The European Commission is chucking its enduring free-market ideals in an attempt to curb China’s unfair trade practices—and that means the United States and other countries could be on the chopping block as well.
The Commission and the High Representative published a joint communication on a European Economic Security Strategy. The policy is still in its preliminary stages, but it underscores Brussels’ willingness to impose novel invasive economic tools.
In its first iteration, the strategy involves two main components. First, the Commission undertakes studies of supply chain risks for energy, cyber security, critical infrastructure, technology leakage, and economic dependencies (a purposefully broad term).
If the Commission concludes that the technology or good in question has a “resiliency” problem or is subject to foreign “coercion,” it proposes a menu of open-ended trade defense measures, including tariffs, divestment, reduced market access, or deeper investigations of corporate financial assets and intellectual property.
The economic strategy is billed as a team building activity, giving Europe the tools to partner with the U.S. in countering unfair trade practices from China and stopping the flow of advanced chips to Russia and other adversaries. However, when national security trumps economic freedom, there’s quite a bit of blow back.
America’s use of industrial trade strategy—namely the Inflation Reduction Act—is a primary example. It has riled up many of America’s allies. In particular, Britain, France, and Germany have expressed concerns that it would suck investment and production from their native industries. Macron went as far as to state that the Inflation Reduction Act and the U.S. Chips Act will divide the West, warning that America would distort competition by subsidising American companies and negatively affect European industries as a result.
Meanwhile in Europe, the industrial strategy dubbed “digital sovereignty” has come with a number of competition laws such as the Digital Markets Act and Digital Services Act, which target the market access of American tech firms. The left-wing competition and technology advisor to the Biden White House called the Digital Markets Act “undoubtedly an illustration of over regulation … generating detrimental consequences on innovations essential for digital technologies that are critically lacking for European technology.”
The EU’s Economic Security Strategy in greater detail
Purportedly, Brussels wants to protect the EU’s economic security through a range of existing and new policies to address possible gaps. The economic strategy draws on earlier tools passed as part of the sovereignty initiative, such as the Critical Raw Materials Act, the European Chips Act, the Net Zero Industry Act, and the proposed Cyber Resilience Act, highlighting that their success may depend on the use of trade defensive measures.
The impetus of the trade defense tools Europe plans to use to protect these industrial strategies begins, once again, with trade tensions from the United States. When Trump imposed steel and aluminum tariffs Brussels had little recourse besides complaining to the WTO. In response Europe passed more than a half dozen measures, many of which are named in the Strategy paper, such as the Anti-Coercion Instrument (ACI) giving the EU access to a wide range of possible countermeasures against a coercing country. These include the imposition of tariffs, restrictions on trade in services, and restrictions on access to foreign direct investment or public procurement. This new defensive trade policy places technocrats in the Commission at the driver’s seat, all of whom are far from perfect.
A case in point, the Anti-Coercion Instrument permits the Commission to impose anti-dumping-like tariffs if a country, such as China, decides to prohibit all imports from an EU member, like Lithuania.
Chief economic adviser at the Sweden’s National Board of Trade, Patrik Tingvall, found Europe’s Anti-dumping measures ultimately harm consumers, escalate prices, and undermine producers confidence by increasing uncertainty and risk. From the American experience (the world’s heaviest user of anti-dumping duties) these measures tend to get renewed rather than resolved, and have a large negative downstream effect on other industries effecting wages, prices, sales, and investment.
The Security Strategy is not all about defense
The strategy includes the initiative called Strategic Technologies for Europe Platform (STEP), which directs investment inside Europe on the condition that it develops industries that are green, digital, or biotech in order to achieve stated national goals. In a nutshell, STEP will “support investments in companies that contribute to preserving a European edge on critical technologies, throughout companies’ full life cycle”.
Brussels is also broaching the screening of EU investments abroad in certain technology sectors, in support of EU technological sovereignty. Fortunately, America already offers lessons on the issue—research by the Information Technology & Innovation Foundation highlights that the U.S. market share of commercial communications satellites dropped by 19% due to Congress imposing export controls on satellites in 1998, with $2.4 billion in lost sales attributable to export restrictions between 2003 and 2006. In addition, businesses diverted research and development spending to avoid developing new assets that might fall in the controlled category. We can expect the same market diversion by firms to avoid being subjected to a bureaucratic screening mechanism.
Historically, Europe has been one of the world’s chief proponents of free trade. Through its many trade agreements and its accession to the WTO, Europe has pushed down tariffs and advocating for rules-based trade around the globe. By keeping the single market and free trade at the heart of the enterprise, the economy reaped a 2 trillion dividend. Indeed, by many accounts, even dating to Montesquieu in the 1700s, free trade is a prerequisite for peace. What the European Commission proposes in its strategy and through the use of various alphabet soup acts is not rules-based trade but managed trade, with Commission technocrats pulling the strings to favour EU industrialization. The world has tried economic management in its various forms, and the results are less than optimal.
