Faced with contemporary geoeconomic challenges, the European Union and its member states are experiencing an identity crisis. But Thijs De Cuyper argues that the EU shouldn’t slavishly copy other countries' policies, especially when that means abandoning the pursuit of a rule-based economic order in favour of a unilateral system bearing China's signature
Following WWII, the United States enjoyed a hegemonic position that allowed it to advance and consolidate economic liberalism throughout the world. The Bretton Woods institutions (the World Bank and IMF) were established to achieve these aims.
Following the fall of the Iron Curtain in 1989, the Soviet Union’s command economy, most formidable systemic rival of the US economy, appeared defeated. This marked the beginning of an era of unlimited economic globalism. However, the globalised economy and the high interdependence it entails now pose a new challenge: multipolarity.
To tackle this challenge, it is critical to address China's 'alternative' state-capitalist model. This is essentially a system of political-economic organisation in which the state functions as the leading economic actor. The existence of such regimes is not a cause for concern per se. However, the situation is different when these regimes turn outward.
China's rise has had a distortive effect in that other countries have complained about the unequal playing field. Indeed, Chinese State-Owned Enterprises (SOEs) are often granted subsidies and tax breaks to become not only domestic champions of industry, but also international titans.
When China's outbound investments are directed toward critical infrastructure, this can have security implications
In addition to unfair competition, Chinese outbound investments are frequently perceived as being too closely linked with the Chinese Communist Party's (CCP) strategic agenda. This can have implications for security when directed toward critical assets or infrastructure. But while the Chinese alternative model continues to attract condemnation, a closer examination of the characteristics of new trade and investment policies around the world reveals a shift in the opposite direction.
Policymakers began to adjust in response to the Chinese model by improving their own grip on international trade and investment. In essence, this is nothing new. However, the degree to which trade and investment have now become so politically charged is unprecedented.
Geoeconomics is the term we're looking for to describe the zero-sum game in which nations compete economically rather than militarily. This is not to say that armed conflict has become unthinkable, as the conflict in Ukraine so obviously demonstrates. Even in this case, however, we should not ignore the economic dimension of the conflict.
Geoeconomics describes the zero-sum game in which nations compete economically rather than militarily
As the flow of natural resources became weaponised, Western firms had to divest from Russia. Openness and rule-based relations gave way to fragmented systems of blocs, spheres of influence, mercantilist rivalries and regional economic networks.
This geoeconomic competition has accelerated in recent years. In fact, neo-mercantilist and protectionist ideas are being incorporated into both domestic and foreign economic policy all across the world. It's worth noting that traditional supporters of a globalised economy, such as the United States, are adapting, too. The Inflation Reduction Act (2022), for example, has a geoeconomic dimension because it aims to promote the domestic acquisition of critical materials and development of key technologies. In essence, it incentivises decoupling from foreign players.
We can see similar policies elsewhere. Zimbabwe, for example, blocked raw lithium exportation, because its government would rather see lithium-based electric car batteries developed in Zimbabwe. Canada ordered Chinese investors to divest from three Canadian lithium mines because their presence was seen to constitute a risk to Canada’s supply of critical minerals. It appears that the urge to unilaterally regain control takes priority over market efficiency and global efforts to accommodate it. (One notable feature, however, is that the overall policy landscape has a Chinese flavour.)
How is the EU faring under these new dynamics? Developments such as the Sino-Lithuanian trade-conflict and the Ukraine war ensure that the EU and its member states are fully aware of the 21st century's political-economic challenges. Brussels now understands that asymmetries in dependency relationships with third countries should be avoided if at all possible.
Ursula Von Der Leyen’s geopolitical commission introduced and emphasised Europe’s need for open strategic autonomy. This is not a call for European isolationism. Rather, it is a move towards managing Europe’s interdependence in the best possible way. Based on this new philosophy, the EU and its member states are putting in place tools to screen foreign investment, mitigate distortive effects of foreign subsidies, combat economic coercion, and aim for reciprocal access in procurement markets.
The EU is screening foreign investment, mitigating distortive effects of foreign subsidies, combating economic coercion, and aiming for reciprocal access in procurement markets
Recently, the EU also prolonged a Temporary Crisis and Transition Framework for state aid, which allows for more easily subsidised green technologies, as well as tax breaks to encourage businesses to invest in the EU rather than third countries. The framework is temporary because it is a response to the spill-over effects of the Ukrainian conflict. However, it also demonstrates the EU's discomfort in taking geoeconomic action. Indeed, due, in the main, to the internal division of competences, it is difficult to believe that these initiatives will transform the EU into a fully-fledged geoeconomic actor. These instruments are a reaction to others' geoeconomic policies; they do not constitute an active strategy in and of themselves.
The geoeconomic era will have a price, this much is certain. The EU, one pole in this multipolar world, should be selective about who it connects to and decouples from. On the one hand, refusing policy outright because it does not conform to the liberal-economist mindset would be a mistake. On the other hand, European policymakers need to be careful of narratives that call for improbable outcomes.
For instance, the recently discovered rare earth element deposit in Sweden is helpful in the country's quest for autonomy, but does not take away the need for import. Combined with a focus on diversifying dependencies, the EU's current reactive posture may well be a viable, non-provocative, alternative model.