Who gains most from EU’s de-risking plan targeting China, Russia? The US of course

The EU’s latest economic security initiatives will be difficult to implement, messy to roll out and chilling in their effect on trade and investment
Meanwhile, the US will achieve its geopolitical objective of hindering China’s industrial progress

Sebastian Contin Trillo-Figueroa

Published: 7:30pm, 30 Jan 2024

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For a Chinese investor, the news of increased barriers to enter the European market will cause concern.

The EU’s latest economic security initiatives, unveiled last week, mark the continent’s latest step towards economic de-risking, part of Europe’s policy toolbox to mitigate pronounced vulnerabilities in strategic sectors. This package aims to strengthen the single market’s trade-defence architecture by balancing openness and protection.

Economic security policies help to build resilient nations capable of withstanding external pressures at the intersection of economic, national security and technological factors. The goal is to safeguard advanced industries, critical resources and vital infrastructure, ensuring stability amid global challenges.

Despite being labelled “country-agnostic”, the EU measures primarily target China and Russia. The focus is on achieving a unified stance on export controls, especially for “dual-use” items applicable to both civilian and military domains.

Additionally, the measures aim for harmonised regulations in FDI screening – imposing stricter rules for investments in the EU – and conducting risk assessments for outbound hi-tech investment, to prevent the leakage of sensitive know-how with potential military applications.

Examining how Europe reached this critical juncture requires us to delve into the background.

The package arises out of Europe’s search for a strategic stance amid US-China rivalry. At the heart of this endeavour lies technology – the primary catalyst in the intensifying competition between the two economic juggernauts.

The Americans believe Western tech has supported China and Russia in developing dual-use tech, leading them to impose restrictions in 2018, with stricter curbs in October 2022. In January 2023, the US compelled Japan and the Netherlands to curtail Chinese access to advanced semiconductor technology. ASML, the leading European chip equipment supplier, was restricted from selling freely to China.

The US wielded extraterritorial influence, propelling Europe, caught in the crossfire, towards enhanced technological sovereignty.

Europe implemented several economic security policies throughout 2023, affecting the US and placing a greater emphasis on China. Elsewhere, the trend towards deglobalisation intensified, exemplified by China’s Law on Foreign Relations and the US president’s executive order restricting investments in “national security technologies”.

However, despite the EU’s persistent call for enhanced trade-defence measures, the current package’s impact may not match the vigour of the bold announcements. This can be seen in recent high-profile Chinese FDI investments; China’s state-owned shipping giant Cosco’s acquisition of a stake in Hamburg’s port, a strategic asset, caused notable alarm in Europe.

A container ship of Chinese shipping giant Cocso is seen in the harbour at Hamburg, Germany, in October 2022. With the German government’s approval, Cosco has taken a minority stake in a container terminal at the port. Photo: AP

Furthermore, while Europe has reduced its dependence on Russian energy and China’s FDI in Europe is in decline (€7.9 billion, or US$8.6 billion, in 2022, a significant drop from €47.4 billion in 2016), it is notable that among the investments scrutinised by European authorities for risks in 2022, 32 per cent were American and just 5.4 per cent were Chinese. This raises questions about the discernible risks.

While Chinese Premier Li Qiang’s plea in Davos this month calling on the EU to ease its hi-tech export restrictions may have been heard, China, despite committing to boost European imports, still falls short of reciprocating and providing easier market access – critical elements outlined in the now-stalled China-EU investment agreement.

The China-EU Summit last December sought to alleviate tensions, yet Europe warned of defensive trade actions if China delayed measures. Amid this complex scenario, the economic security package appears shrouded in ambiguity.

Implementing the policy will be difficult for the EU. Crucially, the measures face regulatory hurdles during the implementation phase.

Firstly, since legislation is non-binding and only nations can screen foreign investments, a challenge arises when a sole member state lacks a mechanism, potentially allowing unchecked foreign investments into the EU single market. This underlines the fragmented and inefficient approach among the 27 states.

Secondly, to resist foreign pressure, coordination is essential, ultimately resting on three critical factors: diverse implementation timelines; consultation between the European Commission and states in executing mechanisms; and substantial variations among countries regarding scope, thresholds, criteria and the overall screening processes.

Finally, a forthcoming challenge lies in the EU parliament elections in June. A new EU leadership may chart different courses, potentially resulting in policy changes or different timelines.

People are seen outside the European Parliament in Brussels, Belgium, on January 24. A leadership change in the parliament, following June elections, could affect implementation of the EU’s economic security strategy. Photo: Reuters

Despite having weakened the EU economic security strategy, collaboration on cutting-edge tech will still be limited, yielding several major consequences. First, European enterprises might limit exports to China, given the confusing and ambiguous regulatory environment.

Second, it will hinder Chinese investments into European companies.

Third, both Chinese and European companies can expect disruptions, hampering established business operations and trade relations, which would lead them to decrease engagement in the targeted markets.

Globalisation and free markets face a new setback as economic security measures gain momentum. The security narrative undermines the multilateral trading system and fair trade principles, affecting cross-border transactions.

Therefore, who benefits? The US achieves its geopolitical objectives hindering China’s industrial progress and attracting “green” production through legal incentives. This may negatively affect foreign companies, particularly European ones, given that green policies are among the EU’s top policy priorities, potentially shifting hi-tech resources to America in the long term.

The EU lacks the industrial clout of the US, and by prioritising security over economic growth, this is likely to jeopardise its competitive edge.

Non-Western regions are expected to gain. Southeast Asia and the Middle East are ideally placed to leverage their strategic capabilities to build contingency plans, alongside capital flows. In turn, they may emerge as primary beneficiaries, provided that China – and Europe – diversify their strategies here.

All in all, the complex geopolitical dance between economic policy, security and global trade will unfold, potentially shaping a new setting for international competition.

Sebastian Contin Trillo-Figueroa is a geopolitics analyst with a specialisation in EU-Asia relations