EU’s dilemma: balancing national and economic security

The European Union last week released a package of measures that put meat on the bones of its economic security strategy.

Like many governments, Brussels is worried about geopolitical tensions imperiling its future, either through the loss of technologies vital to its growth or by exposing member states to economic coercion.

Similar concerns are voiced daily in Tokyo and Washington, but dig into the background of the EU measures and a surprising picture emerges. Europe’s fear of coercion isn’t unfounded; the source of its concern is an eye-opener, however.

The EU first articulated its new economic security strategy last year amid geopolitical tensions, questions about supply chain reliability and Russia’s invasion of Ukraine. That document identified four areas of focus: supply chain resilience, critical infrastructure, securing technology and economic coercion. At the heart of EU thinking about economic security is fear that economic dependencies will be weaponized.

The EU list looks a lot like Japan’s, which was laid out in the Economic Security Promotion Act. That legislation, enacted in May 2022, has four pillars: supply chain resilience, critical infrastructure, developing and securing critical products, as well as technologies and secret patents. Japan too is worried about geopolitical tensions and dependence on foreign sources and suppliers for items essential to daily life or national security — items that open the door to economic coercion.

The EU’s June 2023 strategy called for an understanding of the economic security landscape. That meant assessing risks, technologies and the tools that exist, including talking to the private sector about ways to proceed and greater cooperation with third countries on these issues. Substantive measures would await the outcome of those assessments and conversations.

The package announced last week is the product of those consultations. It has five components: a proposal to revise the current foreign direct investment screening mechanism; a white paper on identifying security risks linked to EU outward investment (outward investment screening); a white paper on increasing the effectiveness of EU export controls for goods with civilian and military use (dual-use goods); a white paper on ways to support research and development; and a recommendation on ways to research security.(Gabriel Dominguez has a good recap in his article in The Japan Times last week.)

The short summary of all the paperwork is that there is mounting concern about a problem, little precision on what exactly it is and no consensus on what to do, whether in regard to export controls, investment screening or research security. In other words, the EU is experiencing the same difficulties that every other government is having as it tries to tackle this issue, but multiplied by 27: the number of EU member states.

Remember that for all the shaking of fists at EU bureaucrats, many of these issues remain within the purview of national governments. No matter what the EU does, national legislatures have to put those designs into effect. Valdis Dombrovskis, EU vice president for trade relations, acknowledged that “this is an area where we need also respect institutional, so to say, prerogatives and the fact that national security is member states' competences.” Or, as Competition Commissioner Margrethe Vestager said, the commission is trying to avoid “a turf war” with national capitals.

Those turf fights impede efforts to coordinate inward investment screening, export controls and university protocols. Apart from fundamental differences in bureaucratic capacity — screening and regulating business activity is hard — there are also divergent views of China and the U.S. and, as elsewhere, a reluctance to jeopardize opportunities with both economic giants.

Pushback has perhaps been hardest against the screening mechanism for outbound investment. Some national governments and the private sector complain that this will undercut their prerogatives and the ability to do business. Originally, European Commission leaders promised a proposal to address this issue. Instead, a white paper was released last week and it merely calls for a period of research and consultation that won’t wrap up until the summer of 2025. Coming up with legislation, invariably a negotiation with affected stakeholders, will push any likely date for concrete action back to late 2027 at the earliest.

The EU strategy is “country agnostic,” which means that it doesn’t call out China as the source of concern. The Asian giant is almost never mentioned — not once in the 2023 strategy — while there is little hesitation to name Russia. Since the EU has cut energy imports from Russia, Moscow wouldn’t seem to be able to attempt economic coercion. And China is the economic partner for which protection of technology would seem to be an issue. In this reticence, too, Europe’s approach resembles that of Japan.

That hasn’t assuaged Beijing. After encouraging the EU to “abide by the basic norms of market economy” and to avoid taking measures “that roll back globalization and overstretch the concept of security,” Chinese Foreign Ministry Spokesperson Wang Wenbin brandished a stick, warning that last week’s package “bears on the image of the EU ... and more importantly, on the confidence of companies from China and other countries in Europe’s business environment.”

Wang Yi, a reporter for the nationalist Global Times, was more blunt (as writers for that publication invariably are). He criticized the EU for “borrowing a concept from the U.S. and Japan” and adopting an approach that “is not conducive to EU's strategic autonomy and economic security.”

In fact, “the issue Europe faces is not so-called shielding key technologies from Chinese influence. It is about maintaining economic policy autonomy and protecting European companies’ interests from the harm caused by the U.S.’ reckless chip war.” The EU is “compromising to the U.S. pressure (and) will further undermine trade and economic cooperation with China ... actions (that) will inevitably harm the economies of both sides and will only benefit the U.S. in the end.” China has pushed that message in bilateral meetings with European officials.

This is the standard Chinese response to action by any country other than the U.S.: calling it a puppet and warning of harm to bilateral economic relations. That’s no reason to dismiss it out of hand.

The U.S. does weigh on European decision making. Like Tokyo, Brussels wants to stay aligned with Washington to ensure access to the U.S. market and its cutting-edge technology. Being in the tent allows the EU to shape decision-making on these vital questions. Tokyo is a natural partner of Brussels in efforts to soften the sharpest edges of U.S. policy.

Washington also matters because it too has used economic coercion — a lot. Beijing is flexing its muscle, but it has a long way to go before it will have either the power or the record to match the U.S. in this area. A history of U.S. efforts to “turn thriving economic networks into tools of domination,” is detailed by political scientists Henry Farrell and Abraham Newman in their riveting study, “Underground Empire.”

They show how “opportunistic and sporadic” sanctions once considered emergency exercises of power instead became “precedent for a more general transformation of U.S. financial power.” Just ask Cuba, Iran, North Korea or any of the other governments subject to U.S. sanctions — or any of the other states, U.S. friends and allies among them, that won’t conduct economic exchange with them for fear of being punished, too.

In a delicious twist, Farrell and Newman explained that what they considered warnings about the consequences of weaponizing the world economy — their path-breaking article on the subject in International Security, a leading journal of security affairs — instead entranced the Trump administration, citing an interview with an official who mused that “weaponized interdependence, it’s a beautiful thing.”

They then quote “a cynical European official” who compressed the campaign to block Huawei, the Chinese telecommunications giant, from the national communications grids of U.S. allies, into this pithy assessment: “America was angry with China for trying to do what America had already done, in one case by turning the global communications systems into an empire of surveillance.”

When Brussels a couple of years ago solicited comments on a proposed anti-coercion instrument, legislation that would allow the EU to make an institutional response to attempts to pressure member governments or companies, the U.S. was as big a concern as China. The report includes seven specific incidents of intended coercion by China; the U.S. tally reached 16. Two European legal scholars conclude that new instruments in the EU’s resilience toolbox were conceived explicitly in response to U.S. policy.

Those concerns are growing in tandem with the prospect of a second Trump administration whose “America First” policies pose a clear threat to European economic autonomy. Even Joe Biden, a multilateralist who is committed to alliances, has inflamed European sensitivities by pushing an agenda that disregards their priorities.

It’s a troubling reminder of the reality of “the new national security economy,” a world of increasing connectivity and the worrying vulnerabilities that are created as a result.