EU’s trade ideals face ‘economic security’ reality check

EU’s trade ideals face ‘economic security’ reality check

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The European Commission is preparing to ditch its long-held free-market ideals as geopolitics and U.S.-China competition elbow their way into the picture.

On Tuesday, the EU’s executive will propose its economic security strategy, a new political paper which will be discussed by EU leaders at their meeting later this month. 

Mixing economics and national security was once unthinkable for a bloc which tried to separate its liberal trade policy from foreign politics. But that split has been tested, and in some cases, discarded. 

National security concerns jumped to the top of the European agenda following Russia’s war in Ukraine, from pipeline sabotage to cutting gas supplies to U.S. pressure to ban on Chinese telecoms suppliers, to new export controls on Dutch chips equipment to China. Europe’s reliance on Russian gas has also shown that dependencies can threaten its economic security if they are weaponized.

Now, the EU wants to become a player itself, instead of being bullied by other powers on the global playground.

“We need to decide ourselves and give ourselves the means to decide, because otherwise we’re in a situation of risk and dependency. I think that is shared by everyone,” said French MEP Marie-Pierre Vedrenne, from Emmanuel Macron’s liberal Renaissance group.

Brussels’ new thinking is exemplified by France’s pushback against China’s advantages in export sectors such as electric cars. As POLITICO reported last week, the European Commission is discussing whether to launch an investigation which would allow Brussels to impose additional levies, known as anti-dumping and anti-subsidy tariffs, on Chinese electric cars, in addition to other anti-China offensives. 

Despite risk of a Chinese backlash, conviction is growing that Brussels shouldn’t just grumble about unfair trading practices, but also take practical action against them.

Delicate balance

Still, even talking publicly about economic security is sensitive in the EU and member countries have warned the Commission not to go too far.

The ways that a general or a CEO looks at the world are very different, said Henrik Isakson of business organization Swedish Enterprise: “Now these two worlds are meeting, and that’s unfortunate, but of course, we can’t ignore that and pretend that everything is as it used to be.”

Because of those sensitivities, von der Leyen has struck a careful balance in the upcoming proposal, said three EU officials with knowledge of her plans. 

Her strategy announcement is set to be more of an appetizer rather than concrete proposals for new laws. The idea is to try to create an EU recipe for “economic security,” a Cold War-era concept that former U.S. President Donald Trump revived and has since mushroomed across the world.

The trick will be for Brussels to apply this concept in a distinctly European way that contrasts with Washington’s approach of conflating national security with trade. 

“The definition of economic security here is obviously paramount,” said André Sapir, an economist at the Brussels-based Bruegel think tank. The EU discussion “is not an ideological turn [against China] — this is an observation of a new environment.”

The strategy is set to include further steps for the EU to protect itself from economic blackmail and supply chain dependencies, according to people with knowledge of the text. 

Brussels wants to identify those risk dependencies so that it can act in the future to tackle them. This is in line with earlier initiatives such as its 5G Security Toolbox that weaned its telecoms sector off Chinese supplier Huawei; the EU Chips Act; and the Critical Raw Materials Act, which aims to reduce reliance on Chinese rare earths necessary for the green transition.

“We cannot afford to maintain critical dependencies that could become a weapon against our interests,” Internal Market Commissioner Thierry Breton said last week as he presented a review of the bloc’s work on decreasing its reliance on Chinese telecoms equipment.

Brussels will also broach the topic of screening EU investments abroad in strategic sectors like technology. This controversial discussion could potentially happen as part of the EU’s review of its foreign direct investment screening later this year.

“We first need a proper risk assessment before we can decide whether we need a bazooka or a slingshot,” an EU diplomat said. 

At the same time, the bloc will also emphasize its own economic strengths to ensure that European firms remain competitive, especially in crucial fields like technology or the green transition.

Another key aspect will be greater coordination, for example on export controls, to avoid a divide-and-conquer strategy by economic bullies. U.S. pressure led to a Dutch decision earlier this year to impose new controls on exports of advanced microchip equipment to China — curbing sales by chipmaking equipment supplier ASML.

Shifting momentum

The European Commission is taking care not to cross any member countries’ red lines. Still, such a strategy would have been taboo a couple of years ago in Brussels, which for decades was known for its dogmatic free trade liberalism. 

The momentum for change began to emerge after the pandemic laid bare the EU’s supply chain dependencies, then leapt forward with China’s economic coercion against Eastern member state Lithuania. It gained further momentum when Russia invaded Ukraine forcing Germany into an economic reckoning over its gas dependence on Russia. The rest of the EU also started to realize how economics and geopolitics are intertwined, especially with a possible Chinese invasion of Taiwan looming in the background. 

“It would have been much more difficult for the Commission to sell something like this to member states before Russia invaded Ukraine and before governments experienced firsthand what it means to suddenly find new sources of energy, because otherwise your country is not going to work,” said Francesca Ghiretti, an analyst at the Mercator Institute for China Studies (MERICS).

While Brussels has started to build a more defensive arsenal of trade instruments to tackle foreign subsidies or screen inward investment, the EU still needs a more coordinated approach, said Tobias Gehrke of the European Council on Foreign Relations think tank. For him, the freshest bit lies in the language, for example by talking about technology and trade in security terms. “Another novelty is that the Commission tries to get into this field [of security], which is normally a member state competence,” he said.

The economic security strategy puts the EU much more in line with the U.S. and Japan, which have placed national security concerns at the heart of their economic policies. Tokyo also pushed to showcase economic security at the G7 discussions this year. 

EU countries on the defensive 

That doesn’t mean the new approach is a done deal. 

Some EU countries are wary of another power grab by von der Leyen. The Commission, consciously, isn’t suggesting any transfer of competences from EU countries to Brussels. For instance on export controls, the idea would be to create more EU-wide coordination. Still, that risks becoming a first stepping stone toward more Brussels-centric policies, some countries fear. The strategy will also boost Europe’s capacity to assess risks, which remains more of a national competence.

Other EU countries are warning the executive not to put all its eggs in the Atlanticist basket — von der Leyen has already been criticized for being too pro-American. 

A third critical camp is the EU’s traditional free traders. While most of them support the general idea of economic security, they are wary of going too far, too fast, especially on outbound investment screening.   

“We should not shoot ourselves in the foot,” said another EU diplomat. “Our economic strength is our geopolitical strength. So if we want to be a player in this geopolitical game and call the shots, we have to maintain and strengthen that competitiveness.” 

Camille Gijs, Pieter Haeck and Laurens Cerulus contributed reporting.


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