Europe’s new economic security plan is aimed at the country whose name shall not be spoken

The European Commission’s proposed new economic security strategy is directly targeted at China, even though it studiously avoids any mention of China.

On Tuesday, the EC unveiled the strategy, which it says was motivated by a desire to minimise risks flowing from “certain economic flows in the context of increased geopolitical tensions and accelerated technological shifts”.

European Commission president Ursula von der Leyen says Europe must be “clear-eyed” about a world that has become more contested and geopolitical.Credit: AP

The strategy deals with risks to Europe’s supply chains; to the physical security and cybersecurity of its critical infrastructure; to its technology security and “leakage”; and to the weaponisation of economic dependencies and coercion.

While saying the proposed strategy was “country agnostic”, EC president Ursula von der Leyen said it was aimed at a limited set of cutting-edge technologies and that the EC wanted to ensure it did not enhance the military capabilities of “some countries of concern”.

China has become the country whose name should not be spoken when countries – or blocs such as the European Union – move to reduce their dependence on it.

The EC plans to develop a list of technologies that it deems critical to the EU’s economic security; to review screening and regulation of foreign direct investment; to look at options for supporting its own research and development of so-called “dual-use” technologies (which have commercial and military applications); to improve research security; to develop responses to foreign information manipulation and interference; and to increase co-operation with third countries on economic security issues.

Like the US and Joe Biden’s CHIPS and Science Act – which provides hundreds of billions of dollars for strategic research and development, subsidies to develop domestic manufacturing of strategic products, and incentives to re-shore or “friendshore” strategic activities and their supply chains – the EC wants to ensure there is support for its strategic technologies and less vulnerable supply chains. It says more investment is urgently needed to ensure EU leadership in various strategic technologies.

Von der Leyen said Europe had to be “clear-eyed” about a world that had become more contested and geopolitical, while another EC executive, Margrethe Vestager, said the strategy was a plan to de-risk rather than decouple Europe’s economic interdependencies on technologies it needed the most. That’s the same language and goals that the US has adopted for its relationship with China.

Russia’s invasion of Ukraine shocked the Europeans by exposing how dependent it had become on one energy supplier, while China’s closer relationship and strong support for Russia since the invasion has caused them to re-evaluate their economic ties with China.

China has become the country whose name should not be spoken when countries – or blocs such as the European Union – move to reduce their dependence on it.

China hasn’t helped itself with its heavy-handed response last year to Lithuania’s decision to allow Taiwan to open an office in Vilnius under its own name. China imposed a de facto ban on imports from Lithuania that resulted in a 75 per cent fall in their value last year.

The EC’s proposals are designed to try to harmonise the European approach to China.Credit: AP

Australia, of course, was subjected to a similar attempt at economic coercion via China’s bans on imports of Australian coal, barley, wine, beef, lobsters and cotton.

The Europeans have generally had an open approach to trade and investment, but as geopolitical tensions have increased in line with China’s economic influence and geopolitical ambitions, they have begun to look more closely at the vulnerabilities the trade relationship with China might create, and have begun a dialogue with the US about a more co-ordinated approach on strategic trade issues.

Not all the EU’s member states are on the same page. Germany’s economy, in particular, is heavily dependent on trade with China. France is very protective of its independence (particularly from the US) and its freedom to act in its own national interests.

With Italy this month moving to limit the access to technology and influence that China’s Sinochem can have over tyre-maker Pirelli, and the Netherlands restricting exports of AMSL’s high-end chip-making tools, individual states are taking matters into their own hands.

The EC’s proposals are designed to try to harmonise the European approach to China and Russia, to avoid conflicting actions by individual states. The ambition is to reduce the risks in the relationship with China while maintaining the broader trade relationship.

The EU states have already stepped up their screening of inbound investment from China, but want a more co-ordinated policy while developing a similar (but more difficult, practically and politically) screening of outbound investment that might have economic or military security risks. A particular concern is technology transfer and intellectual property theft.

They have previously developed regulation of foreign subsidies that might distort competition within Europe, another measure aimed at China because of its state-owned enterprises and heavy state subsidisation of strategic sectors.

Chinese Premier Li Qiang is in Germany this week urging German companies to be vocal in opposing the EC’s plan.Credit: Getty Images

The EC proposals are just a strategy – albeit a more advanced attempt to create a comprehensive framework for trading with China than any other jurisdiction has put forward.

The US has tended to act in an ad hoc fashion, although it is much further along in actually implementing measures to restrict exports of strategic technologies and to develop new supply chains for China-dependent strategic minerals and products.

Given that there are 27 member states in the EU, with varying exposures to trade with China as well as different relationships with Beijing – and different views on how closely the EU should align itself with the US – the process of turning the plan into regulation will be difficult and probably quite protracted.

Also, China will inevitably attempt to undermine the prospect of an agreed deal with promises and threats to Europe as a whole, and to the EU’s individual member states. China’s Premier, Li Qiang, is in Germany this week urging German companies, which have massive investments in auto plants in China, to be vocal in opposing the plan.

China wants European companies, not their governments, to determine the extent to which their investments and dealings with China constitute a risk to the EU’s interests. It will also inevitably attempt to play individual economies off each other. It would be alarmed at the prospect that the EU might join with the US, Japan and other like-minded countries in a new and powerful bloc trying to thwart, or at least limit, its ambitions.

Had Russia not invaded Ukraine with China’s tacit support, or had Donald Trump (who declared a trade war on Europe and multilateral institutions, as well as on China) been re-elected for a second consecutive term, or had China not been so aggressive in its treatment of Lithuania, implementing the kind of measures envisaged by the EC would probably have been impossible. As it stands, it won’t be easy.

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.