Developing an Economic Security Strategy: EU and U.S. approaches

Dr. Lúcio Vinhas de Souza is currently a Visiting Professor at Brandeis University, a Fellow at Harvard University, and a Board Member of the National Economic Club in Washington, D.C.. Before that, he was an Advisor to the leadership of the European External Action Service (the EU’s Ministry of Foreign Affairs and Defence) and he led the Economics Department of an internal advisory body to the European Commission President Jean-Claude Juncker akin to the US’ Council of Economic Advisers, a position he joined from Moody’s Investors Service in New York City, where he was Managing Director and Chief Sovereign Economist.

This article does not necessarily reflect the views of any organization the author is or was linked to. All usual disclaimers apply.

The European Union and United States: differences

While the European Union and the United States share many similarities, as market democracies that uphold the rule of the law, they also have many differences, from preferences to levels of vulnerability. One of immediate relevance for this work is the institutional differences between these two regions. 

Namely, the United States is a federal state, with a center that has encompassing capabilities in most areas related to economic security (notably, all dimensions of external relations). The EU is a hybrid construct, in which an institutional center (made up of the European Commission [EC], its executive body, and other bodies like the European Council, the European Parliament [EP], and the European External Action Service [EEAS]) has limited (but growing) capabilities in many areas, while excluding (at least) aspects of several, notably external relations and defense, which are either shared with its 27 Member States (MSs) or are fully MSs responsibility. This said, on areas like trade, competition, and some aspects of foreign direct investment (FDI), the EC has direct centralized authority. These differences are of key importance for the subject of this piece.

A more geopolitical EU

Western Allies face a rapidly evolving geopolitical environment, from Russia’s war of aggression against Ukraine, an increasing number of conflicts —for instance in the Middle East—to rising tensions in the Asia-Pacific region. Such growing and multiplying security concerns also imply direct economic costs, like impacts on supply chains, translated in delays, pauses in production, and increasing costs, including in energy, and a fragmentation of the “global commons” laboriously put into place after the end of World War Two.

Faced with that, the EU has progressively expanded its arsenal of tools since 2019, adding defensive (e.g., new trade defense instruments, FDI screening, revamped export controls, an Anti-Coercion Instrument), resilience and industrial policy (e.g., the Critical Raw Materials communication, the European CHIPS act), and security/military components (e.g., the Strategic Compass). 

The two most recent examples of that trend are the “Joint Communication”¹ on a European Economic Security Strategy (EESS) published in June 2023 and the related package from January 2024 of five initiatives (namely, this package includes one Regulation—e.g., a binding legal act, one “Recommendation”—a non-binding act, and three “White Papers”, which are consulting/discussion tools). The EESS is a comprehensive strategy, with a 3-pillar structure, aiming to:

1) Promote the EU’s competitiveness and growth, strengthening the Single Market, supporting a strong and resilient economy, and fostering the EU’s research, technological, and industrial base.

2) Protect economic security through a range of policies and tools, including targeted new instruments where needed.

3) Partner with and further strengthen cooperation with countries worldwide. 

The EESS “protect” pillar (Pillar 2) is the more advanced (see Figure 1), which was made clear by the January 2024 package.²

Figure 1: The EESS Pillars.

The EESS also identifies four risk areas, where “in-depth risk assessments” have been launched:³

1. Risks to the resilience of supply chains, including energy security;
2. Risks to the physical and cyber-security of critical infrastructure;
3. Risks related to technology security and technology leakage;
4. Risk of weaponization of economic dependencies or economic coercion.

Regarding the development of “critical technologies” and associated technology security and technology leakage risks outlined in the EESS, a joint (e.g., involving both EU bodies and the MS) risk assessment exercise is taking place in four areas deemed as critical, namely a) Advanced Semiconductors, b) Artificial Intelligence (AI), c) Quantum Technologies, and d) Biotechnologies. 

Let’s now have a deeper look at three components of the EESS Pillar 2, namely, exports controls, inbound FDI screening, and outbound FDI screening, which were further fleshed out in the 2024 package.

EU Exports Controls Reform

Export controls are a well-established and important part of the EU’s trade toolbox—with a binding legal tool, the “Dual Use Regulation”—and key in the context of the ongoing economic security debate. The related 2024 package’s “White Paper” (therefore a discussion tool) on this subject  suggests to amend the “Dual Use Regulation” to include items subject to export controls under the Wassenaar Arrangement⁴ but whose adoption was blocked by a particular Wassenaar signatory, namely, Russia. These proposed controls outside Wassenaar would still be evaluated using the Wassenaar Criteria, e.g.:

1. Foreign availability outside participating states;
2. Ability to control effectively the export of the goods;
3. Ability to make a clear and objective specification of the item; or
4. Controlled by another export control regime.

It recommends closer consultation among EC and MS before any new export restrictions is introduced, while bringing forward a previously scheduled evaluation of the current Regulation to early 2025.

One should note that under the current Regulation only a marginal share of exports was actually denied: e.g., 559 denials were issued in 2020, representing about 1.4 percent of the value of controlled dual-use exports in that year, and 0.03 percent of total extra-EU27 exports (see Figure 2). However, the ongoing Russian war of aggression against Ukraine, which started in 2022, implied an unprecedented number of EU sanctions (coordinated with allies like the United States), which both increased the number of export controls and ultimately led to the proposed revision of the existing Regulation.

Figure 2: EU FDI screening actions by investor country (%)

EU FDI Screening Framework Reform

The 2024 package includes also an updated FDI screening Regulation proposal (again, a binding legal act). In it, MS would now not only be required to have an FDI screening mechanism (currently, 22 out of the 27 have one, while the others are in the process of creating one), but to have one that respects harmonized minimum requirements to conduct screening and enforce decisions. An “authorization” review and screening process is now to be mandatory for all FDI in projects/programs deemed of “EU interest”, dual-use, critical technologies, medicines, or entities and in the financial system. The proposal also strengthens the cooperation mechanism between MS and EC, through a better notification system, more streamlined information requirements and stricter deadlines for the provision of comments by the MS and for the EC “Opinion”.

The scope of the FDI screening mechanism is also extended by the proposed Regulation, by including (1) foreign investors’ subsidiaries in the EU, directly or indirectly controlled by a third government, (2) foreign investors that are subject to EU sanctions, and (3) foreign investors or subsidiaries involved in foreign investment previously screened by an EU MS.

To place those proposed changes into context, the original FDI screening Regulation put the EC as the center of what can be almost described as an “information sharing” network of MS-based screening authorities (but did not make obligatory for EU MS to have one, rather advised to create one). It allowed the EC to issue “Opinions” when it considered that an investment posed a threat to the security or public order of more than one MS, or could undermine a project of interest to the whole EU. In such “Opinion” the EC could recommend actions, but it was up to MS to both take it on board and implement it (this is still the case).

Its original development (started as far back as 2016) and enactment (in 2019, but with entry into force in 2020) were largely driven by fears related to China, which have now somewhat abated, since Chinese FDI inflows into the EU have fallen precipitously (see Figure 3) and become largely concentrated geographically and sectorally, namely in “greenfield” FDI for electrical vehicles plants in Hungary during 2022-23. This resulted in a large fall of screening actions related to China (see Figure 4).

Figure 3: Chinese FDI into the EU (€ billion)

Figure 4: Germany and EU FDI screening actions on China

Historically speaking, by far the most important target of screening actions has been the United States, and this remains the case, which is not surprising, given the large share and stock of FDI into the EU from the U.S. (see Figure 5).

Figure 5: EU FDI screening actions by investor country (%)

Outbound FDI Screening

This is a “White Paper” that outlines a stakeholders’ consultation tool. It covers limitations on outbound FDI that do not arise from sanctions, and includes an initial discussion proposal that outlines a staged and gradual approach starting with a consultative, open, and comprehensive questionnaire. The “White Paper” stresses that any potential future EU initiatives in this area are to be based on a clear definition of the problem and a thorough assessment of any risks, before developing any new tools.

The consultation results were published on 23 July 2024, and are now being assessed by the “Expert Group on Outbound Investment”, which was created in July 2023 and that brings together EU and MS’ experts on several areas, from dual-use export controls, FDI screening, trade, and foreign affairs departments (this group already met three times in 2023). 

The consultation was open to the public from 24 January 2024 until 17 April 2024. Its questionnaire contained 21 queries, with the possibility to provide an open response for most, as well as to support the response by submitting a “position paper”. Overall, 53 responses were provided, 35 from businesses/business associations (including 3 from the U.S. and 1 from the U.K.), 5 from academic/research institutions, 3 from public authorities and 10 from EU citizens or non-governmental organizations (NGOs). Concentrating on the replies by business⁵, they:

1. Most expressed a cautious stance towards monitoring outbound FDI, saying that if measures are taken, they should be “well informed”;
2. Most were in favor of risk assessments;
3. Most did not give a clear answer whether the four technology areas as described in the White Paper were a sufficiently defined basis for monitoring;
4. Most were in favor of monitoring asset transfers, joint ventures and venture capital transactions (less agreement on potentially covering mergers, acquisitions, and greenfield FDI).

The number of respondents who did not give a clear answer is very high, often the relative majority in many of the questions. Most oppose any monitoring measures that could limit outbound FDI, undermine EU competitiveness or jeopardize the ability of EU firms to innovate and grow on global markets. Several respondents proposed only a de minimis threshold. Most think that the focus should be on technologies rather than transactions, and most agree that the monitoring should be based on the risk criteria already routinely used by MS’ export control authorities. Most say that the monitoring should only cover new and ongoing transactions, not legacy/existing ones.

Respondents also raised concerns regarding data protection, confidentiality, and data collection, stressing that “amounts could overwhelm both authorities and businesses”. Almost all respondents said that further information should not be gathered. Most are very skeptical about additional tools for monitoring, saying priority should be given to existing tools and any new tool to be introduced only if “absolutely necessary”. All in all, a clearly fairly limited level of support for the introduction of this type of controls.

The United States: no overall strategy and few frameworks¾but generally effective. 

Contrary to the EU, the United States has no integrated economic security strategy (as opposed to a national security strategy). Rather, several U.S. departments and agencies have released their own individual strategies (e.g., the Departments of Defense, Treasury, Commerce, etc.). Also, the U.S. government derives most of its economic security tools from a small set of federal-level legal frameworks: e.g., sanctions authority comes from the International Economic Emergency Powers Act (IEEPA) of 1977, the 2018 Foreign Investment Risk Review Modernization Act (FIRRMA) expanded Presidential authority on national security and investment and modernizing the Committee on Foreign Investment in the U.S. (CFIUS), while the Export Control Reform Act (ECRA) of 2018 updated exports controls rules, giving the United States the ability to impose unilateral controls on items not listed on multilateral export control lists (the EU largely lacks such unilateral tools, but part of this particular gap is being proposed to be addressed, as indicated above). 

This said, the existing U.S. tools are however used in a more centralized and “offensive” way than in the EU, and are in some cases more institutionally developed.

The United States and Exports Controls

Dual-use exports controls are governed in the United States by the ECRA.  ECRA provides broad authority for the U.S. federal government to impose unilateral or multilateral controls to address a range of national security and foreign policy objectives, including those related to combatting weapons proliferation and terrorism, preserving the military superiority of the United States, strengthening the U.S. defense industrial base, protecting human rights and democracy, and facilitating military interoperability with allies. 

Dual-use export controls are administered by the Department of Commerce’s (DoC) Bureau of Industry and Security (BIS), in close coordination with the Departments of Defense, Energy, and State.

Figure 6: U.S. export controls actions⁶

The US and Inbound FDI Screening 

The United States has an established, effective, and centralized legal framework for screening certain types of FDI into U.S. firms for national security risks that may arise from such transactions. This is implemented by CFIUS, an interagency body chaired by the Secretary of the Treasury. CFIUS has broad authority to respond to national security risks arising from FDI flows covered by it. 

It can do this through the negotiation—or in some cases, imposition—of terms on transactions to mitigate identified national security risks. When “mitigation” cannot overcome national security concerns, CFIUS may recommend that the President suspend or prohibit the covered transaction.

CFIUS is seen as generally well functioning, and implicitly the EU uses it as a reference to its own “steady state” institutional development. It works largely by deterrence, with between 25 percent and 30 percent of FDI proposals withdrawn after the beginning of investigation but before its conclusion, and the number of actual Presidential decisions (cancelling or prohibiting FDI) effectively at zero.

The US and Outbound FDI Screening 

Like in the EU, U.S. policymakers are currently debating if and how to regulate U.S. outbound FDI. The U.S. administration has released an executive order, with an accompanying advanced notice of proposed rulemaking (ANPRM), outlining a targeted proposal to mandate notifications of—and in some cases, prohibit—certain U.S. investments into (China’s) AI, semiconductor, and quantum technology. 

The U.S. Congress is also considering a range of proposals: 1) the Senate favoring a mandatory notification program, 2) The House of Representatives is considering different options, e.g., the House Financial Services Committee leaning to traditional sanctions while the House Select Committee on the Strategic Competition between the U.S. and the CCP has recommended new authorities to implement a sectoral approach to regulating outbound FDI.

Conclusion: Transatlantic learning and coordination possibilities (and limits).

So, how do the “Economic Security” frameworks of the EU and of the United States compare? In terms of exports controls, both regions seem to have similar frameworks (even bearing in mind the more limited EC competencies, and the MS-level implementation) of comparable levels of effectiveness, dealing with similar volumes of applications and grappling with similar questions on their relation with existing multilateral frameworks.

On the other hand, the United States’ CFIUS was/is the reference for the EU when designing its evolving inbound FDI screening mechanism, and there is still great margin for EU learning from the United States and reaching its level of institutional development. This said, when one looks at the effectiveness of the frameworks, it is not really apparent that the EU framework performs less well than its U.S. counterpart in terms of results in this area.

Finally, as for outbound FDI screening, this is an evolving discussion in both sides, but the staged process followed by the EU, with open and transparent consultation with stakeholders, and notably with industry, may have lessons for the United States. Notably, the strong resistance by private sector stakeholders to any such controls is made apparent by open consultative processes.

This short piece started with differences between the two regions, and will finish with that also.

There are many differences when considering policy design and choices between the EU and the United States, beyond the institutional one. To quote just a few, the main thrust of EU approach is “de-risking”, not “de-coupling” (now equally shared with the United States). The EU also mostly eschews unilateral/extra-territorial actions/frameworks, while the United States seems to favor those more.

It also is fundamental to tailor any actions to its desired aims, and ideally at least partially agreed on what those aims are with your allies (as an example, while recognizing that the tools in both scenarios may partially overlap: is the aim to “contain” China or to create incentives for it to be a “good global citizen”?). Equally, those ideally agreed aims and actions should naturally reflect both preferences and capabilities (which do differ between the EU and the United States). The (political) economy context matters a lot for this, given the EU much higher exposures and vulnerabilities, and not only towards China, but in general, from energy dependency to migration (see Figure 7 for an example: it shows that the EU FDI stock in China is now 66 percent larger than that of the US). 

Figure 7: FDI stock in China ($ millions)

This large vulnerabilities remains true even if those are falling and getting (like in Chinese FDI inflows into the EU) more geographically and sectorally concentrated (see Figure 8).⁷ Friends and allies should respect and understand each other’s red lines in this evolving set of discussions. 

Figure 8: EU FDI inflows into China (%)

1 A “Communication” is a non-legally binding EU instrument that, in this particular case, provides outlines on future policies or arrangements concerning details/reforms of current policies. It is “Joint” because it is issued by the EC and the EEAS (the EU’s joint Ministry of Defense and Foreign Affairs, which is not an EC body as it includes direct representation from all EU MSs).

2 In practical terms, new instruments are found only under Pillar 2, with Pillars 1 and 3 largely listing pre-existing frameworks. This may imply competitiveness concerns for the EU economy, as expressed by business associations, if a greater balance between the “protect” and the “promote” and “partner” pillars is not eventually achieved.

3 They include, e.g.:

• Supply Chain Alert Notification (SCAN) monitoring system (for identifying strategic dependencies and supply chain distress)
• Assessment of risks on physical/cyber-security of infrastructure (conducted under the Critical Entities Resilience Directive and the “NIS 2 Directive”)
• The Cyber-Resilience Act and the Cyber Solidarity Act.

The timeline for the conclusion of the risk assessments is still undecided.

4 The Wassenaar Arrangement, established in July 1996, is a voluntary export control regime whose 42 members exchange information on transfers of conventional weapons and dual-use goods and technologies. The Wassenaar Arrangement is not targeted at any region or group of states, but rather at “states of concern” to its signatories.

5 MS representation in the “Expert Group” frequently acts a voice for the respective MS businesses (one should also note that monitoring is the only point of agreement at this stage among the members of the group).

6 ECCN stand for “Export Control Classification Number”: the “600 series” is munitions, 9x515 is spacecraft, related items, and some radiation-hardened microelectronic circuits. The obligation to obtain an export license from BIS before “releasing” controlled technology to a foreign person is informally referred to as a “deemed export”. Releases of controlled technology to foreign persons in the U.S. are “deemed” to be an export to the person’s country or countries of nationality. Many of the licenses for “deemed” exports involve those conducting scientific research.

7 Namely, EU FDI into China is increasingly a “German story”: the three big German automakers (Volkswagen, BMW and Daimler) plus German chemicals group BASF were responsible for over 34% of all EU FDI into China during the period between 2018 and 2021: this seems to be continuing in 2024, as German central bank figures show German FDI into China during the first half of 2024 at €7.3 billion, already surpassing the record value of € 6.5 billion for the whole of 2023. It is noteworthy to observe that the EU FDI stock in China fell from over 200% of the US one stock in 2014 to 165% in 2022 (because of faster U.S. FDI growth than the overall EU’s one).

References:

Benson, E., Mouradian, C. and Leonard, A., (2024). Toward a U.S. Economic Security Strategy: Twenty-First-Century Guidance for Domestic and International Policymaking, CSIS, Washington, D.C.

CFIUS, (2023). Annual Report to Congress-CY2023, Department of Treasury, Washington, D.C.

European Commission. (2021). Strategic dependencies and capacities. Commission staff working document, SWD (2021)352, Brussels.

European Commission. (2022). EU strategic dependencies and capacities: second stage of in-depth reviews. Commission staff working document. SWD(2022) 41final, Brussels.

European Commission (2023) Joint Communication on “European Economic Security Strategy”. JOIN(2023) 20 final, Brussels.

European Commission. (2023). Third Annual Report on the screening of foreign direct investments into the Union. Commission staff working document, SWD(2023) 329 final, Brussels.

European Commission. (2023). Screening of FDI into the Union and its Member States. Commission staff working document, SWD(2023) 329 final, Brussels.

European Commission (2024). Proposal for a Regulation of the European Parliament and of the Council on the screening of foreign investments in the Union and repealing Regulation (EU) 2019/452 of the European Parliament and of the Council, SWD(2024) 23 final, Brussels.

European Commission (2024). White Paper on Outbound Investment, COM(2024) 24 final, Brussels.

European Commission (2024). Summary of responses: Targeted consultation on the White Paper on Outbound Investment of 24 January 2024, Brussels.

Kilcrease, E., (2024). Testimony before The U.S. Senate Committee on Banking, Housing, and Urban Affairs Hearing on “National Security Challenges: Outpacing China in Emerging Technology, CNAS, Washington, D.C.

Kratz, A., Zenglei, M., Brown, A., Sebastian, G. and Meyer, A. (2024). Dwindling Investments become More Concentrated: Chinese FDI in Europe: 2023 Update”, Rhodium Group and MERICS, New York and Berlin.

White House (2017). National security strategy of the United States of America, December 2017.

White House (2022). National Security Strategy.