By Anjali Bhatt | Rising Expert for Economics | June 4, 2023 | Photo Credit: Wikimedia Commons
Since its inception in 1951 as the European Coal and Steel Community, strategic positive trade dependency has been fundamental to the European Union (EU) economy. While fostering strong trade relationships, both between EU member states and with other countries, was an effective engine for job growth and economic prosperity, it did not always help to advance Brussels’ foreign policy goals. Yet it remained the bloc’s preferred approach to economic policy as it evolved into the European Union we know today—until now.
Against the backdrop of an uncertain global security environment, the EU is updating its economic statecraft doctrine. Brussels has proclaimed a more assertive approach to trade relations with other countries—one that accounts for political and strategic aims as well as economic ones. European policymakers present this geo-economic shift as a way for the bloc to secure and protect its prosperity and spread its influence. Ultimately, however, the extent of its success will rest on a myriad of factors—not all of which are within Brussels’ control.
Economic statecraft can be defined broadly as states using economic tools like trade agreements, sanctions, and foreign aid and investment to advance foreign policy goals. Strategic sectors and industries, supply chains, and dependencies and vulnerabilities in those chains are critical considerations when designing these policies. The largest-scale modern example is the unprecedented suite of coordinated economic sanctions imposed by the US, EU, and their partners on Russia after its invasion of Ukraine, but these actions are a geopolitical anomaly from common practice. Economic statecraft has generally been the actions of one state: like China’s decade-old Belt and Road Initiative and the recent US decision to impose strict export controls limiting China’s access to semiconductors, advanced computing abilities, and other technologies. But as the global security and economic environments become more enmeshed, we’ll likely see more creative versions of economic statecraft.
Indeed, the EU’s new approach to economic statecraft is based on four pillars, which were laid out in a recent speech by French Minister of State for Europe Laurence Boone at the Peterson Institute for International Economics: protecting a level economic playing field; ensuring reciprocity; countering coercion and aggression; and partnerships. (Disclosure: I am the social media and digital communications manager at the Peterson Institute and attended this event; all views expressed here are solely my own.)
Protecting a level economic playing field
This pillar addresses the threat that foreign companies subsidized by their governments pose to the EU internal market, unfairly tilting a “level playing field.” China’s bevy of heavily subsidized state-owned enterprises are the biggest threat here, but European leaders argue there is a need for a cohesive response to all foreign subsidies, as they tend to distort competition and provide an upper hand to less efficient foreign companies operating in Europe at the expense of more efficient, non-subsidized companies. The World Trade Organization and the EU have their own rules governing domestic subsidies, but European leaders argue these aren’t enough, and the WTO’s dispute settlement mechanism is defunct anyway. Foreign companies may acquire EU firms with their state’s public money or subsidies to companies in the foreign state’s territory are funneled to subsidiaries in the EU.
The EU Foreign Subsidies Regulation (FSR) entered into force last year, giving the European Commission wide discretion to investigate subsidies “granted by non-EU governments to companies active in the EU.” These investigations are expected to largely focus on mergers and acquisitions and public procurement bids, triggered by transactions involving high levels of foreign financial contributions. If investigators find these subsidies are distortive, the Commission can impose punitive measures like divestment, fines, repayments of the subsidy, the blocking of mergers and acquisitions, and reduction in market presence.
Similar to existing European anti-trust laws, the ex-ante nature of the investigations means distortive foreign subsidies can be identified and mitigated before the transaction is completed, providing firms with legal certainty about the rules governing investigations. But the FSR contains broad definitions and grants considerable discretion to investigators, which will increase legal and administrative demands on firms in an already complex regulatory environment. The Commission has been vague about what sectors it will investigate, though the push to “de-risk” from China means industries like semiconductors, critical minerals, and renewable energy technology are likely targets.
The FSR’s effectiveness will ultimately hinge on the measures imposed: The costs of the economic sanctions imposed on the foreign companies must outweigh the benefits of non-compliance. Some foreign companies, for example, may accept financial penalties as an inconvenience—a mere cost of doing business in Europe without significantly changing practices. The penalties must be calibrated to take this into account.
Ensuring reciprocity
This pillar addresses public procurement access and trade agreements. A majority of public procurement in the EU is open to foreign firms, but many of the bloc’s trading partners restrict their own public procurement markets to domestic firms. A new EU International Procurement Instrument stipulates that if a third country recurringly restricts European firms’ access to its procurement markets, even after consultation between the country and the European Commission, the Commission may impose measures restricting that country from European procurement markets.
Reciprocity is also being built into the EU’s trade agreements through standards-setting. EU trade and investment agreements now must include social and environmental standards on matters like labor rights and natural resource management, “to protect the high standards we demand from our firms, as well as to exert influence beyond our borders,” essentially exporting the EU’s social and environmental standards to its trading partners. This is not the first time the EU has used its policies to shape behavior abroad—the General Data Protection Regulation (GDPR) resulted in companies all over the world altering their privacy rules to continue operating in the EU. But with GDPR, non-European companies could choose whether to comply. Building strict standards into trade agreements is a more sweeping approach, dictating how all companies from the signatory state interact with the EU economically, as well as how that state regulates its own firms and markets—a much more sweeping approach to using market access as geopolitical leverage.
Deploying assertive instruments against coercion and aggression
This pillar is perhaps the murkiest. Brussels defines “assertive instruments” broadly, as indicated by Boone’s inclusion of a strong industrial policy as part of this pillar. The pros and cons of industrial policy—the practice of governments intervening in their markets to support strategic firms or industries—have been debated for decades. While the practice fell out of favor among most American and European policymakers over the course of the second half of the 20th century, it is regaining popularity, illustrated by the CHIPS Act and the Inflation Reduction Act, the latter of which triggered a US-EU spat over tax credits for electric vehicle supply chains.
There is a degree of hypocrisy here, as the EU has created new regulations to combat foreign subsidies while also advancing its own industrial policy. This contradiction is at the heart of the current industrial policy debate—at its core, Western countries have criticized China’s practices of subsidizing domestic firms, especially in manufacturing while investing billions of dollars or euros to subsidize their own strategic industries in production of things like semiconductors and renewable energy technologies.
Industrial policy debate aside, the EU has also created a new Anti-Coercion Instrument (ACI), intended to deter foreign countries from interfering with the EU or a member state through trade and investment measures. It provides a last-resort pathway for the bloc and its members to retaliate in light of economic coercion if the coercing country is unresponsive to dialogue and other traditional diplomatic tools. Like other recent EU measures, this tool technically applies to any country but is clearly a response to China. A high-profile example of such coercion arose when Lithuania opened a “Taiwanese Representative Office” in its capital, Vilnius, which China viewed as a violation of its Once China policy. Beijing promptly blocked all imports from Lithuania, then escalated to refuse imports from any company that sourced from Lithuania.
Partnerships
The final pillar of the EU’s economic statecraft doctrine is still developing: external partnerships and development aid. The EU has yet to coordinate its investment in developing countries in a strategic way as a viable alternative to China’s investments. It does have the Global Gateway initiative, meant to narrow the “global investment gap” in emerging economies and developing countries, but a cohesive means of mobilizing public and private investment across Europe has yet to materialize.
The future of European economic statecraft
The EU’s efforts to codify its new economic practices puts the bloc well on its way to defining a systematic economic statecraft doctrine. There are many lessons from the past and the present, particularly from past instances of industrial policy and the current effectiveness of the coordinated sanctions against Russia. But the success of the EU’s economic statecraft will be determined by how it is perceived abroad: Will other countries—particularly China, but also developing countries looking to reach EU markets—comply with the new policies? Foreign companies may find EU rules too cumbersome and costly, instead directing their trade and investment flows elsewhere. Countries could retaliate against these new policies, further splintering the global economy.
As the EU steps into its newly assertive role in the global economy, influencing policy beyond its borders is an explicit goal of European economic statecraft. The world we live in now demands creative use of economic tools to do so.
Anjali Bhatt is YPFP’s 2023 Rising Expert on Economics. She is a is the Social Media and Digital Communications Manager at the Peterson Institute for International Economics, and is also pursuing a Masters of Advanced Studies in International Affairs at the University of California, San Diego.
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