If the level of inward FDI management in Japan is lower than others and
thus Japan becomes a ‘loophole’ … it would not only raise security concerns
through the outflow of technology, but also deter foreign companies from
building business relationships with Japanese companies. In order to avoid
this situation, it is necessary to review Japan’s inward FDI management as
soon as possible.74

It should be noted that it also emphasises the importance of “cooperation with

countries that share values and philosophy with Japan” and the promotion of
discussion on this matter in an international framework.75

70 Ministry of Finance, “Amendment Bill of the Foreign Exchange and Foreign Trade Act” (21 October
2019), available at https://www.mof.go.jp/english/international_policy/fdi/20191021.html (visited 3
February 2020).
71 For an overview of the amendment, see Center for Information on Security Trade Control, “On the
2019 Bill to Amend FEFTA”, available at http://www.cistec.or.jp/service/zdata_gaitame_kaisei2019/
kaisetu_2019kaiseian.pdf (visited 3 February 2020) (in Japanese); Yuki Kanemoto, “Revision of
Foreign Exchange Law Regarding Inward Direct Investment” (Daiwa Institute of Research Legal Tax
and Research Paper, 28 November 2019), available at https://www.dir.co.jp/english/research/report/law-
research/20191128_021158.pdf (visited 3 February 2020). For the exemption from the prior-notification
requirement, see https://www.mof.go.jp/english/international_policy/fdi/kanrenshiryou_191021.pdf
(visited 3 February 2020).
72 https://www.meti.go.jp/shingikai/sankoshin/tsusho_boeki/anzen_hosho/pdf/20191008001_01.pdf
(visited 3 February 2020) (in Japanese) (“interim report”)
73 Interim report (n.72) 1.
74 Ibid., 7–8.
75 Ibid., 3.
 Investment Screening on National Security Grounds in Japan 85

III. Conformity of FEFTA with Japan’s

International Commitments .

A. Japan’s international commitments concerning

investment liberalisation
Few would disagree that protecting security interests is the most fundamental
power and responsibility of any sovereign state and that, as a matter of policy,
“security interests at times override economic considerations”.76 However, under
international law, many countries including Japan have the obligation to apply
their investment screening mechanism in conformity with their international law
obligations under the GATS and their liberalisation model IIAs. Indeed, efforts have
been made to avoid possible conflicts between domestic rules on FDI screening
and international investment liberalisation commitments. In the case of Japan, the
FEFTA itself provides that its application is subject to the limitation that inward
FDI and specified acquisitions that are subject to advance screening are confined
to those which are free from obligations under the GATS and the OECD Code
of Liberalisation of Capital Movements,77 thereby avoiding inconsistency between
FEFTA and the GATS. However, such limitations on the application of FEFTA
do not apply to IIAs. Therefore, it is left to the mechanism under these IIAs to
address any inconsistency between domestic restrictive measures and international
liberalisation commitments.

B. Exclusion of non-conforming measures in IIAs

One method of avoiding conflicts between domestic restrictive measures and
liberalisation commitments under Japanese liberalisation model IIAs is to
exclude the former from the scope of the latter by either: (a) making liberalisation
commitments to the extent specified in the Schedule of Commitments (the positive
list approach); or (b) by excluding non-conforming measures and/or business
sectors identified in the Annexes (lists of non-conforming measures) from the
scope of investment liberalisation obligations (the negative list approach). Unlike
the GATS which adopts the positive list approach, all the Japanese liberalisation
model IIAs except for the Japan–Thailand EPA adopt the negative list approach.78
Under this approach, in the course of treaty negotiations, the government tries,
to the maximum extent possible, to identify existing non-conforming measures,
business sectors and activities that need to be excluded from treaty obligations, in

76 United States Congress Joint Economic Committee, Subcommittee on Foreign Economic Policy, “A
Foreign Economic Policy for the 1970’s, Part 7” (1971) US Government Printing Office 1336. See also
Michael J Hahn, “Vital Interests and the Law of GATT: An Analysis of GATT’s Security Exception”
(1991) 12 Michigan Journal of International Law 558, 562.
77 Articles 27(3)(i) and 28(3)(i) of the FEFTA. See also arts.3(6) and 4(6) of the Cabinet Order.
78 See, eg, Annexes I and II of the CPTPP.
86 Journal of International and Comparative Law

order to retain consistency between their domestic law and the provisions of the
treaty being signed.79 .
However, when the non-conforming measures are subject to so-called ratchet
obligations, under which an amendment to any non-conforming measure must
not decrease the conformity of the measure with the relevant obligations as they
existed immediately before the amendment, the government may not adopt new
or more restrictive measures for the future.80 Therefore, when a more restrictive
advance screening of inward investment under the amended FEFTA falls within the
category of non-conforming measures with ratchet obligations, it would amount
to a violation of Japanese investment liberalisation obligations. That is, unless the
measure is excluded from the obligations by the application of exception clauses,
as discussed below.

C. Security exception clauses

Another mechanism to carve out non-conforming measures from the scope of treaty
obligations is to apply exception clauses. As FEFTA requires advance screening for
inward investments in business sectors “which are likely to impair national security,
disturb the maintenance of public order or hinder the protection of public safety”,
both general and security exceptions may be relevant.81 However, given that the
major reason behind the FEFTA amendments was strengthening the protection of
security interests, the Japanese Government is likely to invoke security exception
clauses to justify future investment screening under FEFTA that goes beyond the
lists of non-conforming measures.
It should be noted here that invocation of security exception clauses is
distinguished from the invocation of the customary international law defence of
necessity: the state of necessity is a circumstance precluding the wrongfulness
of an otherwise wrongful act.82 While a security exception clause prevents the

79 Joseph C Lemire v Ukraine, ICSID Case No ARB/06/18, Award (28 March 2011) [49]:

Previous notification of limiting laws and regulations is not simply a formality: it is a fundamental
requirement in order to guarantee that investors enjoy legal certainty, and that States cannot
invoke the exception ex post facto, surprising the investor’s good faith.
80 Eg, art.9.12 of the CPTPP provides that:

“Article 9.4 (National Treatment), Article 9.5 (Most-Favoured-Nation Treatment), Article 9.10
(Performance Requirements) and Article 9.11 (Senior Management and Boards of Directors) shall
not apply to: (a) any existing non-conforming measure that is maintained by a Party … (c) an
amendment to any non-conforming measure referred to in subparagraph (a), to the extent that the
amendment does not decrease the conformity of the measure, as it existed immediately before the
amendment” with these obligations.
81 Japanese liberalisation model international investment agreements (IIAs) typically provide general
exception clauses modelled on General Agreement on Trade in Services (GATS) XIV, which include
measures “necessary to protect public morals or to maintain public order”.
82 Article 25 (then art.33) of the International Law Commission (ILC) Articles on State Responsibility was
recognised to “reflect customary international law” (ICJ, Case Concerning the Gabčíkovo-Nagymaros
Project, Hungary v Slovakia, Judgment 25 September 1997, ICJ Rep 92 [52]).
 Investment Screening on National Security Grounds in Japan 87

violation by carving-out measures from the scope of the obligations, defence of

necessity exempts the state from responsibility after a violation of international.
law has actually occurred. The wording of art.XIV bis of the GATS clearly entails
a carve-out by providing that: “Nothing in this Agreement shall be construed: …
to prevent any Member from taking any action which it considers necessary for the
protection of its essential security interests …”. 83 All the security exception clauses
in Japanese liberalisation-type IIAs adopt similar “carve-out” language.
The annulment committee in CMS v Argentina clearly distinguished the two in
the following terms:

Article XI specifies the conditions under which the Treaty may be applied,
whereas art.25 is drafted in a negative way: it excludes the application
of the state of necessity on the merits, unless certain stringent conditions
are met. Moreover, art.XI is a threshold requirement: if it applies, the
substantive obligations under the Treaty do not apply. By contrast, art.25
is an excuse which is only relevant once it has been decided that there has
otherwise been a breach of those substantive obligations.84

Therefore, security exception clauses and the defence of necessity have different
scopes of application. They are in a sequential relationship in the sense that the
defence of necessity comes into operation only where the state has not relied
on a security exception to prevent the occurrence of a violation of international
obligations.85 In other words, customary international law remains applicable
unless the relevant treaty contracts out of these rules.86 Therefore, even when a
measure constitutes a violation of investment liberalisation obligations, it is, at
least theoretically, possible to preclude the responsibility of the violating state by
invoking the defence of necessity. This is confirmed by the following statement
by the ICJ in the Nicaragua case. The court, in rejecting the argument by the
United States that customary international law was subsumed and supervened by

83 Rüdiger Wolfrum, Peter-Tobias Stoll and Clemens Feinäugle (eds), WTO: Trade in Services (Martinus
Nijhoff, 2008) p.331.
84 CMS Gas Transmission Co v Republic of Argentina, ICSID Case No. ARB/01/8, Decision of the ad hoc
Committee on the Application for Annulment of the Argentine Republic (15 September 2007) (CMS
decision on annulment) [129]. See also William W Burke-White and Andreas von Staden, “Investment
Protection in Extraordinary Times: The Interpretation and Application of Non-Precluded Measures
Provisions in Bilateral Investment Treaties” (2007) 48(2) Virginia Journal of International Law 307, 322;
Jürgen Kurtz, “Adjudging the Exceptional at International Law: Security, Public Order and Financial
Crisis” (2010) 59(2) International and Comparative Law Quarterly 325, 359–362; CC/Devas (Mauritius)
Ltd., Devas Employees Mauritius Private Ltd and Telecom Devas Mauritius Ltd v India, PCA Case No.
2013-09, Award on Jurisdiction and Merits (25 July 2016) [254]; UNCTAD (2009) (n.46) 36.
85 CMS decision on annulment (n.84) [134].
86 In the WTO context, see Panel Report, Korea-Government Procurement, WT/DS/163, adopted 1 May
2000 [7.9]. For the discussions on the extent to which customary international law applies in WTO
dispute settlement, see Isabelle Van Damme, Treaty Interpretation by the WTO Appellate Body (Oxford:
Oxford University Press, 2009) pp.13–21. See also UNCTAD (2009) (n.46) 36–37.
88 Journal of International and Comparative Law

the United Nations Charter, stated that “customary international law continues to
exist and to apply, separately from international treaty law, even where the two.
categories of law have an identical content”.87
It would be extremely difficult to successfully invoke the customary
international law defence of necessity in the context of entry restrictions for inward
investment, even when the restrictions are based on security reasons. This is
because ICJ case law as well as the International Law Commission (ILC) Articles
on State Responsibility recognise strict limitations on the application of the state of
necessity defence, including that the course of action taken must be the “only way
for the State to safeguard an essential interest against a grave and imminent peril”.88
If the measure did not meet the requirements under the security exception clause, it
would be highly unlikely that it would meet these even stricter conditions.
Therefore, for a state implementing a restrictive screening measure, it is of
crucial importance that the measure falls within the scope of a security exception
clause in the relevant IIA. In this regard, all the security exception clauses in
Japanese liberalisation model IIAs adopt “self-judging” wording concerning,
inter alia, the question of whether a measure is necessary to protect essential
security interests.89 A “self-judging” security exception clause is a provision in an
international instrument by which a state reserves the right to be free or derogate
from obligations under the instrument, where “it considers” certain security and
public order issues exist.90 This is contrasted with the “non-self-judging” wording
of security exception clauses in the US–Argentina BIT (art.XI) and Mauritius–
India BIT (art.11(3)) that have been discussed in investment arbitration cases.91
How self-judging wording affects the interpretation of security exception clauses
remains a much debated question.

87 ICJ, Military and Paramilitary Activities in and against Nicaragua, Nicaragua v United States of
America, Judgment (merits) 27 June 1986, 14 ICJ Rep 15 [179]. See also Burke-White and von Staden,
“Investment Protection in Extraordinary Times: The Interpretation and Application of Non-Precluded
Measures Provisions in Bilateral Investment Treaties” (n.84) 324.
88 Article 25 of the UN General Assembly, Responsibility of States for internationally wrongful acts:
resolution/adopted by the General Assembly (8 January 2008) A/RES/62/61.
89 For example, art.29.2 of the CPTPP provides that:

Nothing in this Agreement shall be construed to: (a) require a Party to furnish or allow access
to any information the disclosure of which it determines to be contrary to its essential security
interests; or (b) preclude a Party from applying measures that it considers necessary for the
fulfilment of its obligations with respect to the maintenance or restoration of international peace
or security, or the protection of its own essential security interests.
90 See Robyn Briese and Stephan Schill, “Djibouti v France: Self-judging Clauses before the International
Court of Justice” (2010) 10 Melbourne Journal of International Law 308, 308.
91 CMS v Argentina (n.84), LG&E Energy Corp, LG&E Capital Corp, and LG&E International, Inc v
Argentine Republic, ICSID Case No. ARB/02/1, Award (25 July 2007); Enron Corp and Ponderosa
Assets, L.P. v Argentine Republic, ICSID Case No. ARB/01/3, Award (22 May 2007); Sempra Energy
International v Argentine Republic, ICSID Case No. ARB/02/16, Award (28 September 2007);
Continental Casualty Co v Argentine Republic, ICSID Case No. ARB/03/9, Award (5 September 2008);
El Paso Energy International Co v Argentine Republic, ICSID Case No. ARB/03/15, Award (31 October
2011) and CC/Devas v India (n.84).
 Investment Screening on National Security Grounds in Japan 89

IV. Interpretration of “Self-Judging” Wording in

Security Exception Clauses .

A. Justiciability of self-judging security exception clauses

In relation to the interpretation of “self-judging” security exception clauses,
discussion has centred primarily around art.XXI of the General Agreement on
Tariffs and Trade (GATT).92 Certainly, World Trade Organization (WTO) law and
investment law are different in various ways, including in terms of their development
and the substantive obligations they encompass.93 However, art.XXI of the GATT
and security exception clauses in IIAs concern the same issue of whether or not, and
to what extent, the state’s sovereign power to control the admission of goods and
investment on security grounds may be restricted in light of the state’s liberalisation
obligations. Therefore, the WTO case law concerning GATT XXI in this context
provides guidance for the interpretation of security exception clauses in the IIAs.
Kurtz notes the existence of “cross-fertilisation of jurisprudence” between the two
regimes.94 For example, in Continental Casualty v Argentina, the tribunal relied
on GATT and WTO case law on art.XX of the GATT (general exception clause) in
interpreting the exception clause in the US–Argentina BIT (art.XI).95
There are three broad approaches to interpreting art.XXI of the GATT. At one
extreme, there is the view that a self-judging provision is subject to full substantive
review by adjudicatory bodies.96 At the other extreme, there is the position that
self-judging wording excludes the justiciability of security exception clauses.97
On its face, this latter position appears to find support in the ICJ’s findings in the
Nicaragua case, in which the security exception clause in the US–Nicaragua Treaty

92 See, eg, Roger P Alford, “The Self-Judging WTO Security Exception” (2011) Utah Law Review 697;
Donald N Zillman, “Energy Trade and the National Security Exception to the GATT” (1994) 12 Journal
of Energy & Natural Resources Law 117; David Knoll, “The Impact of Security Concerns Upon
International Economic Law” (1984) 11 Syracuse Journal of International Law and Commerce 567;
Hahn, “Vital Interests and the Law of GATT: An Analysis of GATT’s Security Exception” (n.76).
93 See Nicholas DiMascio and Joost Pauwelyn, “Nondiscrimination in Trade and Investment Treaties:
Worlds Apart or Two Sides of the Same Coin?” (2008) 102 AJIL 48, 51–53; Broude, “Investment and
Trade: the ‘Lottie and Lisa’ of International Economic Law?” (n.1) pp.139–155. See also Panel Report,
Canada-Administration of the Foreign Investment Review Act, GATT Doc L/5504–30S/140, adopted 7
February 1984 [5.9]: “The purpose of Article III:4 is not to protect the interests of the foreign investor but
to ensure that goods originating in any other contracting party benefit from treatment no less favourable
than domestic goods”.
94 Jürgen Kurtz, The WTO and International Investment Law: Converging Systems (Cambridge: Cambridge
University Press, 2016) p.18.
95 Continental Casualty Co v Argentine Republic (n.91) [192–195].
96 Russia — Measures Concerning Traffic in Transit, WT/DS/512, European Union Third Party Written
Submission (8 November 2017) para.28: “[the self-judging wording is] in reality of very limited
relevance, if any, for the interpretation today of Article XXI of GATT 1994”.
97 Eg, Russia — Measures Concerning Traffic in Transit, WT/DS/512, Third Party Executive Summary of
the United States of America (27 February 2018) part.I (Invocation of art.XXI is Self-judging and Not
Subject to Review).
90 Journal of International and Comparative Law

of Friendship, Commerce and Navigation (FCN) was discussed. The clause did not
include self-judging wording; that is, it provided, inter alia, that “the present Treaty.
shall not preclude the application of measures … necessary to protect its essential
security interests”. The Court contrasted this wording with art.XXI of the GATT
1947, and stated:

This provision of GATT (Article XXI), contemplating exceptions to the

normal implementation of the General Agreement, stipulates that the
Agreement is not to be construed to prevent any contracting party from
taking any action which it “considers necessary for the protection of its
essential security interests”, in such fields as nuclear fission, arms, etc. The
1956 treaty, on the contrary, speaks simply of “necessary” measures, not of
those considered by a party to be such.98

This might be interpreted as suggesting that self-judging wording precludes the

Court’s jurisdiction.99
The Court’s approach in the Nicaragua case was followed in a series of cases
concerning different paragraphs of art.XX of the 1955 US–Iran Treaty of Amity,
Economic Relations, and Consular Rights.100 Article XX likewise did not include
self-judging wording, but the United States claimed that this clause precluded the
Court’s jurisdiction in respect of any claims predicated on measures set out in this
clause. In Oil Platforms, the Court rejected this argument by endorsing the Court’s
reasoning in Nicaragua, and concluded that “Article XX, paragraph 1 (d), does not
restrict its jurisdiction in the present case, but is confined to affording the Parties
a possible defence on the merits to be used should the occasion arise”.101 This
position was upheld in two subsequent cases.102
Certain Questions of Mutual Assistance in Criminal Matters103 concerned,
although in a different context from economic treaties, a “self-judging” provision

98 Military and Paramilitary Activities in and Against Nicaragua, Judgment (merits) (n.87) [222].
99 Stephan Schill and Robyn Briese, “‘If the State Considers’: Self-judging Clauses in International
Dispute Settlement” (2009) 13 Max Planck Yearbook of United Nations Law 61, 113.
100 ICJ, Oil Platforms, Islamic Republic of Iran v United States of America, Judgment 12 December 1996
(preliminary objection) ICJ Rep (II) 811 [para.1(d)]; ICJ, Alleged violations of the 1955 Treaty of Amity,
Economic Relations, and Consular Rights, Islamic Republic of Iran v United States of America, Order 3
October 2018 (request for the indication of provisional measures) [para.1(c)].
101 Oil Platforms (judgment on preliminary objection) (n.100) [20].
102 Alleged Violations of the 1955 Treaty of Amity (order on request for provisional measures) (n.100)
paras.41–42; ICJ, Certain Iranian Assets, Islamic Republic of Iran v United States of America, Judgment
13 February 2019 (preliminary objections) [45–47]. In the latter case, the United States sought
to distinguish subparagrah (c) from subparagraph (d), but the Court also rejected this argument by
stating that; “there are no relevant grounds on which to distinguish it from Article XX, paragraph 1,
subparagraph (d)” [46].
103 ICJ, Certain Questions of Mutual Assistance in Criminal Matters, Djibouti v France, Judgment 4 June
2008, ICJ Rep 177.
 Investment Screening on National Security Grounds in Japan 91

relating to the refusal of a request for mutual assistance in criminal matters.104 The
Court observed as follows: .

While it is correct … that the terms of Article 2 provide a State to which a

request for assistance has been made with a very considerable discretion,
this exercise of discretion is still subject to the obligation of good faith
codified in Article 26 of the 1969 Vienna Convention on the Law of
Treaties.105

This statement by the Court suggests a third approach, which lies between the
two approaches discussed above. According to this interpretation, self-judging
security exception clauses fall under the general obligation of a state to carry out its
commitments in good faith (art.26 of the Vienna Convention on the Law of Treaties
(VCLT)), and the good faith standard is subject to judicial review.
The above approach was adopted by a WTO panel in the Russia-Transit
case. This case was the first dispute in which a WTO dispute settlement panel
was asked to interpret art.XXI of the GATT 1994 (or the equivalent provisions in
the GATS and the Agreement on Trade-Related Aspects of Intellectual Property
Rights (TRIPS Agreement)).106 The panel concluded that it had jurisdiction to
review Russia’s invocation of art.XXI(b)(iii). The panel held that, even if the self-
judging wording of art.XXI(b) extended to the question of whether a measure is
necessary to protect essential security interests (see discussion below), it did not
extend to the remaining provisions, ie, the determination of the circumstances in
each subparagraph, the latter of which is subject to objective judicial review.107
It should be noted, however, that this interpretation does not apply to other
security exception clauses which have different formats.108 Of more relevance
for this type of self-judging clause is the panel’s assessment of the question of
whether the self-judging wording qualifies not only the determination of the
necessity of the security measures but also the determination of the invoking

104 Art. 2(c) of the Convention on Mutual Assistance in Criminal Matters between France and Djibouti of
27 September 1986 provides that: “the requested State may refuse a request for mutual assistance if it
considers that execution of the request is likely to prejudice [the] sovereignty, . . . security, . . . ordre
public or other . . . essential interests [of France]”.
105 Ibid., [145].
106 Panel Report, Russia — Measures Concerning Traffic in Transit, WT/DS/512, adopted 5 April 2019
(Russia-Transit Panel Report). It should be noted that the panel dismissed the relevance of the Nicaragua
and Oil Platforms cases on the ground that the security exception clauses invoked in these cases lacked
the self-judging wording (fn152).
107 See in particular ibid., [7.101]. For the same approach, see Dapo Akande and Sope Williams,
“International Adjudication on National Security Issues: What Role for the WTO?” (2002–2003) 43
Virginia Journal of International Law 365, 399–400.
108 See Michael D Nolan and Frederic G Sourgens, “The Limits of Discretion? Self-Judging Emergency
Clauses in International Investment Agreements” in Karl Sauvant (ed), Yearbook of International
Investment Law and Policy (Oxford: Oxford University Press, 2011) pp.362, 403 (on art.22.2 of the
2006 United States–Peru TPA).
92 Journal of International and Comparative Law

member’s essential security interests.109 The panel concluded that, while it is

in general left to member states to define what they consider to be essential.
security interests:

this does not mean that a Member is free to elevate any concern to that
of an “essential security interest”. Rather, the discretion of a Member to
designate particular concerns as ‘essential security interests’ is limited by
its obligation to interpret and apply Article XXI(b)(iii) of the GATT 1994
in good faith.110

The panel went on to hold that under the good faith obligation, the invoking member
must “articulate the essential security interests said to arise from the emergency
in international relations sufficiently enough to demonstrate their veracity”.111
This strongly suggests that the panel considered that the good faith requirement
makes the determination of “essential security interests” of an invoking member
subject to judicial review, even in the absence of the “objective” conditions set out
in art.XXI(b)(iii). The panel specified the content of the good faith obligation by
stating that:

[the good faith obligation] is crystallized in demanding that the measures

at issue meet a minimum requirement of plausibility in relation to the
proffered essential security interests, ie, that they are not implausible as
measures protective of these interests.112

Certain Questions of Mutual Assistance in Criminal Matters judgment and the

Russia-Transit panel report both support the justiciability of self-judging security
exception clauses on the ground of the good faith obligation under art.26 of the
VCLT. This approach, which is widely supported by scholars,113 is most appropriate
in the context of today’s rapidly changing security environment, for the following
reasons: (i) In line with societal developments, the concept of national security
has changed from its traditional meaning of “protecting territorial boundaries

109 Russia-Transit Panel Report (n.106) [7.128].

110 Ibid., [7.132].
111 Ibid., [7.134].
112 Ibid., [7.138].
113 Van den Bossche, Peter and Werner Zdouc, The Law and Policy of the World Trade Organization:
Text, Cases and Materials (Cambridge: Cambridge University Press, 4th ed., 2017) p.618ff; Matsushita,
Schoenbaum, Mavroidis and Hahn, The World Trade Organization: Law, Practice, and Policy (n.1)
p.550; Wolfrum, Stoll and Feinäugle, WTO: Trade in Services (n.83); Schill and Briese, “‘If the State
Considers’: Self-judging Clauses in International Dispute Settlement” (n.99); Nolan and Sourgens, “The
Limits of Discretion? Self-Judging Emergency Clauses in International Investment Agreements” (n.108);
Burke-White and von Staden, “Investment Protection in Extraordinary Times: The Interpretation and
Application of Non-Precluded Measures Provisions in Bilateral Investment Treaties” (n.84).
 Investment Screening on National Security Grounds in Japan 93

with — and from — uniformed troops”114 to include a variety of non-military

security concerns that are equally regarded as essential, such as the protection.
from the threat of nuclear contamination, severe economic crises and attempted
foreign control of domestic strategic industries; (ii) Technological advancement
has brought, and is bringing, new types of threats that were neither known nor
foreseeable at the time of the conclusion of IIAs (see below). As a result, the
concept of national security has dramatically expanded and become increasingly
ambiguous; and (iii) There is a rising backlash against globalisation and a spread of
protectionism in the global political arena.
These make it extremely difficult to draw a line between protectionism and the
legitimate protection of security interests. This suggests that there is an increasing
risk of abuse of rights, that is, the risk that states may use the concept of national
security as a way of pursuing populist protectionist goals, while avoiding their
international obligations. Therefore, denying the justiciability of self-judging
exception clauses could lead to instability and unpredictability in the application of
rules under the GATS and liberalisation model IIAs.

B. Standard of review
A question which follows from this analysis is what the good faith obligation actually
requires. Different approaches to the application of the good faith obligation in
the context of self-judging exceptions have been presented, including: reversing
the burden of proof; granting a wide margin of appreciation to the invoking state;
imposing procedural requirements (such as transparency) on the invoking state; and
“asking a number of concrete questions in order to identify a failure on behalf of a
state invoking a self-judging clause to meet the requirement to act in good faith”.115
This article offers another interpretative method which is mutually exclusive to
none of the approaches listed above: to incorporate a precautionary approach in
applying the good faith standard of review into the invocation of self-judging
clauses. This is distinguished from applying the precautionary principle as a matter
of law to national security issues, and therefore this article does not examine the
thorny question of whether or not it has become customary international law.116

114 UN Commission on Human Security, “Human Security Now” (2003) 6 (Sadako Ogata), available at
https://www.un.org/humansecurity/reports-resolutions/ (visited 3 February 2020).
115 Schill and Briese, “‘If the State Considers’: Self-judging Clauses in International Dispute Settlement”
(n.99) 124.
116 On this issue, see, eg, James Cameron and Juli Abouchar, “The Status of the Precautionary Principle in
International Law” in David Freestone and Ellen Hey (eds), The Precautionary Principle and International
Law: The Challenge of Implementation (The Hague, Kluwer Law International, 1996) pp.29–52; Harald
Hohmann, Precautionary Legal Duties and Principles of Modern International Environmental Law:
The Precautionary Principle: International Environmental Law Between Exploitation and Protection
(Springer 1994); Arie Trouwborst, Evolution and Status of the Precautionary Principle in International
Law (Kluwer, 2002); Gary E Marchant, “From General Policy to Legal Rule: Aspirations and
Limitations of the Precautionary Principle” (2003) 111 Environmental Health Perspectives 1799–1803;
Theofanis Christoforou, “The Precautionary Principle in European Community Law and Science”, in
94 Journal of International and Comparative Law

The precautionary concept has been developed primarily in the domains of

environmental protection and, in Europe, with respect to health and food safety..
It was first explicitly recognised in an international instrument in 1982,117 and
since the 1992 United Nations Conference on Environment and Development
(UNCED)118 it “has been included in virtually every recent treaty and policy
document related to the protection and preservation of the environment”.119
There are various understandings of a precautionary approach, ranging from
the weak version that lack of decisive evidence of harm should not be used as
a basis for postponement of measures,120 to the strong version that requires the
reversal of the normal burden of proof (ie, regulation is required unless potential
polluters prove that their activities are not causing environmental harm).121
The measures to be taken differ depending on the provisions of the relevant treaty,
and the consequences of applying the principle also differ widely.122 However,
at its base, there is the consideration that preventive measures are allowed to be
taken in cases of uncertainty. The basic rationale for this approach is the necessity
of overcoming the evidentiary difficulty in proving environmental damage of
an irreversible nature.123 In many cases, these grounds apply to the new types of
security threats, as explained below.

Joel A Tickner (ed), Precaution, Environmental Science, and Preventive Public Policy (Island Press, 2nd
ed, 2002) pp.241–264; Owen Mclntyre and Thomas Mosedale, “The Precautionary Principle as a Norm
of Customary International Law” (1997) 9 Journal of Environment Law 221–241.
117 UN General Assembly, World Charter for Nature (28 October 1982) A/RES/37/7.
118 The principle was explicitly recognised in four of five UNCED documents, ie, the Rio Declaration;
Agenda 21; the United Nations Framework Convention on Climate Change (UNFCCC) and the
Convention on Biological Diversity.
119 Freestone and Hey, The Precautionary Principle and International Law: The Challenge of
Implementation (n.116) p.3.
120 Eg, Principle 15 Rio Declaration; art.3(3) of the UNFCCC.
121 International instruments that stipulate a shift of the burden of proof include: 1989 Oscom Decision
89/1 (14 June 1989) on the reduction and cessation of dumping industrial wastes at sea; art.3(3)(c) of
the OSPAR Convention; para.11(b) World Charter for Nature (n.117). See also, Wingspread Statement
on the Precautionary Principle, available at http://www.who.int/ifcs/documents/forums/forum5/
wingspread.doc (visited 3 February 2020); Hohmann, Precautionary Legal Duties and Principles of
Modern International Environmental Law: The Precautionary Principle: International Environmental
Law Between Exploitation and Protection (n.116) p.334; Patricia Birnie, Alan Boyle and Catherine
Redgwell, International Law and the Environment (Oxford: Oxford University Press, 3rd ed., 2009)
p.161. Steele regards reversal of the burden of proof as the strongest version of the precautionary
principle as it “operates as a veto” in the sense that safety should be prioritised whatever the costs, once
doubt is identified. She argues that “this kind of uncompromising approach to precaution is unlikely to
succeed in attaining legitimacy or support”, and it should not be adopted as a general principle rather
than individual instances of precaution with specific application. Jenny Steele, Risks and Legal Theory
(Oxford: Oxford University Press, 2004) pp.194–195.
122 Ved P Nanda and George Pring, International Environmental Law for the 21st Century (Leiden: Brill/
Nijhoff, 2nd ed., 2013) pp. 63–65.
123 See in particular, ICJ, Request for an Examination of the Situation in Accordance with Paragraph 63 of
the Court’s Judgment of 20 December 1974 (New Zealand v France) Case, Order 22 September 1995,
ICJ Rep 288, Dissenting opinion of Judge Weeramantry 58.
 Investment Screening on National Security Grounds in Japan 95

Social and technological advancement has brought the possibility of malicious

use of new technologies which were originally developed for beneficial purposes..
The Foresight of Evolving Security Threats Posed by Emerging Technologies,
an EU-funded project, identified the following as the “top 10 technologies
which have a relatively significant potential of abuse” and pose security threats:
smart phone “mash-ups”, the internet of things, cloud computing, gene transfer,
advanced AI, synthetic biology, cyborg insects, energetic nanomaterials, radio
frequency identifiers and mini-robots.124 The occurrence of malicious abuse of
these technologies, and the impact and consequences of such abuse, is extremely
difficult to predict. In addition, new types of threat such as bacterial contamination
and information stealing by cyber hijack attacks125 augur consequences potentially
irreversible in nature and global in reach.
These considerations provide support for the incorporation of a precautionary
approach in the assessment of self-judging security exception clauses. The next
question is what this approach specifically requires in this context. Applying the
strong version of a precautionary approach which reverses the burden of proof
would mean that the invoking party need not provide any evidence of the existence
of threats to its essential security interests and a connection between the relevant
measure and the protection of the essential security interests, unless the party
challenging the measure provides prima facie evidence on the absence of the threats
and/or the nexus. As Schill and Briese point out, this approach “would practically
remove all accountability” of self-judging security exception clauses, given the
extreme difficulty for the challenging party in obtaining information concerning
sensitive security issues in the invoking state.126 Therefore, in the context of a self-
judging security exception clause, the state invoking the clause should still bear the
burden of proving that the measure falls within the scope of the clause.127 However,
the standard of proof, or “standard of evidence that [is] necessary for a party to have

124 Final Report Summary — FESTOS (Foresight of Evolving Security Threats Posed by Emerging
Technologies), available at https://cordis.europa.eu/project/rcn/89978/reporting/en (visited 3 February
2020). See also Aharon Hauptman and Yair Sharan, “Foresight of Evolving Security Threats posed
by Emerging Technologies” (16 September 2013), available at https://www.emeraldinsight.com/doi/
pdfplus/10.1108/FS-05-2012-0036 (visited 3 February 2020.
125 As a recent development concerning cybersecurity, in December 2018, UNGA adopted two resolutions
concerning threats in the field of information security which established two different groups to study
this issue. A/RES/73/27 (11 December 2018) and A/RES/73/266 (22 December 2018).
126 Schill and Briese, “‘If the State Considers’: Self-judging Clauses in International Dispute Settlement”
(n.99) 123.
127 This is the approach the Appellate Body consistently adopts in the context of the general exception
clause. Appellate Body Report, United States — Measuring Affecting Imports of Woven Wool Shirts
and Blouses from India, WT/DS33/AB/R, adopted 23 May 1997; Appellate Body Report, United
States — Standards for Reformulated and Conventional Gasoline, WT/DS2/ABJR, adopted 29 April
1996; Appellate Body Report, India — Quantitative Restrictions on Imports of Agricultural, Textile
and Industrial Products, 136, WT/DS90/AB/R, adopted 23 August 1999; Appellate Body Report,
Turkey — Restrictions on Imports of Textile and Clothing Products, 45, WT/ DS34/AB/R, adopted 22
October 1999.
96 Journal of International and Comparative Law

discharged its burden of proof”128 is a separate question, and it is submitted here

that the criteria for judging the evidence should reflect a precautionary approach..
According to this approach, in assessing the arguments and evidence produced by
the state invoking the security exception clause, potential threats would qualify as
threats to essential security interests.129 With respect to the necessity requirement,
a connection between the threats (including potential threats) and the measure with
which some reasonable people could disagree would still meet this requirement.
Under this approach, the risk of abuse by the invoking state should be controlled
by assessing the process by which the invoking state obtained the information
underlying its argument.
Admittedly, the process-focused inquiry is severely limited in that sensitive
information on national security issues is normally classified and exempt from
disclosure.130 Nevertheless, courts and tribunals may require and assess information
on, for example, the scientific methods and procedures that support the evidence,
and the impartiality of the institution that presented the evidence. If the evidence
and arguments presented by the invoking state are found to be based on a reasonable
process of determination, the measure is deemed to be “necessary to protect its
essential security interests”, unless the complaining party successfully refutes this
presumption. Again, it would be difficult to rebut the presumption given the limited
access to information concerning security issues. However, the need to promptly
respond to new types of security threats that constantly arise would justify the
presumption in favour of the invoking state’s evidence that has been scrutinised by
the process-focused assessment.131

V. Conclusion

This article has presented Japan’s policy shift towards tightening inward FDI
screening on security grounds by focusing on the amendment of FEFTA. It has
examined the relationship between Japan’s FDI screening mechanism and its

128 ICJ, Oil Platforms (Islamic Republic of Iran v United States of America), Judgment 6 November 2003
(merits) ICJ Rep 161, Separate Opinion of Judge Higgins, [30].
129 Wolfrum, Stoll and Feinäugle, WTO: Trade in Services (n.83) p.340.
130 On this point, see Benton J Heath, “The New National Security Challenge to the Economic Order”,
Draft of 27 March 2019, Yale Law Journal (forthcoming 2020), available at https://papers.ssrn.com/
sol3/papers.cfm?abstract_id=3361107 (visited 3 February 2020).
131 Although in a different context from that discussed in this article, in Hamdi v Rumsfeld, the US Supreme
Court addressed the question of how to strike a proper Constitutional balance between the competing
demands of national security and the US citizen’s essential liberties. A plurality of the Supreme
Court (Justice O’Connor, joined by Chief Justice Rehnquist and Justices Kennedy and Breyer), while
remanding Hamdi’s case to apply certain procedural protections, stated that, under “the exigencies of the
circumstances”, “the Constitution would not be offended by a presumption in favor of the Government’s
evidence, so long as that presumption remained a rebuttable one and fair opportunity for rebuttal were
provided”. Hamdi v Rumsfeld, 542 US 507 (2004) 533–534. I am grateful to Professor Adeno Addis for
his suggestions on this point.
 Investment Screening on National Security Grounds in Japan 97

international investment liberalisation commitments. Although both FEFTA and

international instruments seek to avoid possible inconsistency between domestic.
screening measures and investment liberalisation obligations through various
carve-out measures, ultimately this issue requires the careful interpretation of
security exception clauses which, insofar as Japanese liberalisation model IIAs are
concerned, invariably include self-judging wording.
The interpretation of self-judging security exception clauses requires the
consideration of how much deference should be paid to the state’s freedom of
action concerning investment screening on security grounds. It is argued that the
expansion and increasing ambiguity of security threats in today’s world give rise
to a particularly high risk of abuse of self-judging security exception clauses, and
therefore such clauses should be subject to judicial review under the good faith
requirement. Having assessed the content of good faith reviews, this article stresses
that the new types of security threat brought about by social and technological
advancement often do not respect borders, spread on a global scale and are
irreversible. As a result, threats to one country immediately mean threats to other
countries.132
The security needs of one country being deeply connected to the security needs
of other states, this article proposes the adoption of a precautionary approach,
which has been primarily developed in the context of environmental protection, to
the interpretation of security exception clauses. Concerning the question of what
this approach requires in this context, this article concludes that, while it does not
reverse the burden of proof, it substantially lowers the standard of proof, effectively
limiting the court’s assessment to the process by which the arguments and evidence
presented by the invoking state are produced.
Admittedly, a precautionary approach to the interpretation of self-judging
security exception clauses presented by this article, which shows a certain deference
to the invoking state’s determination of that “which it considers necessary to protect
its essential security interests”, does not eliminate the risk of abuse. However, this
is the necessary limitation of the current framework of international law under
the WTO and IIAs. That is, security exception clauses in these instruments draw
on the concept of state security,133 and therefore it is impossible, as a matter of
interpretation, to expand terms such as “its essential security interests” (art.XIV bis
GATS), “its own essential security interests” (art.29.2 of the CPTPP), or “national
security” (art.17.20 of the Japan–Australia EPA) to include “human security”,
“international security” or even “collective security”. Therefore, at this stage,
affording broad discretion to a state invoking a security exception clause is the

132 Garry Jacobs, “Integrated Approach to Peace & Human Security in the 21st Century” (2016) 3(1)
Cadmus Trieste 48–71.
133 Except for the rare case of “to prevent any contracting party from taking any action in pursuance of its
obligations under the United Nations Charter for the maintenance of international peace and security”
(art.XIV bis GATS).
98 Journal of International and Comparative Law

only means to protect not only the security interests of the invoking state but also
those of other states. .
A way forward must be found for the future. An obvious choice is an
international cooperation mechanism. The recently established EU FDI screening
mechanism, which was discussed in the introductory part of this article, is a case
in point. Certainly, establishing a global cooperation mechanism in the absence of
a framework equivalent to, or even remotely similar to, that under EU law would
be extremely challenging, especially given the highly political and sensitive nature
of current security issues, together with intensifying protectionism in the political
arena. Nevertheless, this initiative should be taken seriously, given that the tension
between economic globalisation and security issues is likely to increase rather
than abate.