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Europe’s Economic Security and China: Where to Draw the Line

Europe’s Economic Security and China: Where to Draw the Line
 Mathieu Duchâtel
Resident Senior Fellow and Director of International Studies
 François Godement
Special Advisor and Resident Senior Fellow - U.S. and Asia

A "framework for a robust assessment and management of risks to economic security at EU, national and business level while preserving and increasing our economic dynamism": the European Commission and the High Representative of the Union for Foreign Affairs and Security Policy assigned a highly ambitious goal to the coming European Economic Security Strategy. The project was presented on June 20 as a communication to the 27 Members of the EU, and to the European Parliament. What's next? The ball is in the court of the EU Member States. There are many signs that these are lukewarm both towards the method of the Commission, perceived to be excessively top-down and suspected to prefer coordination with the US to consultations with Member States, and also regarding some of the instruments proposed in the text, such as outbound investment screening. This is the European Union and in the end, there is nothing the Commission can impose on Member States outside external trade, its exclusive competence. Whatever the outcome, let’s take a look at the Commission’s economic security proposition on its own merits. It kickstarts a crucial debate regarding how to best manage technology issues with China, and where to draw the line between mutually beneficial business relations and transactions that feed China's civil-military fusion.

Indeed, economic security is a fuzzy notion. It can stretch all the way from external dependencies such as supply chain vulnerabilities, technology leakage through human exchanges or outright theft, to financial risks on investments made outside the EU. It can also stretch from a narrow focus on national security in a military sense to the much wider goal of maintaining an economic edge over competitor nations. The problem is that a new age for innovation has extended the notion of dual-use technology to the point where innovation aiming at civilian commercial applications can have unpredicted military applications as well. China is positioned at the apex of these tensions. Its civil-military fusion project serves a revisionist international security agenda for the regional and even global order. The nature of its political system means that the state has all the means available to compel private companies and scientists to cooperate in military projects. And yet, trade and financial interdependencies between China and other advanced economies have created knots that appear next to impossible to entangle.

Trade and financial interdependencies between China and other advanced economies have created knots that appear next to impossible to entangle.

While the United States does not hesitate to use economic statecraft tools to ensure its economic edge, the European Union has been sitting at the other end of the spectrum. The Union was founded on the premise of free trade and multilateral rules, with the belief that economic interdependence creates peace and security for all. Adopting the mere language of "economic security" therefore reveals a deep transformation of how the European Commission approaches the international economy. 

This is a logical continuation of what has been described as a "Copernican revolution" for Europe, linking geopolitics with geoeconomics. These changes were mostly defensive to start with. They were prompted by the need to counter China’s use of its hybrid economy to enlarge its share of Europe’s market economy, and its use of overseas investment as a way to capture advanced technologies. In short, Europe’s turn to economic security started with a focus on seeking reciprocity in EU-China trade and investment relations, and on addressing systemic asymmetries between Europe’s openness and Chinese high fences.

But this time, it’s more than a search for a trade rebalance. For the first time, the Commission and the European External Action Service propose to use economic policy measures to slow down China’s military modernization. Indeed, "technology leakage" (read: facilitating the progress of the Chinese arms industry) is one of the four categories of risks identified by the Communication, alongside supply chain resilience, physical and cyber security of critical infrastructure, and weaponization of economic dependencies. This is to be achieved by creating a new common European list of "strategic technologies critical for economic security", including those that pose a "risk of civil-military fusion".

The Commission takes the lead in drafting such a list, to be shared with Member States for revision and approval in September 2023. In plain geopolitical terms, this also implies a choice in favor of transatlantic coordination related to China policy. Without close consultations with the United States and Japan, the EU would find it very difficult to maintain such a list, given the speed of innovation, the increased relevance of civilian developments for military applications, and the extent to which the EU and the US tech ecosystems are closely interlinked. 

The list of European defensive policies had already expanded because of the experience from the Covid-19 pandemic and in response to Russia’s war with Ukraine. 

The list of European defensive policies had already expanded because of the experience from the Covid-19 pandemic and in response to Russia’s war with Ukraine. Their scope has further expanded as a result of consultations by the Commission with the United States, with Japan through the annual EU-Japan summit, and with India, inside the new EU-India Trade and Technology Council.

The second step is to seek further improvement of the two main existing EU tools that restrict transfers of dual-use technology: export controls and the EU’s investment screening regulation. The Commission’s communication recognizes their inherent limits. The communication carefully mentions the competences of Member States in some areas such as export control, dual use and national security. But it also underlines that failing a coordinated and unitary approach, some partners of the EU will form alliances with key partners, while less well-intentioned states will "divide and conquer".

The 2021 revision of the EU’s Regulation on dual-use export control enables Member States to "Europeanize" their national control list. This seems highly procedural. In practice, it is a method to allow and encourage EU Member States to expand their own national lists beyond simply mirroring multilateral agreements - and in particular, when it comes to dual-use technology, the Wassenaar Arrangement’s list of dual-use goods and technologies

Export control is a sensitive area of national sovereignty.

The Commission acknowledges the necessity of moving towards more "rapid and coordinated action at the EU level". This is sure to meet with at least initial resistance from many Member States. Export control is a sensitive area of national sovereignty.

Handing over control to the Commission is not politically realistic at present, even after the precedent set by measures taken against Russia since February 2022 - for which Member States were in fact always in the lead. Still, there is a need for an update of the common European control list and for better enforcement capacity across the continent. The June 2023 Economic Security Strategy explicitly calls for a balanced process between common institutions and Member States, and warns against the risk of loopholes if this is not the case. 

What will be the compromise, if any, between Member States’ prerogatives and the joint pursuit of efficiency is a key question. The devil will be in the details, and details require time.

A related development regards the existing FDI screening regulation. It was built as an information-sharing and communication system, with national governments making a sovereign decision regarding screened transactions, but the Commission weighs more on the process here than on that of export control by issuing its opinion. DG Trade has just opened a consultation to evaluate the effectiveness of the regulation, and has taken in suggestions for revisions during the summer.

What will be the compromise, if any, between Member States’ prerogatives and the joint pursuit of efficiency is a key question.

China poses specific enforcement problems in these two areas. The risk of diversion to military end-users by civilian proxies is inherent to the nature of state capitalism and the "Party leads everything" governance philosophy. In addition, China is conducting a very active policy of data denial against open source foreign analysts and due diligence services, restricting access to databases and statistics.

The same can be said of a third area, access to European technologies by the People’s Liberation Army through research and innovation cooperation. The mention in the Commission’s text of the "toolkit on tackling foreign research & innovation interference" is both a recognition of the reality and a sign of weakness - the power of European institutions to address this problem, from the Commission to national governments, is so far limited to raising awareness and providing unsolicited advice to individuals and research institutions.

The most difficult item on the agenda is that of outward investment screening.

The most difficult item on the agenda is that of outward investment screening. This would target transfers of technologies through joint venture agreements, venture capital and private equity facilitating civil-military innovation or industrial production, and even passive investment through publicly trade securities.

The remit is broad. Simply gauging the facts and figures of European capital funding Chinese civil-military fusion is a difficult task. Not only does it imply new powers over capital markets and financial actors, but it will also affect the most dynamic sectors of European (or American…) companies that invest into leading-edge developments inside China in order to gain, or simply retain, market share. Top German firms are the most directly concerned. Germany’s new China strategy policy mentions outward investment screening as "a potential supplement to existing instruments". A decisive move forward would bring the EU’s economic security approach into new territory. It also takes many Member States out of their comfort zone. Barring unexpected international developments with China, outward investment screening will face strong headwinds in Europe. The Commission’s new initiative has the merit of starting a process of charting and clarification, which ultimately would lead to a political decision.

Finally, the country-agnostic trade and economy doctrine of the Commission may also be an obstacle - just as the lesser duty rule used to be until June 2023. The shadow of China looms large over these policy areas. Member of the European Parliament and former Dutch counterintelligence chief Bart Groothuis argues that a country-agnostic approach does not ensure maximum enforcement efficiency. The process would be facilitated if target countries were clearly identified politically. The category "destinations of concern that operate civil-military fusion strategies" in the Commission’s communication is a step away from the self-restraint of the country-agnostic approach. Unsurprisingly, China will spare no efforts with Member States to stop this trend.

Such a tall agenda is bound to generate a new phase of intra-European politics on how to best ensure the position of the EU in the international system, in relation with China and the United States. Excluding "decoupling", which the Biden administration has also done, was just a start. Between declarations by Ursula von der Leyen and Margrethe Vestager and a remark made by France’s minister of the economy in Beijing - "derisking does not mean China is a risk", there is at least a gulf of words. The implied shifts of influence from Member States to coordinated actions spearheaded by the Commission, if not outright competences, is met with caution, if not opposition, by EU countries. This applies perhaps more to the larger, rather than to the smaller Member States, which are used to deal with decisions made elsewhere.

How much of the initial Commission proposal will remain once 27 Member States and the Parliament - often at cross purposes - will have incorporated their views? An added issue is that the present Commission will be renewed in June 2024 - with some key Commissioners sure to leave.


Copyright: JOHN THYS / AFP

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