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18 November 2021

Economic arm-twisting is on the rise. Europe must learn how to resist it

Protectionism is not the answer. European countries must build public support for strategic openness.

By Jonathan Hackenbroich and Pawel Zerka

Economic coercion is the new language of great power politics. Breaking its erstwhile promise, globalisation did not eradicate conflict from the world. Instead, it provided the most powerful countries with a new weapon. And some of them have not hesitated to use economic interdependence to scare Europeans into adjusting policies to their liking.

This is what happened when China, earlier this year, stopped rail freight and curbed Lithuanian imports into the Chinese market when Vilnius announced the opening of a “Taiwan representative office” (and not a Taipei office) in the Baltic country. That, in the eyes of the Chinese, looked too much like support for Taiwanese independence. A similar thing happened to the Netherlands in April 2020, when China went as far as threatening to cut the country off from critical medical supplies at the height of the Covid pandemic.

In April this year Russia threatened to ban Czech beer imports when the government in Prague linked Russian intelligence to the 2014 Czech warehouse explosions. And even the EU’s close ally, the United States, used economic coercion against Europeans when Washington imposed secondary sanctions to stop European companies trading with Iran.

Across the EU, policymakers realise that Europe cannot afford to remain vulnerable. Currently, one of the hottest debates in Brussels concerns a new trade tool. The so-called “anti-coercion instrument” would allow the bloc to deter economic coercion – or respond to it – using counter-measures such as trade and investment restrictions, curbs on access to EU public procurement markets, or possibly export controls to cut off a third country from a critical technology. In a few weeks the EU Commission will propose this promising initiative. But, if designed poorly, it comes with the risk of protectionism.

To make this instrument credible and effective, Europeans need to think about their economic strength – as their number one defence. It is crucial to ensure the vivacity of the European economy: you can’t stand up to strong economies if you are weak. Besides, European countries should avoid being perceived as protectionist, not least because their prosperity and ability to be innovative rely so much on open and rules-based trade. This is a major challenge, but also just a starter.

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[see also: Why Germany has less to teach the UK than most think]

Completing the single market – such as by allowing for a liberalisation of services, integrating the digital and the energy markets, or advancing on the capital markets union – should also return to the top of the EU’s agenda. A huge, booming and innovative European market would provide the leverage in a world where politics and economics are increasingly intertwined. It would make it more costly to use economic coercion against Europe in the first place. But serious progress on the single market won’t happen as long as discussions are driven mostly by domestic, rather than strategic, considerations. 

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At the same time, Europe needs to better understand its dependencies on third countries, by assembling, analysing and sharing information on instances of economic coercion. A new geo-economic taskforce, or Resilience Office, at a high level in the Commission could play a key role here. It would improve coordination of broad EU policies, gather solid analytics to underpin evidence-based policy, and could even provide a clear point of contact for business. But for this to happen, it needs to be seen as creating new strategic capacity – not more bureaucracy or just a transfer of competencies to the EU level.

Europeans should also consider how they can reduce their dependence on third countries and develop some asymmetries in their own favour. This does not mean, as some still argue, that Europeans should necessarily aim at becoming more self-sufficient. In some strategic areas, it may be justified for businesses to re-shore, near-shore. Certainly diversifying supply chains is an important task for many. The EU and its member states should invest in the development of Europe’s own industrial capacities – as recognised by the ambitions of the recently announced European Chips Act (which aims to secure Europe’s supply of microchips). But these efforts would need to be kept in check, lest they lead to overreach.

Similarly, discussions about the trade and competition policies of the EU, its role in setting international standards, its use of economic diplomacy and its approach to multilateralism could all be refreshed by taking as a starting point the fact that Europe needs to be economically strong in order to be secure.

Free trade agreements are another stark example. Take the deal with Canada, for instance, which has not yet been ratified by the EU, even though it concerns a close partner and friend. The EU has also negotiated and then failed to ratify a trade agreement with Mercosur countries in Latin America. Withdrawing the offer of closer trade ties to encourage better climate policies in Mercosur countries could be a good strategic use of Europe’s economic clout. But such a move has to be weighed against the negative consequences: others such as China or the US might fill the vacuum Europe leaves.

Of course, the public is less favourable to new trade deals in some places – for example, France and Greece, where research suggests only around half of people have positive views of globalisation. Ensuring Europe’s strength, then, is about crafting the right domestic policies to make sure ordinary people do not lose out on strategically important trade deals.

When Europeans adapt to economic coercion, they need to look with fresh eyes at their longstanding economic debates. Until now, the EU’s economic policies have often lacked a sufficient strategic underpinning. In the new era of geo-economics, the positive agenda and defensive tools are two sides of the same coin, and an inseparable package. Europe needs to get the balance right.

[see also: Svetlana Tikhanovskaya calls for tougher EU sanctions on Belarus]

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