How the new economic security strategy will affect the EU economy

In January, an economic security strategy was presented. Essentially, this strategy tries to expand the number of tools that the European Commission has at its disposal. This idea is part of a broader plan to concentrate power in the hands of Brussels, which in turn is part of a plan to achieve strategic autonomy. This set of tools concerns trade and investment, as these are what determine how different players in the EU perceive the political and economic feasibility of certain actions. In essence, the European Commission wants to be able to manage this feasibility.

Competition with China and Chinese goods

The bet is also on increasing the technological resilience of the EU. In principle, there is no indication that Brussels or EU leaders have changed their views to see China as the main threat, even though the main economic threat to the EU comes from China. In reality, of course, this is not the case, as China's giant and ever-expanding domestic market has become an economic lifeline for the EU over the past few decades, especially for export-oriented economies such as Germany, the Netherlands, Italy, and others.

Yes, it must be recognized that Beijing's growing influence in international trade and on the world stage raises concerns that China's economic presence could undermine the EU's strategic interests. EU policy circles have emphasized the dominance of Chinese companies in key sectors such as telecommunications, technology and infrastructure, raising fears of long-term dependence on China. These fears are heightened against the backdrop of growing Chinese investment in European ports, businesses and high-tech companies.

However, this perception is largely wrong. While China does play a key role in the global economy, its influence on the EU has been exaggerated. European countries still enjoy significant economic autonomy and diverse trading partners. Moreover, China remains an important partner for the EU in global supply chains, and its contribution to European markets contributes to technological advances and infrastructure development. Rather than viewing China solely as a threat, the EU can benefit from mutually beneficial cooperation while strengthening its own position in strategic sectors.

The new package includes five key objectives: (1) strengthening inbound investment control regulation, (2) improving export controls at the European Union-wide level, (3) exploring the feasibility of implementing an outbound investment control system, (4) expanding dual-use and advanced technology research, and (5) protecting this research and technology from leakage to strategic competitors.

Although there has long been talk of devolving some of the national security powers of EU member states to Brussels, in reality the EU is far from doing so. Nevertheless, the European Commission has been given some powers to control outbound investments, although this procedure will be advisory. Brussels will not adopt economic sanctions unilaterally. In 2019, an important document regulating the verification of foreign direct investment was adopted. The document was designed to protect critical sectors of the economy from undesirable influence of foreign investors, especially in the context of national security and public order.

The document does not introduce a single control mechanism at EU level, but sets out a framework for coordination between Member States on FDI screening. Member States are obliged to notify each other and the European Commission of planned checks on foreign investment. The Regulation also aims to protect strategic sectors such as energy, water, transport, communications, financial services, high technology and defense. These sectors are particularly vulnerable to potential threats from foreign investors.

It is true that not all countries have ratified the instrument, in particular several Eastern European states, but they are on their way to do so. This delay is due to the fear of worsening the investment climate in these countries, which are just developing and for whom every dollar of investment is more important than for the richer countries of Western Europe.

Another important aspect of EU economic policy is the relationship with the US, especially in the context of the EU-US-China triangle. Since the Trump era, the US has been pushing the EU to organize China's access to some European markets and industrial technologies, particularly semiconductors and dual-use equipment. This happened under the Wassenaar Arrangement. Another aim of the new strategy is to try to prevent a situation where unilateral restrictions are adopted instead of a collective decision, which would undermine the doctrine of European market integrity.

This consultative approach has its advantages and stands in stark contrast to the behavior of the US, which is increasingly acting aggressively and unilaterally. For example, with regard to microchips, the US imposed perhaps the toughest sanctions in the high-tech sector two years ago, restricting China's access to microchips.

Checking outbound investment

As early as last year at the G7 summit, the EU and the US agreed to develop a mechanism to control outbound investment, and other member states have also responded positively to this initiative. All eyes are on controlling investments in biotechnology, quantum computing, semiconductors and artificial intelligence. One of the mechanisms for implementing these measures is to strengthen information sharing between regulators and private companies.

Technological security

One of the key objectives of the EU's new strategy is to prevent the leakage of data from cutting-edge research, especially in strategic industries. The EU seeks to limit the participation of foreign countries, such as China, in EU-funded programs, including Horizon 2020, to protect technological developments from potential threats.

To this end, there are plans to establish a European Center of Expertise on Research Security to coordinate security policy across the bloc. Some countries, such as the Netherlands, are already taking steps to protect technology by vetting Chinese researchers, while the US and Japan are also tightening their approaches to preventing technology leaks.

Difficulties and what could go wrong

Xi faces three main obstacles to implementing his strategy. First, member countries must be persuaded to follow the commission's recommendations and take legislative action, which is difficult because of the sensitivity of economic security issues. Second, China's response to expanded economic security measures could be restrictions on the use of critical resources and increased scrutiny of foreign companies. Third, the upcoming EU and U.S. elections in 2024 could lead to a change in political direction, which would complicate coordination and increase policy uncertainty regarding China and other economic issues.