The European Union’s Economic Security Strategy Update

The Package

In January 2024, the European Union unveiled five new initiatives to advance the implementation of its Economic Security Strategy, which it formally introduced in June 2023. The updated strategy further articulates policy objectives outlined in the June 2023 agenda. Together, these documents are less an economic growth doctrine and more closely represent an EU attempt to position itself as a geopolitical bloc. This strategy seeks to enhance the strategic trade and investment toolkit of the European Commission. According to the European Union, scaling up technologies while preventing any leakage—through a more robust strategic trade toolkit—will better position it to assume a truly geopolitical and geoeconomic position on the world stage.

Although the new package is similar to recent U.S. economic security initiatives (particularly on the sectors identified as strategic for outbound investment), it tries to distinguish itself from the United States, especially in emphasizing country-neutrality. This is not because the European Union is not concerned with China’s economic threat, but because the bloc remains overwhelmingly focused on Russia as a malicious actor. The European Union is also concerned about the trajectory of transatlantic relations under a change in U.S. political leadership. The European Union has also remained a key defender of the rules-based liberal economic order and insists on sufficiently recognizing the risks associated with deglobalization.

The new package consists of five main goals: (1) tightening inbound investment screening rules, (2) advancing export control conformity throughout the European Union, (3) contemplating the establishment of an outbound investment screening mechanism, (4) scaling up dual-use and advanced technology research, and (5) protecting research and advanced technology from leaking to strategic competitors.

Since economic security is a part of national security, it is a prerogative of member states. This means that it would be difficult to pass legislation beyond the inbound investment screening mechanism, which is part of the European Union’s trade policy. Thus, it is in the hands of the commission. Different working groups in which member states, the commission, and the high representative are represented will continue working on these topics and will elaborate on specific risk assessments.

FDI Screening

The European Union passed its hallmark foreign direct investment (FDI) screening regulation in 2019. This decision was largely precipitated by the Chinese acquisition of Kuka Robotics company in Germany in 2016. Since the entry into force of the FDI screening regulation, additional member states have adopted means of screening inbound investments. However, five member states—Bulgaria, Croatia, Cyprus, Greece, and Ireland—currently lack this authority, creating a gap in the single market. Sweden’s FDI screening regime came into force in December, and Ireland’s will be operational in 2024. The language in the latest EU strategy document calls for a legislative solution that would create greater conformity over inbound investment screening and also require, statutorily, that each EU member state erect an inbound screening regime. It is likely that this legislative process will unfold over a two-year time period through legislative processes.

Export Controls

Following the application of the U.S. export controls on artificial intelligence (AI) chips to China, the United States sought buy-in from the Dutch and Japanese governments. The subject of additional controls on machine tooling to China has been a key bilateral issue between the United States and Netherlands since at least the Trump administration. Under threat of the Foreign Direct Product Rule, which permits the United States extraterritorial leverage over supply chains that contain a de minimis level of U.S. inputs, the Dutch government ultimately acquiesced to U.S. demands and levied controls on semiconductor machine tooling exports. These controls exceed thresholds established under the Wassenaar Arrangement, the multilateral export control regime for dual-use items.

Because the EU dual-use list is tied to the Wassenaar Arrangement regime list, the Dutch decision to exceed that threshold in some ways challenged the European Union’s overall alignment with multilateral lists. This move is particularly sensitive, given ongoing deterioration of the World Trade Organization and the U.S. move away from that system as its preferred forum for international trade cooperation in favor of more “mini-lateral” arrangements. In updating its approach to export controls, the European Union is creating an additional buffer against the future use of unilateral export control measures that could challenge the integrity of the EU single market. Additionally, now member states can impose authorization requirements on exports of items included in other member states’ control lists through a common compilation from the commission. Even if the Netherlands and Spain were the only countries to initially participate, this should allow further coordination on export controls between member states. In other words, the commission is clarifying that exceeding dual-use multilateral regime standards should be carried out only through EU-wide consensus.

Where the European Union continues to reaffirm the utility of a multilateral system, the United States has instead leaned increasingly into both a unilateral export control toolkit and also one that takes direct aim at China. For example, the October 7, 2022, export controls on advanced AI chips, for the first time in recent history, levied export restrictions on advanced technology on a country-wide basis, moving the U.S. policy closer to its Cold War stance toward the USSR. The European Union remains unlikely to take this country-wide approach in the near term, especially when it remains overwhelmingly focused on Russia.

Outbound Investment

The EU discussion regarding outbound investment screening initially evolved out of the bilateral summit with Presidents Biden and von der Leyen in March 2023. The ensuing G7 summit in May 2023, under Japan’s leadership, recognized the potential utility of an outbound screening mechanism, specifically to avoid that countries and companies could circumvent export controls but did not directly endorse creating the capability throughout G7 members. In line with the G7, the latest EU strategy calls for ongoing assessments of the utility of such a tool, with a specific risk assessment on four prioritized critical technologies—advanced semiconductors, AI technologies, quantum technologies and biotechnologies, following the Commission Recommendation in its October 2023 critical technologies list.

The newly released white paper expands on the state of play of the European Union’s initial work on outbound investment, as well as the risks of technology and know-how leakage resulting from these investments. The white paper specifically urges member states to evaluate whether extant tools can mitigate these risks, such as respective domestic FDI screening mechanisms, or whether member states would benefit from additional proportionate policy action at the EU or national level.

Similar to the United States, there is insufficient information about the value and volume of outbound capital and knowledge transfers among European firms to strategic adversaries. The standing up of an outbound mechanism could generate additional information about these flows and provide helpful insights about whether a firmer screening tool—or potential targeted bans—would be merited.

Scaling Up Technology Research

U.S. companies are responsible for over 42 percent of global research and development (R&D). While China achieves second place with 17.8 percent of advanced technology research, the European Union currently accounts for 17.5 percent, closely competing with Beijing. However, in 2022, the European Union spent 6.34 percent more than in the previous year with €352 billion ($381 billion) on R&D. However, the European Union’s R&D intensity—how much it spends in proportion to GDP—dropped from 2.27 percent in 2021 to 2.22 percent in 2022.

For the European Union to cement its role as a leader in the technology-driven geoeconomic era, the bloc recognizes that it must do far more to invest in a sustainable and durable way in the technologies of tomorrow. For example, while the European Union has also passed its EU Chips Act in an answer to the U.S. CHIPS and Science Act, portions of the package remain unfunded, further underscoring the need for the European Union to erect a fiscal instrument that can more easily advance technology research throughout the European Union.

The January 2024 strategy seeks to achieve mechanisms to support research and development in technologies which can be used for different purposes, while enhancing research security across the European Union. This goes hand in hand with the white paper recently released, in which the Commission reaffirmed its support to EU initiatives supporting cross-fertilization between civil, defense and space R&D activities, as civilian and military research programs have often been managed under different and fragmented programs like Horizon Europe and the European Defence Fund, respectively. The new 2024 strategy aims to shift the focus, foster cooperation between civilian and military research, and tailor cross-sector programs that can scale up the European Union’s technology research. This is why risk assessments and controls to prevent technology leakages from these programs will be more common from now on.

Preventing Advanced Research Leakage

Related to foreign investments, one of the pillars that the European Union will enhance through its new scope of action is research security. The main rationale is to prevent foreign countries from participating in EU-funded research, such as Horizon 2020, in strategic sectors. Even if China has been already excluded, further effort will be aimed at preventing circumvention efforts from non-Horizon projects in dual-use sectors that could indirectly end up in Chinese entities. The European Union thus envisions the creation of a European Center of Expertise on Research Security to “support policy learning, coordination and consistency” across the bloc.

Some member states have previously addressed this domestically, with the Dutch government considering legislation for screening PhD Chinese students in technical fields last year. This reflects a trend that both the United States and Japan have also recently pursued. A Chinese researcher at the National Institute of Advanced Industrial Science and Technology purportedly leaked information to a Chinese company. This, in turn, prompted the Japanese government to reinvigorate efforts to influence how universities are preventing the outflow of advanced technology. The United States has also fought against this as well through the 2021 National Security Presidential Memorandum. Additionally, the House Select Committee on the Chinese Communist Party adopted a bipartisan report in December 2023 that urges the United States to strengthen research security measures and expand controls on technology exports.

Transatlantic Approaches

There exist major differences in transatlantic approaches to economic security. Washington, unlike Brussels, does not have a formal economic security document or doctrine. The Biden administration has periodically attempted to articulate its approach to economic security, but the sharing of economic security competencies across several U.S. government agencies can obstruct the formulation of a single doctrine. However, in the coming days the U.S. Department of Commerce will unveil a formal document outlining the department’s approach to national and economic security.

Even without a formal doctrine, U.S. policies have in some ways accelerated the economic security discussion in Europe. The U.S. export controls on advanced AI chips, for example, forced difficult questions about the EU approach to export controls and has teed up an overdue conversation throughout the European Union at the nexus of trade policy, which is a competency of the European Commission, and national security, which remains a competency of member states. But, overall, the European Union and United States remain aligned overall, particularly in their promulgation of policies that fall under the “3 P’s”—protect, promote, and partner, and in the need to accelerate “de-risking" while avoiding “decoupling” (especially with China).

Another key difference is that the European strategy remains country-agnostic. Various facets of the strategy are clearly aimed at Russia, which remains the primary focus of Europe’s foreign policy and national security agenda. Export controls and sanctions, for example, have been overwhelmingly applied to Russia in the wake of its invasion of Ukraine. This differs considerably from the U.S. approach, which is increasingly focused on strategic trade tools aimed at China.

Obstacles on the Horizon

The first hurdle will be for the commission and the high representative to get member states to follow their recommendations and agree to pass legislative measures in the council in the direction indicated in the package. This will not be easy because, as noted, economic security considerations are traditionally very sensitive, and some of the member states, while in favor of coordination, are reluctant to follow the commission's lead, especially in relation to alignment with the United States on China.

A second problem for the European Union will be how China will react. It is perpetually difficult to anticipate Chinese responses to economic security policies such as export controls. As the economic security net widens, partner countries will inevitably be confronted with escalating retaliatory measures from China. Those could include additional curbs on critical mineral exports or enhanced scrutiny of foreign firms operating in China.

A third problem relates to political leadership changes. There are over 50 elections in 2024, including on both sides of the Atlantic. The European Union will therefore need to contend with an internal political reshuffling and will also need to work alongside the United States, which could take a far more hardline stance on China under different leadership.

Conclusion

In some ways, the EU strategy follows a long arc of EU attempts at building a more cohesive geopolitical bloc, foster its strategic autonomy and be more independent from the United States while maintaining it as its closest partner. In other ways, this strategy represents a European response to a series of exogenous shocks, whether relating to the Russian invasion of Ukraine, U.S. extraterritorial export controls, or growing tensions over Taiwan. The European Union recognizes that today’s geopolitical environment requires additional unity throughout the bloc, and this strategy represents a concrete step toward advancing that goal. Three crucial obstacles are adapting the European Union’s institutional setup to be able to address these risks, increase trust among member states to facilitate the sharing of information in light of internal EU divisions, and creating common fiscal instruments to fund economic security initiatives, particularly those related to industrial policy.

That EU member states retain national security authority, while the commission oversees trade policy, illustrates the historic silo that has existed between these two policy areas. Still-bifurcated trade and national security agendas are a relic of a global environment that no longer exists. As partners advance to this new era of technology-driven economic security agendas, governments will need to work concertedly to break the long-standing barriers between trade policy and national security. 

Emily Benson directs the Project on Trade and Technology at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Federico Steinberg is a visiting fellow with the Europe, Russia, and Eurasia Program at CSIS. Pau Alvarez-Aragones is an intern with the CSIS Project on Trade and Technology.

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Emily Benson
Director, Project on Trade and Technology and Senior Fellow, Scholl Chair in International Business

Pau Alvarez-Aragones

Intern, Project on Trade and Technology