Event Summary
The Peterson Institute for International Economics (PIIE) held a discussion with Laurence Boone, Minister of State for Europe, French Ministry for Europe and Foreign Affairs. Minister Boone discussed economic statecraft: how economic policy tools, including industrial policy and trade, can adapt to a changing geopolitical context and how Europe is willing to establish its own doctrine of economic statecraft and use it to support its strategic autonomy.
A discussion with the audience moderated by PIIE president Adam S. Posen followed.
Transcript
With rising geopolitical tensions, and challenges to the post-war rules-based global order, the European Union is completing its design of an economic statecraft doctrine, to align economic, trade and foreign policy. The objective is to secure its prosperity, the influence of its values, democracy and openness, while being a strong and reliable partner to its allies, on an equal footing with them.
Europe is already engaged in more economic statecraft than is commonly thought, but it has mostly been doing so in a defensive way, for historical, cultural, and economic reasons. Today, Europe is in the process of completing its doctrine, in a more assertive way, on an equal footing with other global powers. Hence, the European economic statecraft doctrine is set to be unique in combining the EU's DNA for free trade as an engine of growth and prosperity with the need to take into account a more uncertain security environment. As such, it involves tools that are directly linked to protection and defence (sanctions, export controls, investment screening, financial market restrictions), but also relies on trade agreements, development finance and cooperation incentives, including on global issues such as climate change, cybercrime or health.
Dependencies, when not well managed, are vulnerabilities
In recent years, many countries have experienced, in an unprecedented way, that dependencies are vulnerabilities. The pandemic, like the Russian aggression against Ukraine, has demonstrated the vulnerabilities of supply chains and how interconnected our economies are. It has taught us that we do not produce everything we need and remain exposed to production bottlenecks.
In addition, an increasing number of countries are manipulating dependencies. Russia has been using energy, and to some extent grain, as a weapon in the war of aggression against Ukraine; not just in direct conflict but also to influence the supporters of Ukraine, in Europe and elsewhere. This has led to cascading effects on the global energy and commodity markets. As a result, energy prices have risen sharply in 2022, fuelling inflation and undermining Europe's competitiveness. In a more indirect approach, China has been relying extensively on trade and investment around the world to achieve its foreign policy objectives. China is the top trading partner of many African countries, which are rich in a variety of raw materials. It is now the largest holder of sovereign debt globally, through infrastructure funding. At the same time, China is heavily endowed with critical commodities, it supplies two thirds of the world's critical raw materials and hosts most of the global cobalt refining capacity. China is most likely the only country with control over almost the entire supply chain of electric vehicle batteries.
The past couple of years have also demonstrated that multilateralism is weakening. Multilateral instances are facing more fragmentation than like-mindedness. As a result, they have struggled to resolve trade tensions, and the rules-based global order is being increasingly challenged. The World Trade Organization is not able to act with the speed and efficiency needed to ensure a level playing field when protectionist measures are being put in place, or in the face of non-market practices.
Europe has all it takes to be a powerful actor with its own statecraft doctrine
The European Union is a global economic power. The EU is one of the largest economies in the world, with a GDP per capita of 25,000 euros for its 450 million customers. It is the world's largest trading area. It ranks first in both inbound and outbound investment. The EU is the top trading partner for 80 countries, the US for just over 20 countries.
Open trade has been the hallmark of European construction. The historic foundation of the Coal and Steel Community was based on creating dependencies between France and Germany in these strategic sectors. Europe's history is based on a positive approach to trade and co-dependencies, intimately related to peace. A significant share of the EU's prosperity comes from trade, both within the EU, with the single market, and outside the EU, with the establishment of a common commercial policy. The EU is an export-oriented economy and has been recording a current account surplus for decades. Many countries joining the EU have done so mostly to benefit from the internal market and from the trade power arising from the single market.
To this effect, the EU has been leveraging on a predictable, and constantly developing, international economic rules-based order. It has thrived on the rules-based global order, which is now being challenged, but which remains at the core of its values. Likewise, the EU is not willing to give up on multilateralism. On the contrary: the EU believes in international cooperation for managing global public goods –climate, biodiversity- and supporting social progress. Aware of the multiplicative power of multilateral organizations, France in particular has been using multilateral processes, for example to protect climate and biodiversity and support the achievement of the Sustainable Development Goals. Multilateralism is part of EU statecraft and will remain so.
In this environment, the EU statecraft doctrine is based on four pillars
The EU has been developing its doctrine of economic statecraft based on four pillars, reflecting its history and construction: (i) protecting the level playing field between the internal market and third countries; (ii) ensuring reciprocity; (iii) deploying assertive instruments against coercion and aggression; (iv) partnerships, which is to be completed.
The first pillar is protecting the level playing field. The EU has made significant use of trade defence instruments, such as anti-dumping and anti-subsidy tools, as well as safeguarding measures. These instruments, based on WTO rules, target specific cases. In 2021, the EU launched 160 anti-dumping and 20 anti-subsidy measures. More than half of them targeted China. One of the challenges in using these instruments is to ensure that firms are fully cooperating and support the strategic vision behind them, as they bear some cost to them in the short term. But when fully used, they have proven effective, for example in protecting the production of bicycles in Europe.
The Foreign Subsidies Regulation complements the anti-subsidy instrument, as it allows the EU to prohibit investment or acquisitions that are subsidized by foreign countries. The Regulation entered into force this January and the Commission stands ready to launch its first investigations.
Screening of foreign direct investment is a direct tool for protecting strategic assets within the single market. This EU regulation was adopted in 2020. Some Member States are already implementing it (18 out of 27 have a mechanism in place). In 2021, over 400 investments were screened by the European Commission. Data demonstrates that the number of strategic cases identified is rising sharply.
The second pillar is reciprocity, for which Europe has also developed a set of tools. In 2016, 86% of public procurement in the EU was open to outside countries, while most public procurement in China was restricted to Chinese companies. As public procurement represents 14% of GDP, European economies can no longer afford to turn a blind eye to this difference. The International Procurement Instrument allows EU countries to implement a local content requirement in public procurement when access to similar markets in third countries is restricted.
The EU believes in standard setting to enforce reciprocity. This is a strategic bet, based on the expectation that third countries will conclude that it is worth abiding by EU standards to gain access to the large EU market. Creating a level playing field for EU companies producing high-quality goods and services will induce corporates from third countries to follow this trend. This is why trade and investment agreements are used to enforce environmental and social standards, to protect the high standards we demand from our firms, as well as to exert influence beyond our borders. Examples include legislative initiatives on forced labour, deforestation, batteries, due diligence, as well as the Carbon Border Adjustment Mechanism. Reciprocity is being embedded in trade agreements, which have to meet three criteria: environmental sustainability, a well-designed balance of concessions, and the demonstration of the strategic interest of the agreement for the EU. For example, the EU will not complete the MERCOSUR trade deal until it meets these criteria; conversely, it has signed the agreement with New Zealand because it fulfilled all three objectives.
The third pillar is about more assertive measures.
It starts with a strong industrial policy to ensure Europe is on par with other regions when it comes to strategic sectors. First, with competitive energy supply and prices. The reform of the electricity market design will accelerate the production of low carbon electricity in Europe, along with enhanced interconnections to secure our common energy supply and its efficiency. The EU is also investing in sectoral initiatives to speed up the development of strategic sectors (commodities, technology, clean energy, health, agriculture). For example, the Critical Raw Materials Act will ease and increase sustainable mining, increase recycling capacities, and pool European resources to strike trade agreements with reliable partners. The Net Zero Industry Act will design a huge regulation overhaul to speed up permitting, alongside a revised state aid framework dedicated to support the industry energy transition.
Europe has also taken steps to adapt to rising global tensions. The anti-coercion instrument is designed to deter economic coercive action through dialogue and engagement, but also allows retaliation with countermeasures related to trade, investment and funding. Discussions are ongoing between EU legislators to determine the severity of countermeasures and the most efficient way to implement them. Sanctions are also an obvious tool under this category. Ten sanctions packages against Russia have been adopted over the past year, including individual targeting (1,473 individuals and 205 entities) as well as sectorial measures (financial sector, transport, defence, energy). The oil price cap has succeeded in limiting Russian oil revenues. According to the OECD, sanctions have caused a 5.6% shortfall in Russian GDP in 2023. The scale and depth of sanctions imposed by G7 members are unprecedented and will have impacts over the long term.
Three areas for improvement
This wide set of instruments documents how the EU views the linkages between economic policy and foreign policy. However, there are three areas for improvement for EU policies to reflect rising tensions in the geopolitical order:
- Screening of foreign direct investments should be strengthened as it is mostly done at national level and contains loopholes. The regulation will be revised by the end of the year and it must be strengthened to (i) improve EU coordination and (ii) make sure that it covers all strategic assets and infrastructures in the European Union.
- Exports control: The EU should complete its doctrine on which technologies it is willing to export and to where. The current doctrine only targets dual-use exports as a priority; it should be expanded. The issue of outbound foreign direct investment also remains open.
- External partnership and development aid: Europe also has some way to go in making better use of tools like development aid. China is scaling up its investment in the Global South, focusing on commodities, land, and infrastructure. One in two large-scale infrastructure projects in Africa is being built by a Chinese company and one in three is being funded by a Chinese Bank. The EU has not yet designed a comprehensive strategy to coordinate its development aid: Global Gateway could be a European tool to use development aid in a strategic manner, but is has to be focused and accelerated to hope to offer credible alternatives to the Belt and Road Initiative. Ukraine's reconstruction is also an opportunity which should not be missed.
Europe's shift towards geoeconomics should in no way be perceived as a way to antagonize the US and other partners with similar values. On the contrary, European economic statecraft is being built with the aim of ensuring the EU is a strong ally to the US and many countries across the world, while being mindful of its interests and values.