Tough Trade: The Hidden Costs of Economic Coercion

Written by | Sunday, February 20th, 2022

The times of easy globalization are over. As the European Union’s economic weight declines relative to that of other powers, it has entered a new phase of globalization characterized by increasing use of economic tools for geopolitical purposes (or geo-economics) and systemic rivalry with China. These tools include everything from positive economic instruments, such as trade deals, to coercive ones, such as curbs on imports, formal sanctions, and informal sanctions (including so-called “popular boycotts”) – from investments in strategic competitiveness to regulations designed to change company behavior. As states try out different strategies, this new era will see them alternate between a focus on positive and negative tools. Periods of escalating economic coercion will give way to a focus on strategic competition, and vice-versa. Yet the underlying trend towards the weaponization of economic relations will remain. This means that economic coercion is here to stay.

The world has changed. In the new era of globalization, Europeans are right to intensify multilateral efforts such as the EU’s initiative with the US and Japan to reform the World Trade Organization (WTO) and the rules-based international order. And it is critical that the EU works with its like-minded partners on common standards. But the EU also needs to negotiate with other powers in an agile, autonomous, and effective manner – to ensure that they have an incentive to engage in fair and rules-based behavior. No one instrument alone can guarantee success in this. The EU needs to develop a comprehensive agenda for the geo-economic era – including an Anti-Coercion Instrument (ACI) that, in grave cases of economic coercion, acts as both a deterrent and a measure of last resort.

The EU has launched a strategy for “open strategic autonomy” to reflect this balance. The EU is building up its resilience against economic coercion through measures such as the Enforcement Regulation; systems for screening foreign direct investment (which a growing number of member states are adopting); reformed export controls; the International Procurement Instrument; and, potentially, the reform of EU competition policy to address unfair competitive advantages through a foreign subsidies instrument. The EU also has various other ways of increasing its resilience against economic coercion. The EU energy union, for instance, could help the EU diversify its energy supply and hedge against the weaponization of energy exports. To strike a balance between openness and strategic autonomy, the EU should focus on the following areas: economic strength and competitiveness; positive strategic trade policy; ensure that the EU-US Trade and Technology Council quickly becomes a success; build a geo-economics package that includes the ACI; create a comprehensive resilience architecture; reform the Blocking Statute and make it fit for the China challenge; establish an export bank; and use the ACI strategically in relations with the US.

The EU could not limit the ACI in such a way legally, but this situation provides it with a two-fold strategic opportunity. Firstly, the EU could reinforce Americans’ view that it is in their interests for Europe to become stronger and more resilient. It could openly discuss the ACI’s economic deterrent with the US, underscoring how the instrument would enhance the bloc’s geopolitical capabilities. Secondly, Europeans can emphasize that they have no desire to use the ACI against the US, as they assume that an ally would not interfere with EU member states’ sovereignty. Indeed, it would be strategically wise for both the US and the EU to avoid targeting each other with punitive measures – such as section 232 and section 301 tariffs, the removal of access to dollar trading, and other extraterritorial coercive measures that the Trump administration used to try to change European policies. A strong EU economic deterrent would remind both Americans and Europeans to think about how they can strengthen their strategic relationship, while making Europe a more capable and attractive partner for the US in relations with third countries.

‘Tough Trade: The Hidden Costs of Economic Coercion’ — Policy Brief by Jonathan Hackenbroich, Filip Medunic and Pawel Zerka — European Council on Foreign Relations / ECFR.

The Policy Brief can be downloaded here

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