The Commission’s recently published economic security strategy suggests that the EU’s free trade paradigm is being taken over by the view that geopolitical tensions increasingly call for restrictions on international trade.
Exchanges between advanced economies may become more complicated as partner countries coordinate only some of their China-related policies and progressively adopt industrial policies in favour of domestic production.
With the EU’s thinking about economic security in an infant stage, and Brussels in need of private sector expertise and investment, businesses are presented with significant opportunities to shape the direction of EU policy.
Implications for International Business
Global business will face a growing number of security-motivated barriers to trade emanating from Brussels, including investment screening, export controls, industrial policies, and outright sanctions, especially vis-à-vis China.
Firms may find it in their best interest to promote a level playing field among a group of allied countries such as the G7, through granting mutual exemptions from security restrictions and making industrial policies less exclusive.
State of Play The price of protection
The European Commission’s first-ever economic security strategy, presented on 20 June, marks a critical shift in the EU’s thinking about economic integration. Following a global trend, the free trade paradigm of recent decades has given way to voices that favor limits on economic openness in the name of national security and geopolitics. The EU recognizes that such measures come at a price, and it becomes increasingly clear that Brussels is willing to pay that price. The Commission is anxious about foreign ownership of critical infrastructure and technology; of member states being too dependent on trade with any single foreign country; and of the leaking of military and dual-use technologies to geopolitical adversaries. The EU has already adopted instruments to deal with such risks, such as the Foreign Direct Investment Regulation, the toolbox for 5G telecommunications security, and the Anti-Coercion Instrument. Now, Brussels has more proposals to table: It does not only want a “bolder and faster” use of existing tools, but also to create new tools that together with the existing ones will make up a holistic system to “protect” economic security, “promote” competitiveness, and “partner” with countries who share the EU’s concerns, as by the strategy’s key terms.
Key Issues Partners on economic security...
Both the Covid-19 pandemic and the war in Ukraine have taught the EU that it cannot take the supply of essentials, ranging from medical equipment to natural gas, for granted. The strongest impetus to prioritise economic security, however, has come from China’s relentless – and sometimes ruthless – rise. Beijing’s investments in the European economy as well as its aggressive foreign policy and economic coercion of EU member states have raised concerns about the EU’s linkages with the Chinese economy. With its new economic security strategy, the EU is trying to position itself among the front-runners in the field like the United States, a prolific user of sanctions, and Japan, which has its own Ministry for Economic Security. And indeed, partnering with such democratic, advanced economies is an important element of the Commission’s strategy. At first glance, this group of states has much in common: The G7, for instance, recently agreed to deepen coordination on “resilient supply chains”, export controls, and joint responses to China’s economic coercion.
Yet these countries also differ significantly in how far they are willing to go when it comes to security-motivated restrictions on China. Whereas the US appears to be most determined, EU member states typically prefer more modest options. As a case in point, the EU’s economic security strategy does not even mention China by name, a sign of several member states' apparent unwillingness to provoke Beijing. Moreover, while G7 partners share the alarm about China, many of them are doubling down on efforts to help their own businesses. In practice, this means using industrial policy in favour of domestic production, like the US Inflation Reduction Act or Canada’s “made-in-Canada” plan. Japan, meanwhile, declared in its new national security strategy that it would promote businesses in “critical goods and technologies”, including the semiconductor industry.For the EU, such initiatives include the Net-Zero Industry Act, the Critical Raw Materials Act and the Chips Act. Going forward, businesses may find themselves in an increasingly complicated landscape of allied economies with different sets of incentives and security regulations. To navigate effectively, they may need to invest more in political risk analysis. They could also benefit from thinking about the trade-offs of being present in different countries, as future policies could create new pressures to relocate operations.
... but rivals in industrial policy
The Commission has ambitious plans to make the Single Market more competitive and resilient. This includes the creation of “industrial alliances” to foster cooperation between partners in a given value chain in areas such as batteries, raw materials, and cloud technologies. In terms of economic security, three initiatives stand out. First, the Critical Raw Materials Act is designed to facilitate the extraction, processing and recycling of critical raw materials in the EU. Second, the Net-Zero Industry Act is set to boost production of green technology. Third, the European Chips Act seeks to ensure the supply of semiconductors. In these areas, the Commission seeks private sector investments, while recognizing that businesses will be “essential partners” in economic security. Therefore, it wants to draw on the knowledge of firms who are advanced in their thinking about risk mitigation, while encouraging others to conduct due diligence and better manage risks in the field.
Consequently, the EU’s new strategy represents the beginning, not the end, of a conversation about European policy. Its direction will be shaped in dialogue with partners in the G7 and elsewhere, especially the EU-US Trade and Technology Council which met in May and will meet again before the end of the year. European thinking about economic security is still at an early stage, and member states have a variety of different objections to the EU’s new instruments, including the idea to screen outbound investments. Going forward, firms may therefore seize significant opportunities to shape Europe’s economic security drive. Some businesses in prioritized areas like solar power, clean hydrogen, semiconductors, or digital services, will be able to profit from industrial policies that favour domestic production and regulations that exclude foreign competitors. However, corporations may also find that a growing web of security restrictions and exclusive industrial policies seriously complicates their operations overseas. Avoiding such trade barriers may not be possible in the case of China and other potential rivals. Allied countries, however, should be able to exempt one another from security restrictions and exclusive industrial policies, effectively fostering frictionless trade and a level playing field among them. Free trade-minded businesses could nudge them in the right direction.