Photo: YVES HERMAN/POOL/AFP/Getty Images
Recognizing that commerce with China entails both economic benefits and national security risks, both the United States and the European Union have further signaled their intent to “de-risk” rather than decouple their respective trade relations with China. U.S. secretary of state Antony Blinken explicitly did so during his recently concluded visit with Chinese president Xi Jinping and other leading Chinese officials. A day after Blinken’s meeting with Xi, the European Commission released its European Economic Security Strategy proposal, which implicitly aligns with U.S. policy to continue trade with China but minimize the geopolitical risk and economic dependency it involves.
Q1: How is the Biden administration framing U.S. trade policy toward China?
A1: During his June 19 meeting with President Xi, Secretary Blinken affirmed comments earlier that week from Secretary of the Treasury Janet Yellen indicating that the United States does not want a “disastrous” economic decoupling that would “stop all trade and investment with China.” Borrowing a phrase from European Commission president Ursula von der Leyen’s March 30 speech on EU-China relations, Blinken instead observed that Washington should “de-risk” U.S. trade with China, just as other U.S. officials have enunciated since April.
Three weeks earlier, at a Senate hearing on countering China on May 31, senior U.S. officials from the Departments of Commerce and the Treasury offered insight into the logic underlying Blinken and Yellen’s policy pronouncements on “de-risking.” Assistant Secretary of the Treasury for Investment Security Paul Rosen stated that while the United States does not leverage “national security tools to gain competitive economic advantage or to stop China from growing,” it nonetheless “will not compromise on national security concerns even when they force trade-offs with [U.S.] economic interests.” This balancing of economic prosperity against the necessity of protecting national security appears to rest, at least in part, on an underlying assumption Assistant Secretary of Commerce for Export Administration Thea Kendler articulated at the same hearing: that the United States should use economic measures such as export controls and sanctions to thwart China’s military-civil fusion strategy, which “deliberately blur[s] lines between commercial sectors and military programs.”
As a result, the Biden administration’s Department of Commerce has added roughly 30 percent of all the Chinese entities now on the Entity List to prevent sensitive U.S. technology leakage to China. Meanwhile, the U.S. Treasury Department is carefully formulating an outbound investment screening mechanism to stem the outflow of U.S. expertise into China in sectors such as advanced semiconductors, artificial intelligence (AI), and quantum computing.
Compatibly, the Department of Commerce has tightened export curbs against China regarding dual-use goods with both commercial and defense applications. This notably occurred when the Department of Commerce’s Bureau of Industry and Security announced sweeping export controls on October 7, 2022, aiming to stymie Beijing’s military, nuclear, and security programs. These controls have sought to do so by not only targeting China’s ability to obtain advanced chips but also by restricting China’s access to the semiconductor manufacturing equipment necessary to produce them. The Department of Commerce has also incorporated “guardrails” into the U.S. CHIPS and Science Act to prevent semiconductor manufacturers receiving CHIPS funding from expanding their operations in China. In a similar manner, the U.S. Inflation Reduction Act seeks to diminish China’s chokehold over raw materials and critical minerals deemed necessary for transitioning to renewable energy.
The policy design and implementation of these economic measures have not been seamless. For example, the possibility of creating an overly broad outward investment screening framework remains controversial among relevant U.S. stakeholders who have expressed concerns about diminishing the profits U.S. businesses earn from trading with China. Furthermore, the Department of Commerce plans to extend existing exemptions from its October 7, 2022, export controls for select firms in allied and partner nations. These exemptions and their extensions resulted from significant pushback claiming that this policy and the CHIPS guardrails would economically disadvantage certain domestic and international companies. A case in point involves South Korea’s Samsung and SK Hynix, which have invested billions of dollars into their China-based chip-making operations. Although both companies appear to have secured exemption extensions, they reportedly remain so concerned about the strings attached to CHIPS manufacturing incentives that they are weighing whether to reject that funding for fear of jeopardizing their China-based business operations.
These matters have, at least indirectly, helped shape leading U.S. officials’ rhetoric that an economic decoupling from China is implausible and disadvantageous. Even so, while the distinction between decoupling and de-risking is becoming clearer, Washington has yet to draw an indelible line separating permissible and impermissible trade with China.
Q2: What are the key takeaways from the proposed European Economic Security Strategy?
A2: On June 20, the European Commission published its proposed European Economic Security Strategy, the implementation of which will serve as the basis for many discussions to come among EU stakeholders.
At a 10,000-foot level, the non-binding European Economic Security Strategy outlines three overarching priorities: ensuring EU competitiveness, protecting EU economic security from exogenous and endogenous risks, and cooperating with partners whose interests align with those of the European Union to create secure supply chains. Beneath the hood of these “country-agnostic” priorities, the European Commission’s strategy requests member states and their industries to assess the economic security risks facing them in four key areas before paving a policy plan to ameliorate them. The four risks requiring assessment involve those that threaten (1) the European Union’s supply chain resilience, (2) its physical and cybersecurity infrastructure, (3) its technology protection, and (4) its economic self-sufficiency.
While this strategy does not name China, its recurrent references to “de-risking” and “destinations of concern that operate civil-military fusion strategies” unmistakably point toward China. Accordingly, the strategy recommends a trade policy that discourages EU member states from furthering their economic dependence on China and compromising their national security by transferring critical dual-use technologies and related knowhow to China.
Although the European Union has an export control regime regulating the sale of dual-use goods, its member states currently apply these controls differently according to their own interests. Moreover, six EU member states still do not scrutinize inbound foreign direct investment. To bridge such gaps in safeguarding sensitive sectors, the European Economic Security Strategy proposes that the European Union both bolster its existing policy options at the intersection of trade and technology and develop new tools where necessary. Thus, the European Commission’s strategy suggests enhancing the bloc’s dual-use export control regime through improved partner coordination, devising an outbound investment screening apparatus to stop unwanted transfer of technological expertise, and reevaluating the scope of inward investment screening while expanding it to include all member states. The strategy also outlines other tools the European Union has at its disposal to protect against economic security risks. This tool kit includes the recently agreed Anti-Coercion Instrument, which is a “framework” for the European Union to secure damages it suffers from economic coercion. Such coercion may arise when “a third country is seeking to pressure the Union or a Member State into making a particular choice by applying, or threatening to apply, measures affecting trade or investment.”
Q3: Where do the United States and the European Union agree on economic security vis-à-vis China?
A3: Emerging de-risking policies in the United States and the European Union appear to predicate themselves on the linchpin assumption that the existence of China’s military-civil fusion essentially means that any end user in China cannot categorically be deemed trustworthy to safeguard advanced Western-origin technologies. So long as China’s national strategy on military-civil fusion persists, this assumption may remain applicable and continue to inform the West’s trade policies involving China. With that in mind, the United States and the European Commission aim to avoid enhancing Chinese military and intelligence programs for fear of weakening their own national security.
As a result, the United States and the European Union have taken positive steps toward charting an avenue for negotiating compromise on economic security policy toward China, particularly through the auspices of the U.S.-EU Trade and Technology Council (TTC). So far, the United States and the European Union have engaged in slow but steady dialogue on international commerce through information-sharing forums, including TTC working groups that coordinate export controls, investment screening, and other tools to mitigate risks to the West’s economic and technological competitiveness. Accordingly, the United States and the European Commission have given priority to promoting competitiveness in clean energy, digital infrastructure, and biotechnology. Both also share the same view of what they deem as sensitive sectors requiring protection from unwanted technology transfer, namely advanced semiconductors, AI, and quantum technologies.
Regarding semiconductors specifically, the Netherlands and Japan earlier this year entered an export control agreement in principle with the United States to block the sale of key chip-making tools to China. This agreement—though not as restrictive as the then-unilateral October 7, 2022, U.S. controls—has sought to safeguard sensitive technologies for national security purposes. In an update, the Dutch government on June 30 released further details on export controls that will restrict China’s access to both cutting-edge and slightly less sophisticated Dutch-made semiconductor manufacturing equipment. Notably, the Netherlands designed this regulation, which comes into effect on September 1, as a “blueprint” for other EU member states to implement similar export curbs against China to safeguard Western-origin technology. In doing so, the Hague has arguably aligned its actions with the European Commission’s proposed prioritization of closer EU coordination on export curbs and other trade tools.
Q4. Why and where do the United States and the European Union diverge on economic security policy with China?
A4: Although Washington should celebrate its successful export control arrangement with the Hague, it has revealed ongoing challenges the United States and the European Union face in securing agreement on issues related to economic security policy toward China. The export control coordination issue offers good insight into these challenges.
Where the United States in recent years has increasingly pursued and successfully implemented unilateral export curbs, the European Union’s export control process faces many more roadblocks. This is because the bloc encompasses the world’s largest economy, 27 member states, and multiple different stakeholders with varying capabilities, interests, and relationships. Naturally, internal disagreement results from sometimes competing interests and complicates the European Commission’s ability to achieve consensus on its economic security policy among all EU member states, let alone with the United States.
Even though the Netherlands has coordinated its new export control policy with other EU member states, it is ultimately up to each member state to decide whether it wants to implement the same policy. Germany’s decision so far not to place export curbs on optics and laser components critical for Dutch-made chip-making tools risks undermining the Netherlands’ export control policy and Europe’s technological lead in this area. More broadly, this divergence underscores the challenges the United States and the European Union face in achieving complete convergence on the restrictions they implement to de-risk trade with China. Thus, while the United States, the European Commission, and now the European Council have publicly called for de-risking trade with China, internal member state disagreement may result in the European Union adopting a lengthier process for de-risking its economic dependencies on China through more narrowly calculated trade measures.
Though recent policy pronouncements from Washington and Brussels suggest nascent agreement between the two on the principle of “de-risking” their trade relations with China, the finer details of this potential accord remain unclear for now. Whether and to what extent the European Union mirrors U.S. economic security policy on China is subject to pending debate between the European Commission, European Parliament, and European Council. Though there are positive signs of growing transatlantic convergence on this critical trade issue, the proof will be in the proverbial pudding.
Eric Meyers is an intern with the Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) in Washington, D.C. William Reinsch holds the Scholl Chair in International Business at CSIS.
