Geopolitics and Economic Statecraft in the European Union

The creation of global markets unleashed powerful forces—known collectively as geoeconomics—that have led to huge challenges of adjustment to new technologies, patterns of production, and modes of communication. Policymakers must address these challenges with limited resources. To meet their political objectives in this area, national governments use their control over market and nonmarket instruments—or economic statecraft.

The concept of economic statecraft therefore relates to the ways in which states connect economic tools to foreign policy goals. Meanwhile, geopolitics is about the ways in which geography and economics influence politics and interstate relations. Economic statecraft can thus be seen as a response to geopolitics that uses economic means for foreign policy ends. In a historical context, economic statecraft reflects a shift away from a neoliberal doctrine toward more interventionism in the economy.

For decades, the general consensus was that in the international policies of the European Union (EU), commercial interests prevailed over wider foreign policy strategy. In a major shift, EU institutions and European leaders now claim that this stance no longer holds. The EU has gradually moved toward a new economic statecraft that is more infused with geopolitical aims and considerations. EU member states have converged on a shared assessment that the weaponization of interdependence requires jettisoning the neat distinction between economic and security affairs. The emerging European economic statecraft encompasses a wide range of measures: Some aim to establish a level playing field with competitors, while others pursue broader external agendas, such as environmental sustainability or human rights.

The EU’s new statecraft is not only defensive but also contains offensive measures against other powers. Some of these powers complain that many new EU measures are a risk to the liberal order that the union claims to defend as its long-term strategic interest. Increasingly, the EU’s narrative is about making interdependence safe for the EU rather than the wider political-strategic aim of mutually beneficial global reforms. A backlash from other states risks deepening the strategic problems that the economic security approach is designed to address.

That is why economic statecraft in a volatile and fast-changing world is, to some extent, experimental. An excessive focus on economic security risks generating harmful unintended consequences. To move forward effectively with this agenda, the EU needs to define the larger goals that economic statecraft is supposed to serve, assess the political and strategic externalities of different policies, and tackle the trade-offs between competing priorities. This is the task for EU institutions and member states in the years ahead.

In a conflict-prone postneoliberal world, these developments require a new examination of the global ambitions and strategies of the EU—traditionally a weak foreign policy player but a strong economic actor. As a pillar of multilateralism, the EU has contributed to and benefited from the rules-based order that is now being challenged. If the EU wants to play a role in this emerging landscape, it needs to adapt its political economic model and craft an external policy fit for purpose.

Adapting to the emerging international environment may mean altering policies and approaches that have been carefully embedded in a set of liberal norms. Building greater European strategic autonomy and internal resilience may entail a shift away from these norms, raising questions about the EU’s global standing. Such a shift would also require far greater coherence between the union’s internal and external policies.

Internally, the search for a new paradigm for the EU’s political economy is challenging, as it represents a departure from the rules-based principles of multilateralism. The compromise found in the notion of open strategic autonomy leaves much room for ambiguity, discretion, and problems of definition. The EU will need to craft an industrial strategy that strikes the right balance between the bloc’s aspiration to support key industries and the imperative to maintain fair competition in the single market.

Externally, the EU will need to navigate the complexities of ensuring that its economic statecraft remains as compatible as possible with the bloc’s commitments to multilateral rules. As the traditional champion of a liberal, rules-based regime, the EU has a special responsibility to protect global multilateralism.

The success of the EU’s policy agenda will thus depend on the union’s ability to pursue its interests while upholding global rules. Although the EU may see its economic statecraft as necessary to fulfill the bloc’s ambition of economic resilience, globally there are concerns about the potential unintended effects of this approach. The external implications of the EU’s burgeoning economic statecraft will require the union to engage in diplomacy to mitigate the impacts of its domestic measures on the multilateral order.

Meanwhile, finding the right balance between economic security and broader foreign policy goals will be crucial for the EU to maintain credibility and legitimacy on the global stage. The union should therefore foster an international engagement strategy to make its practice of economic statecraft compatible with the broader development concerns of the rest of the world.

The EU should, in essence, relearn the art of the strategic management of interdependence. The union should seek to be both strategic and open. Ultimately, the EU’s ability to address the challenges of global turmoil, shifting political realities, and the demands of its member states will determine its future trajectory in a rapidly evolving world.

European integration reached its peak in the 1990s. The European single market deepened economic interdependence on the continent. The attractiveness of that market made the European Union (EU) a global partner in bilateral and regional trade deals. The end of the Cold War enabled the EU’s enlargement to Northern and then Central Europe. And, by leveraging Europe’s interdependence and with strong public support, the EU made its first steps in foreign and security policy.

At that time, economics served the broad geopolitical goal of supporting the post–Cold War order in Europe—just as it had supported the post–World War II order. After the fall of the Berlin Wall, projecting the European model worldwide became the external corollary to the EU’s internal success: The prevailing liberal, rules-based approach to international economic relations helped defuse tensions and regulate global politics.

Thirty years later, the EU’s strength has turned into a liability. There is now a drive toward a politicization of the international economy, while rising geopolitical tensions impact on economics, security, and technology at a time when European countries are transitioning toward a green and digital economy. Rather than a conduit for cooperation, economic interdependence has become subjected to weaponization. Together, several factors are challenging the world in which European integration was possible: the unraveling of the neoliberal order, the “fuzzy bifurcation” between globalization and geopolitics (according to political scientist Richard Higgott), war in Europe and the Middle East, and the simultaneous trends of accelerated technological change and the climate crisis.

The EU’s Political Economic Model Under Threat

War in Europe and great-power rivalry are laying bare the weaknesses of the EU’s political economic model and imposing harsh choices on states. Multilateral institutions, unable to accommodate emerging demands for reform, stand by as international norms and rules are belittled, ignored, or politicized. This situation has polarizing effects on global public opinion and leaves the international order contested by both revisionist states and political actors in societies.

In a conflict-prone postneoliberal world, these developments require a new examination of the global ambitions and strategies of the EU—traditionally a weak foreign policy player but a forceful economic actor. As an experiment and a pillar of multilateralism, the EU has contributed to and benefited from the rules-based order that is now being challenged. If the EU wants to play a role in this emerging landscape, it needs to adapt its political economic model and craft an external policy fit for purpose. The task is even more daunting than it sounds, as it goes to the heart of the logic behind European integration.

Adapting to the emerging international environment may mean changing policies and approaches that have so far been carefully embedded in a set of liberal norms. Building greater European strategic autonomy and internal resilience may entail a shift away from these norms, raising questions about the EU’s global standing. Such a shift would also require far greater coherence between the union’s internal and external policies.

The double shock of the coronavirus pandemic and Russia’s 2022 invasion of Ukraine accelerated a preexisting trend of successive EU measures in response to hostile geopolitics. The prevailing narrative about the EU’s adaptation to global disorder frames the challenge as a choice between interdependence, on the one hand, and strategic autonomy or European sovereignty, on the other. There has been much lively debate and many policy discussions about this narrative.

Running through the speeches of Europe’s political leaders and the policy documents of the EU institutions is a novel connection between security and economics, both at home and abroad. French President Emmanuel Macron, by far the union’s most intellectually engaged political leader, has spoken of a new “prosperity pact” to underpin Europe’s quest for sovereignty. Inspired by French essayist Paul Valéry’s remark at the end of World War I about the mortality of civilizations, Macron has pointed out the urgency of the endeavor, noting that because of “war and peace on our continent,” Europe can die. Launching his September 2024 report on the future of European competitiveness, former European Central Bank president Mario Draghi, too, commented on Europe’s “slow agony” should it not address its problems.

The strategic agenda of the EU’s incoming leadership for 2024–2029 sets out a framework to connect an upgrade of the single market to the EU’s ability to respond to geopolitical turmoil. A string of reports that have been published—including those by Draghi, former Italian prime minister Enrico Letta, and former Finnish president Sauli Niinistö—all address aspects of these issues.

In this context, this compilation is an inquiry into how the EU is adapting to the transformation of the international order. To address this overarching question, the chapters examine the challenges and dilemmas in a series of thematic areas where economic policy and foreign policy meet.

Economic Means for Foreign Policy Ends

The concept of economic statecraft relates to the ways in which states link economic tools to foreign policy goals. Meanwhile, geopolitics is about the ways in which geography and economics influence politics and the relations between nations. Economic statecraft can thus be seen as a response to geopolitics that uses economic means for foreign policy ends. In a historical context, economic statecraft reflects a shift away from a neoliberal doctrine and globalized economic relations toward more interventionism in the economy. 

Prevalent debates frame the challenge within a binary understanding of autonomy versus interdependence. This compilation favors a multidimensional approach that simultaneously examines the politics of the EU and its external impacts. For Europe, having the political leadership to pursue economic statecraft means addressing questions of European unity, the balance between supranational and national powers, and the enduring risk of fragmentation. The interventionism required to strengthen the EU’s economic statecraft raises questions about the degree to which member states are willing to cooperate through EU institutions—or, conversely, the extent to which they will resist this creeping statecraft.

In the context of great-power rivalry, Erik Jones observes in the next chapter that the global economy is characterized by a competitive search for policy autonomy, in which governments look for instruments they can use to either take advantage of or push back against the need for change. For the EU, aside from its unfulfilled ambition of greater European sovereignty, there are inevitable questions about its preferred international relationships. How far will the EU tilt toward the United States and invest in the transatlantic partnership, and what room for maneuver might Europe have in its relations with China? Which preferred modes of interaction will the EU invest in: bilateral, minilateral, plurilateral, or multilateral? What normative and practical coherence is there between the EU’s internal and external policies? And, more broadly, to what extent can the EU shape the external environment and craft its own strategy, rather than respond defensively to hostile outside trends?

The following chapters in this compilation use this framework to examine how the EU is responding to the challenges to its political economic model. The compilation begins with a historical examination of the critical junctures at which the global economy has shifted into new political orders. As well as identifying the features of great historical transformation, Jones argues that the global economy is unlikely to survive the current competitive search for greater autonomy. Yet, today’s national politics place value on the pursuit of autonomy, making this quest conflictual in and of itself.

This is the background against which the EU’s economic statecraft needs to be placed. While policymakers recognize the salience of the connection between economics and security, crafting a mix of economic, foreign, and security policies is harder to achieve. As Giovanni Grevi and Richard Youngs show, European political rhetoric often emphasizes a sense of victimhood in the face of a dangerous international environment, justifying a resort to defensive measures to protect the European economy. Indeed, the EU risks too strong a focus on such a defensive agenda at the expense of a more proactive approach geared toward multilateral cooperation and the protection of international public goods.

The themes explored in this compilation are broad but substantiated by specific policy analyses. Eugenia Baroncelli and Sinan Ülgen examine a range of environmental, technological, trade, and investment policies through the prism of the new doctrine of open strategic autonomy. Lizza Bomassi and Pavi Prakash Nair present supply chain resilience as the key to understanding how the EU translates its ambitions into reality with its partners. Andreas Goldthau looks at the climate agenda through the race for clean transition materials. Raluca Csernatoni considers the EU’s quest for technological sovereignty as the framing for the evolving regulation of emerging digital technologies, artificial intelligence, and the security-technology nexus. And Catherine Hoeffler analyzes security through the EU’s role in defense-industrial policy.

All of the chapters trace recent policy developments with the goal of understanding the logics and narratives of the EU’s policy choices, the degree of continuity with the union’s past practices, the policy dilemmas and possible trade-offs, and the political consensus that may—or may not—emerge to enable the union to move forward in its economic statecraft.

Internal-External Tensions

All areas of foreign policy entail an interface between internal cohesion and external projection. For the EU, these areas require a new political consensus on key choices: between openness to the world and inward-looking protectionism, and between the existing rules of international cooperation and the search for a more restrictively defined European interest. Recent policy developments also pose questions about how the EU wants to position itself in relation to other actors—allies, rivals, new partners, and, especially, the United States—and the principle of multilateralism.

At the more mundane level of policy, the EU’s dilemmas feed into specific challenges about policy preferences and diplomatic tactics. For instance, protecting and enhancing strategic assets can collide with competition and trade policies. Meanwhile, climate transition goals might be achieved by exploiting the resources of third countries, which would go against the stated goals of the EU’s global partnerships. Europe’s task is to strengthen its autonomy while working with partners bilaterally and multilaterally toward reforming global governance. 

All of the chapters in this compilation provide policy-specific insights and illuminate broader trends. The gulf between the EU’s ambition of sovereignty and the economic reality in the areas of technology, innovation, and defense is so enormous as to call into question whether the term “sovereignty” is appropriate at all. The EU’s fragmentation is a chronic feature of these policy fields, and in technology the union’s catch-up needs are huge. Cognitive gaps among stakeholders abound, including between states and the private sector when it comes to the resilience of supply chains. Here, as in defense, there are political tensions between the European level and the national level.

The choice between defensive posturing and protection of the EU’s economic model, on the one hand, and engagement with the rest of the world, on the other, is a theme running through the chapters, which point out the contradictions between the EU’s internal push for autonomy and its stated goal of multilateralism. For example, as Goldthau underlines, there is a risk that the EU’s energy transition will lead to dependency-creating import structures. Baroncelli and Ülgen capture the internal-external contradictions in several recent initiatives. While underlining that the EU can exercise choice in pursuing its goal of open strategic autonomy, they wonder whether the union will be able to chart a coherent external policy on both the economic and the ideational front.

Identifying the next iterations of the economic and conceptual dimensions of European integration is the theme of the final chapter. Rosa Balfour focuses on the political legitimacy of the fledgling EU order and unpacks the economic, political, ideological, and international features that have lent legitimacy to European integration. Balfour asks whether the EU can find a new consensus when the norms that have underpinned integration are challenged by the external environment, political trends, and policy choices. 

Rosa Balfour is the director of Carnegie Europe.

Sinan Ülgen is a senior fellow at Carnegie Europe.

Globalization did not bring about an end to the nation-state. The creation of global markets lifted hundreds of millions out of poverty and gave a handful of thousands extraordinary wealth. Along the way, globalization accelerated innovation, improved communication, gave rise to multinational enterprises and global value chains, and redistributed economic activity from West to East and from North to South. The transformative power of global markets is manifest. And, paradoxically, that is why the nation-state remains central to global politics.

Geoeconomics—the collection of powerful forces unleashed through the creation of global markets—has led to huge challenges of adjustment to new technologies, forms of communication, patterns of production, and locations of activity. Policymakers at all levels must address these challenges with limited resources. Doing so is necessarily a political task that involves deciding who should act and who stands to gain from specific policy choices, as well as who does not.¹ The governments of nation-states—not multinational enterprises, international organizations, multilateral forums, nongovernmental organizations, or any other form of nonstate actor—remain the focal points for this kind of political agency. The more painful or difficult the adjustments are for a given society, the more central these states become.

Each national government faces different needs with different resources. Governments search for instruments they can use effectively to take advantage of the need for change, to push back against it, or to compensate those who lose out. Often that search focuses on the economic domain. National governments use their control over market and nonmarket instruments—or economic statecraft—to achieve their political objectives. Here, it is worth underscoring that economic statecraft is, and always has been, an expression of geopolitics and not of geoeconomics. Where state control over economic instruments is insufficient to the political task, governments are willing to deploy more coercive measures, including violence, both at home and abroad.

In extreme cases, where successive national governments cannot achieve their political objectives either by manipulating economic instruments or by using force, the state fails until some group emerges that is powerful enough to reenergize or replace it. In that sense, responding to geoeconomic forces is an existential requirement. Few, if any, national governments seek to undo the benefits that global markets make possible, and yet most, if not all, of them are determined to do whatever it takes to respond to the adjustment challenges those benefits entail—even if this comes at the expense of making global markets less efficient.

The global economy is unlikely to survive this competitive search for policy autonomy. Global markets exist by dint of political and policy coordination, not self-help. The exercise of political independence fragments global markets through the thousands of cuts inflicted by each national government and through the influence of institutional path dependence on the development of longer-term structural incompatibilities from one country to the next. Nation-states and non-state actors will continue to interact across the globe, but their interactions will be constrained by the implications of the policy choices they make.

Framing the argument as a competitive search for policy autonomy makes it easier to offer a global perspective on this dynamic. Every government that benefits from global markets wants to find a way to respond to challenges of adjustment without tearing those markets apart. The problem for each of them is that coordination cannot be neutral because any negotiation is going to pull some farther away than others from their preferred strategy for adjustment—just as any redistribution of adjustment costs is going to give rise to competing perceptions of fairness. In turn, those differences—both real and perceived—become fodder for opposition to governments in domestic politics.

Coordination across governments in support of global markets comes at a domestic political cost for all negotiating parties that cannot make a credible claim to have benefited more than they have conceded. At the same time, accepting the best alternative to a negotiated agreement is easier when the exercise of autonomy can be celebrated as a virtue in national politics. Indeed, the pursuit of policy autonomy often retains its value in national debates even when it comes at an economic cost both domestically and globally. That cost tends not only to accumulate across countries but also to reshape the possibilities for future coordination. The global economy is the victim of this political dynamic.

Sounds Familiar

There is nothing new in this diagnosis of the interaction between economic statecraft and geopolitics. Much the same argument can be found as a critique of the international economy in the interwar period in works written in the 1930s, 1940s, and 1950s by, for example, John Maynard Keynes, E. H. Carr, Karl Polanyi, and Gunnar Myrdal.² Hence, much of the intellectual and policy work of the early Cold War period focused on overcoming these dynamics by creating international organizations and other multilateral arrangements to enable market integration through common rules and the redistribution of adjustment costs. The Bretton Woods arrangement and other economic organizations created within the United Nations (UN) are one illustration; regional bodies developed in Western Europe, like the Organization for European Economic Cooperation and the various communities that preceded the European Union (EU) are another.

This process was never symmetrical across countries or even democratic. Those shortcomings were accepted as necessary. Writing in the 1970s, Charles Kindleberger argued that the only way to stabilize a global economy is for one country to be powerful and wealthy enough to help mitigate or underwrite the costs of adjusting to global markets for all the rest.³ John Gerard Ruggie added that even then, it is important for national governments to retain significant autonomy in the way they respond to the need for adjustment.⁴ And Robert Keohane suggested that a group of like-minded rich and powerful countries might find a formula for sharing the costs of stabilizing the global system.⁵ The United States played a leading role in the creation of the international economic order immediately after World War II; the Franco-German partners led the creation of what became the EU; and the transatlantic partners may be able to pick up the reins of the global economy after the period of U.S. hegemony ends.⁶

Of course, there would always be problems associated with the exercise of power in the context of interdependence. Some countries are more politically sensitive than others to the influence of geoeconomics or economic statecraft, even when their economic vulnerabilities are much the same.⁷ Worse, both geoeconomic forces and the exercise of economic statecraft create uncertainties that few policymakers can anticipate and few non-state actors can manage.⁸ Policymakers therefore quickly realized that all countries—even the largest and most powerful—need to work with those other governments with whom they are most closely connected economically if their governments are to achieve their domestic policy objectives.⁹

Inevitably, this coordination would systematically benefit some more than others, both in material terms and in terms of perceptions.¹⁰ As a result, not every government could be expected to aspire to coordinate in the use of economic policy instruments, and some might insist on going it alone. Over time, however, the example of coordination and the power of collective action would create incentives for even the most recalcitrant national governments to join multilateral arrangements.¹¹

Meanwhile, any turbulence or conflict could be managed through improvements in the design of coordinating institutions and market regulations. Here, the European Economic Community provided an example of continual—if sometimes halting or only temporary—improvement as it moved through different exchange-rate regimes for the promotion of monetary stability and pivoted from trade liberalization through harmonized regulation to a new approach for dealing with nontariff barriers.¹² The negotiation of the 1986 Single European Act, which launched the project to create a European internal market by 1992, was a success both economically and politically—and one that brought together the traditional Franco-German partners and the initially reluctant British government.¹³ The question at the end of the 1980s was whether other regions could follow Europe’s lead.¹⁴ That question expanded after the end of the Cold War to include the whole international system.

The global economy that emerged in the 1990s rested on these four elements: a diagnosis of the failings of the interwar economic order, a belief in the need for the collective management of interdependence, an acceptance that such collective action would never be wholly equitable, and a conviction that any resulting tensions could be managed in an overarching rules-based system. It also rested on the assumption that these elements are not only broadly applicable but also both portable and scalable—meaning that what works in Europe or across the Atlantic might serve as an inspiration elsewhere and function across the global economy.¹⁵

Within that assumption, it should be possible to transfer Western policies or regulations to other countries and expand Western institutional arrangements to accommodate new members: The two things go together insofar as policy and regulatory convergence can be a condition for institutional support, formal association, or even full membership. In turn, converging on Western policies or regulations and expanding Western institutions would make the global economy more cohesive as well as more inclusive.

What Went Wrong?

This whole setup for a global economy rested on a shared understanding of perceptions, values, institutions, and collective action that, with few exceptions, did not extend beyond the countries of North America, Western Europe, and other advanced industrial democracies—known collectively as the West. Non-Western participants did not accept the West’s diagnosis of what had gone wrong in the interwar period, not because they rejected the theory, but because they told a different historical narrative about colonialism and structural dependence.¹⁶ Within that alternative narrative, equity is more important than economic efficiency, particularly when that efficiency is put at the service of exploitative trade and financial practices. Tolerating some inequality in the service of policy coordination is a bad trade-off. Non-Western countries would rather have equitable institutions than effective ones, and they are willing to thwart collective action to force institutional change. This was the logic behind the call for a new international economic organization in the 1970s.¹⁷

Where that change did not happen, the governments of non-Western countries created their own organizations. Not all of these bodies were successful at garnering representation or exercising influence. The Organization of Petroleum Exporting Countries is an important outlier. But that stands to reason: The non-Western world is more heterogeneous than the West; what unites these countries in general terms is their opposition to what they perceive to be an unjust international system. The success of non-Western countries in creating alternative arrangements is less important than the fundamental disagreement over values—equity versus efficiency—and the implications of that disagreement for the functioning of the institutions that foster collective action.

For their part, Western powers resisted the practical implications of inclusiveness. Rather than democratize institutions, these powers sought to reengineer them in ways that reinforced hierarchy and preserved privilege. When that failed, they turned against established forums for collective action and shifted to other venues, where they could exercise greater autonomy. Like their non-Western counterparts, Western governments were prone to creating new institutions when they felt they lacked control over existing ones.¹⁸ This venue shopping at least partly explains why the Group of Seven (G7) was formed in the wake of debates about a new international economic order as non-Western countries pushed to democratize UN-chartered economic institutions.¹⁹

Western powers also overestimated their ability to transpose their own lessons about policies and institutions to economies with very different institutional and political arrangements. This kind of template thinking aligned well with the need to attach conditions to requests for institutional support or membership, but it fitted poorly with the goal of improving economic performance in non-Western countries—and often triggered social unrest and political instability instead.²⁰ Very quickly, the policy principles of the so-called Washington consensus that were supposed to frame the emergence of the global economy became a focus for conflict between the Western governments that promoted them and the non-Western governments charged with putting them into practice.²¹

This conflict escalated during the Asian financial crisis toward the end of the 1990s.²² Many of the newly industrializing countries in Asia liberalized their capital markets in line with Washington consensus recommendations. This effort succeeded in attracting foreign capital, which was a boon for Asian countries’ domestic industries, but it came at the cost of greater vulnerability to capital flight. Once the outflow started, it became contagious, first across the region, and then implicating other emerging markets, like Russia and Latin America.²³ Asian governments lost confidence in the International Monetary Fund (IMF) and the World Bank and decided instead to impose capital controls and build up foreign exchange reserves as a form of self-insurance.²⁴ They also began to explore ways to share U.S. dollar–denominated assets across the region, rather than rely on conditional assistance from the West.

Emerging markets were not alone in struggling to adhere to consensual recommendations for best market practice. The difficulties of shifting policy or institutional blueprints across national boundaries also applied within the West.²⁵ Western countries may be less heterogeneous than their non-Western counterparts, but they are still very different in terms of both institutional endowments and the way they perceive the trade-off between equity and efficiency.²⁶ Importantly, such differences are not limited to the national level; often they extend down to the regional and local levels. As a result, it is necessary to identify not only the relative importance of equity and efficiency but also how much diversity different political systems can tolerate.

The virtues of market liberalization through policy convergence are a case in point. As the EU pushed the completion of its internal market, the United States went in a very different direction and allowed greater diversity at the state level in terms of taxation, benefits, public procurement, licensing, and regulation.²⁷ These different trajectories not only complicated the negotiation of the Uruguay Round within the General Agreement on Tariffs and Trade—the precursor to the World Trade Organization (WTO)—but also added considerable tension to the debate across the Atlantic about what it means to have a free market.²⁸

These different non-Western and Western dynamics came together at the end of the 1990s in the emergence of the “no-global” protest movement and in the early to mid-2000s in the failure of the Doha Round of trade and development talks in the WTO. The no-global movement organized diverse political groups, drawn from both non-Western and Western societies and inspired by a wide array of ideological sources to challenge the exclusiveness of international economic organizations and demand greater representation for non-Western interests.²⁹ The Doha Round was partly a response to this pressure; it included development as a major focus and engaged directly with governments in emerging markets. Quickly, however, the Doha Round morphed into an arena for debating trade liberalization requirements that would give Western governments greater influence over labor standards, environmental protection, and other regulatory practices in non-Western countries.³⁰

When the Doha Round failed to generate a multilateral agreement, the United States and the EU shifted to bilateral trade negotiations with third countries, where they could use their relative market size and wealth to exercise greater leverage over any agreement. As with the venue shopping for multilateral cooperation, this shift from multilateral to bilateral trade negotiations was widely perceived in emerging markets as an attempt to reinforce Western privilege. That perception was not shared in either the United States or Europe. Instead, the West took a narrower view focused on the virtues of its own policies and the need to pursue national or European interests.³¹

Declining State Effectiveness, Increasing Politicization, and Evolving State Capacity

The deepening divisions in the global economy were apparent in the early 2000s, long before the onset of the 2007–2008 global financial crisis. The problem was the one already identified by Keynes in his 1936 General Theory.³² It is worth quoting him at length, because aside from the syntax and word choice, the argument sounds so contemporary:

Thus, while economists were accustomed to applaud the prevailing international system as furnishing the fruits of the international division of labour and harmonising at the same time the interests of different nations, there lay concealed a less benign influence; and those statesmen were moved by common sense and a correct apprehension of the true courses of events who believed that if a rich, old country were to neglect the struggle for markets its prosperity would droop and fail.

Keynes went on to argue that the only way to avoid having the international economy deteriorate into “what it is, namely, a desperate expedient to maintain employment at home by forcing sales on foreign markets and restricting purchases” was for states “to learn to provide themselves with full employment by their domestic policy.”

That insight was baked into the post–World War II economic system. At its core, the global economy depended on nation-states to smooth the process of adjustment and minimize the politicization of international coordination. As the global economy expanded to include ever more diverse countries, the necessary adjustments grew to exceed the ability or willingness of national governments. Over time, governments fell behind in their efforts to minimize adjustment costs and maintain full employment, and opposition groups took advantage of that failure to ramp up their efforts to politicize international cooperation. This discontent mingled with other complaints about advanced industrialized democracies and the elites who led them to form what political scientist Cas Mudde called a “populist Zeitgeist,” which was as opposed to the global economy as it was to elite privilege.³³

This discontent fed directly into efforts to instrumentalize trade policy in contradictory ways in both Europe and the United States. In those areas where domestic interests made no complaint about the functioning of global markets, national governments pushed for liberalization and multilateral engagement. Where domestic interests expressed opposition to global markets, governments pushed the other way, using a mix of instruments like antidumping measures or social regulations to raise barriers to international exchange. Thus, borrowing from political scientists Alasdair Young and John Peterson, “the EU is both liberal and protectionist in predictable ways.”³⁴ And the same could be said of the United States.³⁵

Meanwhile, the efforts of emerging market economies to create a form of self-insurance by accumulating foreign exchange reserves began to create distortions across the global economy.³⁶ Such reserves can be earned only when countries run consistent current account surpluses by exporting more goods and services than they import. This form of macroeconomic imbalance is theoretically unsustainable over the long run, but that unsustainability reveals itself in different ways from the kind of balance-of-payments crisis that arises from a lack of competitiveness. Instead of facing a progressive deterioration of the terms of trade, countries experience a sudden stop as the flow of funds on the capital account rushes out of the national economy.³⁷ To understand why, it is necessary to focus on the way the capital account finances the current account in the balance of payments.

Foreign exchange reserves are assets denominated in foreign currency. When a government wants to accumulate foreign exchange reserves as a matter of policy, it commits to buying foreign currency–denominated assets. The net export of goods and services is just one way to raise the money for these purchases. While it is common to imagine that countries that import more than they export have to borrow money, it is more common for governments to introduce policies to ensure they export more than they import to purchase foreign assets to use as foreign exchange reserves. And since the global balance of payments must balance (by definition), these two ways of looking at the financial implications of macroeconomic balances are mirror images.

The asset purchases made by governments in emerging markets as a form of self-insurance after the Asian financial crisis represented a massive export of capital.³⁸ This export created liquidity—or spendable money—in other countries, primarily the United States, that could be used only to buy assets or additional imports from abroad. The result was either an inflation of asset prices in the importing countries or another round of net exports and the accumulation of foreign reserves for the governments seeking this form of self-insurance. This policy was unsustainable over the long run because of the distortions it created in the asset markets of the net-importing countries—again, primarily the United States—which experienced ever-increasing prices for government bonds, real estate, stocks, and even commodities. The 2007–2008 global financial crisis started when the market for one of these asset classes collapsed.³⁹ What followed was a series of sudden stops as cross-border investors started liquidating their assets either to repatriate their capital or to send it to a safer investment market.

This thesis of a global liquidity glut was not readily embraced among emerging market economies—and, indeed, never has been widely accepted in much of Asia—but it was adopted in the United States and Europe. The decision to shift the focus of multilateral cooperation from the G7 to the larger Group of Twenty (G20) was a consequence. Western governments, including that of the United States in particular, needed a more inclusive forum to deal with macroeconomic imbalances that they believed originated in emerging market economies.⁴⁰

The fact that those economies embraced macroeconomic imbalances to generate foreign exchange reserves that they could use to avoid having to rely on Western institutions like the IMF closed the circle.⁴¹ The economic institutions created after World War II had failed to represent the interests of emerging market economies. The governments of these economies turned away from these institutions and, in doing so, created market distortions at the global level. And when these distortions resulted in the global financial crisis, Western governments shifted their attention to more inclusive institutions to convince the governments of emerging markets that had created those distortions to help get them under control.⁴²

The implication of this story is that the creation of the global economy gave the governments of emerging market economies access to geopolitical power that Western governments could not ignore. That power included the ability not only to distort world markets but also to ignore, manipulate, or duplicate the institutions created to foster international economic cooperation. If Western governments alternated between liberalization and protectionism, governments in emerging markets could challenge the more protectionist efforts at the WTO. More importantly, they had the power to exercise leverage through and over the WTO’s dispute resolution mechanism.⁴³

Non-Western governments were not the only ones who were empowered by the creation of a global economy. Western governments acquired new powers related to the central role they played in the development of the three basic infrastructures that underpin global markets: currency, finance, and telecommunications.⁴⁴ Global transactions need a common denominator to set prices, store value, and make payments; they need credit, insurance, clearing, settlement, and somewhere to keep things safe; and they need some way to interact at a distance to communicate detailed information unambiguously and with a clear record of what was said, whether the message was received, and whether it was acted on.

These infrastructures are challenging enough to develop around the exchange of finished products, and the first truly global form of capitalism took many hundreds of years to emerge.⁴⁵ This is hardly surprising: Even for the most basic trade, the currency needs to be widely accepted, the finance flexible and stable, and the means of communication reliable and secure. Hence, the focus for commerce was on human relationships and personal interaction. The task became more difficult in the exchange of intermediate goods as part of distributed manufacturing processes. Then it became necessary to work more with numbers than with people and to trust technology more than personal relationships.⁴⁶ With the introduction of global value chains and the emergence of the internet, the endeavor reached new magnitudes of complexity.⁴⁷ And, for historical reasons, Western countries were at the center of that infrastructural revolution.

This central location gave Western governments two largely unexpected forms of power: One was to oversee the transactions that make up the global economy, and the other was to prevent them from happening.⁴⁸ The United States has taken advantage of its central role in the world economy—and, specifically, the central role of the U.S. dollar—at least since World War II.⁴⁹ The U.S. Treasury created the first entity responsible for monitoring dollar-denominated payments in 1940, renamed the Office of Foreign Assets Control in 1950. But it was only after the terrorist attacks on September 11, 2001, that the U.S. government realized the full extent of its ability to sift through the internet and the record of interbank transactions to track terrorist financing and restrict access to the U.S. financial system.

The first administration of former U.S. president Barack Obama used this control to compel Iran to engage in negotiations over its nuclear program. It did so by preventing Iranian banks from participating in dollar-denominated clearing and forcing the Society for Worldwide Interbank Financial Telecommunication (SWIFT) to disconnect Iranian banks from the global network for interbank telecommunications. The second Obama administration joined the EU in using many of the same instruments against Russia after its 2014 annexation of Crimea, cutting Russia off from access to European and U.S. capital markets.⁵⁰ The transatlantic partners went even further in putting pressure on Russia after its 2022 full-scale invasion of Ukraine.⁵¹ These new instruments of economic statecraft were unbelievably powerful. They also proved to be a wasting asset.

Economics, Security, and Strategic Autonomy

The problem with weaponizing interdependence—the process by which states leverage global networks of informational and financial exchange for strategic advantage—is that it encourages governments everywhere to disengage from institutionalized cooperation and find ways to reduce their vulnerability to economic integration.⁵² If the lesson for the countries of East and Southeast Asia at the end of the 1990s was about the importance of self-insurance, even if that creates global market distortions, the lesson from the 2010s for governments everywhere was about the importance of economic security and strategic autonomy. And that lesson applied within the West as well as between Western and non-Western countries.⁵³

This point is worth underscoring and putting into historical context. The use of economic sanctions did not start the shift away from neoliberal forms of market competition. The turn to economic statecraft and related nonmarket forms of state intervention, like industrial policy, began long before the coronavirus pandemic or the 2022 invasion of Ukraine. The EU started turning away from neoliberal free-market ideology even before the global financial crisis.⁵⁴ By that time, the first administration of former U.S. president George W. Bush had already demonstrated its willingness to use tariffs to restore the competitiveness of the U.S. steel and agricultural sectors.⁵⁵

This shift toward more nonmarket interventions accelerated during the global financial crisis as governments everywhere sought to bail out strategic industries and banks. And it continued to develop as the rise of U.S. technology companies and Chinese manufacturing industries underscored the changing nature of the global economy. Donald Trump’s 2016 presidential campaign was a symptom, not a cause, of this transformation. When Trump was elected and his incoming administration made clear the transactional nature of his presidency, Europe’s response was to begin planning an even more interventionist shift in its approach to the use of industrial policy instruments and the politicization of trade policy.⁵⁶

The end of the 2010s was a fertile period for the development of new approaches to economic policymaking—both foreign and domestic—on both sides of the Atlantic. In the United States, Democrats hoping to return to office forged what Carnegie’s Salman Ahmed and Rozlyn Engel called a “foreign policy for the middle class,” which would blur the lines between economic and foreign policies to use the same instruments to achieve multiple objectives: income distribution and manufacturing competitiveness at home, and military security and supply chain resilience abroad.⁵⁷ European officials were also looking for ways to strengthen the EU’s strategic autonomy in terms of both technological innovation and military procurement.⁵⁸

What the use of sanctions did was deepen the friction and suspicion already being created by the breakdown of the Washington consensus and the shift away from neoliberalism. When the Obama administration cut Iran out of SWIFT in 2012, it had to push hard to get Europeans to go along because they feared that this weaponization of a global financial cooperative, headquartered in Belgium, would set a bad precedent in the eyes of the wider world.⁵⁹ When the United States and the EU cut Russian firms out of Western capital markets in 2014, the Chinese and others were quick to take note of the wider implications for their own reliance on the dollar and the euro.⁶⁰ And when the Trump administration announced in 2018 that it would pull out of the Joint Comprehensive Plan of Action (JCPOA), which lifted sanctions on Iran in exchange for restrictions on the country’s nuclear facilities, and instead threatened secondary sanctions on European firms that refused to comply with this change in U.S. policy, the EU began planning its own legal instrument to push back against such economic coercion.⁶¹

The experience of the coronavirus pandemic reinforced this dynamic by revealing both the fragility of global supply chains and the reflexive nature of economic nationalism, and not just in Europe and the United States. Although EU member states may have been surprised by the sudden fights that broke out over personal protective equipment and respirators, the European Commission was quick to swing into action and the European Council found new ways to strengthen European solidarity.⁶² The same was not true of relations between Europe, the United States, and the rest of the world. Non-Western countries experienced severe shortages of basic personal protective equipment and lacked the necessary tools to shut down their economies to slow the spread of the virus. These countries faced even greater difficulties getting access to vaccines once they became available. The pandemic put the self-serving and transactional nature of the global economy on full display.⁶³

The Western response to Russia’s full-scale invasion of Ukraine only reinforced the contrast. The United States and the EU quickly rolled out unprecedented sanctions against the Russian government and economy in response to Russia’s unprovoked and unjustifiable aggression.⁶⁴ Once again, this move demonstrated the vulnerability of any country to key forms of interdependence with lead actors in the global economy. It also provoked a series of unintended disruptions to supply chains, food distribution, energy prices, and transportation routes, with serious negative consequences for other parts of the global economy. For many non-Western governments, the costs of trying to contain the Russian aggression appeared disproportionate when compared with efforts to address violent conflict elsewhere.⁶⁵

The sanctions against Russia proved less effective than many in the West had imagined.⁶⁶ This outcome raises the question of whether the Russian government may have used the time between its 2014 annexation of Crimea and its 2022 invasion of Ukraine to limit its vulnerability to Western leverage.⁶⁷ This situation may also strengthen the regime’s authoritarian character to limit domestic political sensitivity to the costs of disengaging from the West. Such concerns are worth noting because they underscore the waning effectiveness of weaponized interdependence.⁶⁸ They also suggest that China may already be prepared to push back against the West. Weaning the Chinese economy off dependence on U.S. dollar–denominated assets and transactions may not yet be realistic, nor may reducing China’s dependence on U.S. markets and advanced technology.⁶⁹ But the Chinese government can make its economy more resilient in the face of U.S. pressure and rally its population against U.S. economic coercion in ways that will only diminish popular support for the Western-led rules-based international system.

Putting It All Together and Longer-Term Implications

The administration of U.S. President Joe Biden was probably right that the only effective way to build political support for an open U.S. economy is to ensure that such an economy benefits the middle class. For its part, the EU is probably right to aspire to strengthen its strategic autonomy both in general terms and with particular reference to the United States. No U.S. administration can take popular support for American global leadership for granted, and no EU official should expect to count automatically on support from the United States. The bonds that hold the West together as a global political construct still exist, and so do the Western institutions that structure the global economy. But the West is no longer so monolithic, and the non-Western world is no longer so eager to accept Western leadership.

Two scenarios flow from this weakening of the West, one negative and the other positive. The negative scenario is that national governments can be expected to use the instruments of economic statecraft to address different domestic agendas in a more loosely coordinated fashion within the West and largely without systematic coordination with governments elsewhere.⁷⁰ This is a troubling prospect, because it leaves significant room for friction of the kind that arose across the Atlantic around the Biden administration’s 2022 Inflation Reduction Act.⁷¹ It is also troubling because it suggests that many problems that require truly global responses, like climate change, will be met with only piecemeal efforts that work to varying degrees from one national jurisdiction to the next. When the nation-state is the center of attention, that is about the best that can be hoped for. Whether it will be sufficient is an open question. Economic statecraft is no replacement for global economic leadership.

A more extreme version of this negative scenario is that the world economy will become divided into blocs that use competing standards for manufacturing and digital technology. This is a logical consequence of the ever-increasing weaponization of interdependence.⁷² Such a world will be neither representative nor effective. On the contrary, it will be prone to the kind of conflict that existed in the interwar period and that the creation of a global economy under Western leadership was meant to address.⁷³ The results will not be identical to what has been experienced in the past, but they will be similar enough to be familiar.

The more positive scenario is that Western and non-Western governments find a way to come together to address these global problems in ways that are more symmetrical, inclusive, and democratic. Doing so is a question not of virtue but of necessity and resilience. The global financial crisis showed that the forces of geoeconomics are too large to be managed by the West acting alone. They are also too powerful to be ignored. The climate crisis is a good illustration, but it is only one among several.

Moreover, the costs of dismantling the global economy—higher prices, lower real incomes, greater job insecurity, and more inequitable access to resources—are simply too high for societies to bear in any part of the world. As Keynes made clear, peace is possible only when security and economics reinforce one another everywhere. By implication, the new world economy will have to win support far beyond the West if it is to be durable. And durability will be the true measure of its success.

Erik Jones is a nonresident scholar at Carnegie Europe.

Notes

Economic statecraft consists of using economic means to pursue foreign policy goals.¹ Rising competition and volatility on the global stage have heightened the salience of connections between economic policies, security issues, and foreign policy. The European Union (EU) insists that political-strategic considerations have begun to play a more prominent role in its external economic policies. The union started to move tentatively in this direction some years ago, and Russia’s war on Ukraine has reinforced this shift in an apparently decisive way. At least in formal terms, the EU has begun to fashion a different kind of statecraft, in which economic policies serve broader strategic goals alongside policy-specific commercial objectives. This approach represents a potentially deep-seated change, given that the EU has traditionally been seen as an overwhelmingly economic actor bereft of strong geopolitical orientations.

While the rise of a more strategically oriented EU economic statecraft is a significant change, two nuances should be noted. First, a degree of short-term and defensive mercantilism persists in EU economic policies that does not appear to be informed by strong strategic dynamics. Second, it is not yet clear how the EU’s current emphasis on economic security fits with other priorities on the union’s foreign policy agenda. Although the EU has started to frame a different approach to economic security, it still needs to conceptualize how this relates to a broader understanding of economic statecraft and to other political-strategic priorities.

Economic security is an increasingly important component of economic statecraft, but the latter covers a much wider ground. Viable economic statecraft requires a clearer definition of which European interests are to be advanced and a more coherent mix of economic and strategic policies. As the EU rightly moves away from market primacy over foreign and security policy, it risks overcorrecting toward a defensive and competitive geopolitics.

A New Economic Statecraft?

For decades, the general consensus was that in the EU’s international policies, commercial interests prevailed over wider foreign policy strategy. In a major shift, EU institutions and European leaders have come to claim that this position no longer holds. The EU has gradually moved toward a new economic statecraft that is more infused with strategic considerations and aims. EU member states have converged on a shared assessment that the weaponization of interdependence—in which states leverage global economic and information flows for strategic advantage—requires softening the divide between economic and security affairs.²

The emerging European economic statecraft encompasses a wide range of measures: Some aim to establish a level playing field with Europe’s economic competitors; others pursue broader external agendas, such as environmental sustainability; and yet others deal with the security impact of other states weaponizing interdependence.³ In this context, security-related concerns appear to be playing a growing role in shaping Europe’s fledgling economic statecraft.

The shift has occurred incrementally over the last decade and deepened in the wake of Russia’s February 2022 invasion of Ukraine. In the 2010s, the EU’s approach to and perspective on globalization shifted toward a more politically managed form of globalism. The union became increasingly concerned with mitigating economic vulnerabilities and less enthused by the abstract value of supposedly win-win multilateral rules.⁴ The COVID-19 pandemic extended these shifts in the EU’s external economic policy, as it added to concerns about the union’s dependence on global supply chains for medical equipment and other goods.

Into the 2020s, several new EU strategies and documents promised economic policies geared toward the defense of “Europe’s sovereignty”—implying a more political tenor to economic strategy.⁵ In early 2021, the European Commission placed open strategic autonomy at the core of its Trade Policy Review, defining the concept as “the EU’s ability to make its own choices and shape the world around it through unity and engagement, reflecting its strategic interests and values.”⁶ The notions of open strategic autonomy and European sovereignty do not fully overlap, but they share much common ground. They emphasize the need to reduce economic vulnerabilities and defend EU interests while restating the importance of multilateral cooperation and engagement.

The war on Ukraine has added to the priority that European governments attach more specifically to economic security. Most governments have interpreted the conflict as a strong vindication of the need for a tighter focus on the threats and risks that economic interdependence entails. A postwar narrative of Europe taking back control of key supplies and pursuing more strategic trade and investment has become ubiquitous.

Crystallizing such developments, in June 2023 the commission presented a landmark economic security strategy.⁷ In 2024, the EU strengthened commitments to move further in this direction, bringing slightly different terms coming into use. The influential report on European competitiveness presented by former Italian prime minister Mario Draghi in September 2024 called for “a genuine EU “foreign economic policy” that is in tune with security interests.⁸ The European Commission’s political guidelines for 2024-2029 promise a “new economic foreign policy” premised on the conviction that, “In today’s world geopolitics and geoeconomics go together. Europe’s foreign and economic policy must do the same.”⁹ The remit of incoming High Representative, Kaja Kallas, includes the instruction to “shape a new foreign economic policy, focusing on economic security and statecraft.”

Significantly, the heightened focus on economic security appears to entail a new relationship between economic and political strategy. The EU’s stated priorities have become more explicitly political-strategic in nature. Some argue that in the wake of the war, the EU has moved fast to adopt a “geo-dirigisme” that deploys economic tools for strategic aims.¹⁰ European leaders insist that the new approach to economic security fuses economic and political interests as it seeks to curtail and manage the strategic vulnerabilities of interdependence. The combined effect of more than a decade of financial crisis, the coronavirus pandemic, tensions with China, and the invasion of Ukraine has propelled the EU toward a more evidently strategic variant of economic statecraft.¹¹

The EU’s emerging approach nominally embodies a rebalanced position between economic efficiency and geopolitical resilience to the extent that European powers now appear willing to bear a premium to achieve political insulation from other powers’ leverage.¹² French President Emmanuel Macron has insisted that strategic coherence is now much tighter as EU economic policies “obey a rationale which goes beyond the purely economic logic.”¹³ The 2023 German national security strategy captured this ethos by saying that the government would “focus more on security when it comes to decisions on economic policy.”¹⁴ The EU’s economic security strategy points to economic decisions “merging with national security concerns.”¹⁵

In a speech in June 2024, anticipating one of the core themes of his report on European competitiveness, Mario Draghi captured the zeitgeist: “The paradigm which brought us prosperity in the past was designed for a world of geopolitical stability, which meant that national security considerations played little role in economic decisions,” whereas deteriorating geopolitical conditions now required “a fundamentally different approach” to Europe’s industrial policies and “a genuine ‘foreign economic policy’ – or as it’s called today, statecraft.”¹⁶

European governments and EU policymakers argue that a hardened policy of economic security dovetails with tougher geopolitical strategies.¹⁷ Indeed, the general assumption is that these are two sides of a single strategic-adjustment coin and two strands of the EU adapting to the more threatening and inhospitable world that is taking shape in the shadow of Russia’s war on Ukraine. Outgoing EU High Representative for Foreign Affairs and Security Policy Josep Borrell has asserted that “de-risking and strategic autonomy go hand in hand.”¹⁸

The EU has established a mechanism to screen inward investment, and more European states are also undertaking tougher national security reviews of such investment. The union’s economic security strategy promises a new EU mechanism to assess security risks linked to outward investment in some technology sectors too, to prevent critical technologies from going to strategic rivals. The same strategy also recommends a more coordinated approach to tightening export controls on dual-use goods. Following the strategy’s adoption, the commission recommended that EU member states assess the risks associated with four areas of critical technology.¹⁹ In January 2024, the commission outlined five new initiatives to build on the economic security strategy and take it forward.²⁰ In a separate element of economic statecraft, European powers have made trade offers more dependent on reciprocity, while due diligence rules have become another tool for strategically managed trade.

Competing Logics at Play

Although these changes in the EU’s economic posture are significant, the fusion of political-strategic and economic statecraft remains embryonic. A tougher approach to market access and sensitive exports and investments may be justified and overdue, but the EU’s assertion that economic policies are now tailored to wider strategic imperatives is a bolder claim that is so far only partly borne out by the evidence. In fact, several logics are simultaneously at play in shaping the EU’s incipient economic statecraft, some of which are at odds with each other and none of which is clearly predominant.

Even if signs of a more political-strategic dynamic have emerged, parts of the EU’s economic security agenda reflect narrower commercial aims. Alongside elements of a new EU economic statecraft, a revived European mercantilism is evident in some key policy developments. What is needed for short-term commercial interest may be an important element of economic security, but this is not the same as strategically oriented economic statecraft—despite EU leaders’ tendency to conflate the two.

If anything, the EU’s quest for economic diversification is pulling it toward agreements with regimes that clearly do not share its strategic outlook—and discouraging the union from loading such accords with noneconomic demands. A paper published under the Spanish presidency of the EU Council in the second half of 2023 suggested more trade accords with “like-minded” countries and more restrictions on investments from and exports to “non-like-minded countries”—but these categories were not defined, and this is not the approach the EU has adopted systematically to date.²¹

In an effort to diversify commercial opportunities, the EU has new trade-and-investment agreements with regimes in Africa, Central Asia, and Latin America that are far from like-minded on foreign policy issues. In a similar vein, the choice of infrastructure projects under the EU’s Global Gateway investment initiative seems devoid of any apparent foreign policy logic.²² Indeed, the commission has acknowledged that the Global Gateway is oriented toward EU economic interests rather than “foreign policy approaches.”²³ While there is a clear security logic to restricting some of Europe’s most sensitive exports to certain regimes, some of the EU’s trade-and-investment controls are clearly guided by the more immediate commercial interests of European companies. The EU has increasingly used the externalization of its regulations to advance commercial interests—a form of what might be termed regulatory mercantilism.²⁴

The EU insists its emerging approach is about managing specific sectors in which there might be high levels of vulnerability and supplies come from just one or two countries. But the union has made at least some steps toward a more generalized policy of import substitution and preferential domestic support.²⁵ These are commercially defensive moves more than changes that reflect long-term strategic reflection. Moreover, EU member states have dramatically increased their domestic industrial subsidies and economic controls, which may threaten the single market; each state’s measures are in part about boosting national economic sovereignty in relation to other EU states and do not form a united approach to European strategic interests. It also remains difficult to detect a clear political or security logic behind investment screening decisions.²⁶

Part of the trend in the last several years reflects European geopolitical power targeting  immediate economic difficulties and commercial interests.²⁷ Experts note a gathering “commercial realism” that has increasingly conditioned EU positions on when and how international markets need to be controlled and the precise ways in which the union seeks to shape global interdependence.²⁸ While the EU’s economic security strategy talks of strategic priorities directing economic policies, it also insists that foreign and security policy instruments are to be used in pursuit of economic interests.²⁹

Crucially, this commercial realism breeds a narrow and defensive perspective on foreign policy dynamics. In its emerging approach to economic security, the EU does not appear to attach as much priority as it did previously to mutually beneficial problem solving, but rather seeks to craft economic relations that are more tightly attuned to the union’s own weaknesses and challenges. The EU’s focus is increasingly on instrumentalized economic relations through political negotiation, as opposed to stronger rules-based frameworks.³⁰ At least in many of its new measures, the EU is moving toward a less commons-oriented and more power-oriented understanding of the international order. The union has tended to paint itself in a rather one-way fashion as the victim of other powers weaponizing interdependence, justifying these more defensive positions on external economic policies.³¹

The emerging EU approach to economic statecraft is mainly defensive but also contains offensive measures against other powers.³² Several countries, mainly in the so-called Global South, complain that some of the new EU measures outlined above risk affecting both their interests and the liberal order that the EU claims to defend. Even if the EU may feel that some of this criticism is unfair, these countries’ diplomatic pushback matters for the union’s wider priorities. Increasingly, the EU’s narrative is narrowly about making interdependence safe for itself rather than about pursuing the wider political-strategic aim of mutually beneficial reforms to the global order. A backlash from other states risks deepening the very strategic-order problems that the EU’s economic security strategy is notionally designed to address.³³

In sum, a mix of logics is now apparent: In some instances, the EU is shaping economic policies to reflect strategic concerns; in others, the dynamic is inverted, with the union deploying foreign policy leverage for immediate economic interests. EU policy still lacks a fully strategized use of economic statecraft. So far, the union’s policies focus on defensive commercial interests more than they use commercial tools for noneconomic strategic goals. European powers may justifiably feel that this is the kind of trade-off now required, but they are walking a thin line in the way they endeavor to combine the EU’s new economic and security agendas.

Economic and Strategic Interests: Unresolved Tensions

The EU’s now well-established economic security agenda marks a much-needed reckoning with the vulnerabilities that result from weaponized interdependence. Yet, this agenda is still at an early stage of development and, for now, falls short of a fully consistent or comprehensive concept of EU economic statecraft. To move forward effectively with its economic security agenda, the union needs to define the larger goals that economic statecraft is supposed to serve, assess the political and strategic implications of different policies, and tackle the trade-offs between competing priorities.

At present, conflicting goals drive different measures and sit uneasily with each other. An excessive focus on economic security risks generating harmful unintended effects. Speaking a few days after the publication of the EU’s economic security strategy, Borrell noted that “de-risking is itself not without risks.”³⁴ The union’s institutional capacity to articulate fully the links between foreign and economic policies remains insufficient.³⁵ While the EU often carries out cost-benefit analyses for individual policy measures, these assessments do not encompass a broad strategic perspective.³⁶ If a more robust form of economic statecraft is in order, the EU should avoid veering toward an overcorrection that is detrimental to other priorities. In an instructive lesson for Europeans, others have warned that the United States may be overcorrecting in just this way in its rivalry with China.³⁷

As the EU moves into a new institutional term in 2024, the bloc’s economic statecraft still lacks clear definition. The EU insists it aims to shore up multilateralism, and the bloc remains more committed to rules-based cooperation than most other major economies. At the same time, however, the EU relies increasingly on unilateral tools to defend its interests across the trade agenda and is, to some extent, taking part in a global subsidies race. There is divergence among European officials on the right balance between multilateral and unilateral policy pathways.³⁸ The risk is that by adopting a defensive agenda, the EU neglects a proactive approach that focuses on promoting a better multilateral order that can deliver global public goods. Playing defense is necessary but not sufficient to preserve a relatively stable global economic order, on which Europe’s prosperity largely depends.

Calibrating Europe’s approach to China in the context of systemic rivalry between Washington and Beijing will be a pivotal dimension of Europe’s overarching economic statecraft. The EU has outlined a policy of derisking—as opposed to decoupling—as its approach to frame the various elements of its economic relations with China.³⁹ While the derisking agenda addresses serious concerns that need to be tackled, its implementation faces many challenges.⁴⁰ Europe is more exposed than the United States to the potential fallout of a geoeconomic clash with China. Derisking carries the risk of escalation into a spiral of tit-for-tat measures, too.⁴¹ The potential spillover from derisking would affect not only Europe’s economic interests but also other strategic priorities, such as the clean energy transition, for which Europe depends for now on imports of critical raw materials and goods from China. At the same time, the EU has clout and partners, and China stands to lose conspicuously from a potential deterioration of economic links with Europe, the United States, and other countries.

The EU’s stance toward China will likely continue to be a matter of balance between countervailing requirements, not least because balancing acts allow the union to paper over differences among its member states.⁴² However, EU economic statecraft needs a sharper—and shared—assessment of Europe’s overall strategic stance toward China. The bloc’s extensive economic relationship with Beijing requires a clear economic security focus in strategic sectors and further efforts to achieve reciprocity in EU-China trade relations. At the same time, the EU should avoid a largely China-driven approach to its global economic statecraft, which would look like a response to Beijing’s agenda rather than reflect Europe’s own priorities.

Another area that requires tighter definition is the way in which EU economic statecraft relates to the union’s engagement with the developing world, where the EU faces a tough competition of narratives amid offers from other powers. The polarizing effect of Russia’s aggression in Ukraine and the grave consequences of this crisis for the development agenda have made North-South relations both more contested. Meanwhile, the gap between development needs and available means has widened in the last few years.⁴³ The EU’s emerging economic security agenda says little about the priorities and order-related concerns of many developing states. The January 2024 enlargement of the BRICS group to five major countries in the Middle East and Africa, with others expressing an interest in joining, also adds to the challenge of EU engagement with middle powers.  

EU leaders have called for the establishment of a new quality of partnership with countries and regions across Africa, Asia, and Latin America. They point to joint efforts, including the Team Europe approach, which is based on pooling the resources of the EU institutions and the member states; the deployment of the Global Gateway initiative; and a new generation of partnerships on raw materials. Developing countries often retort that the EU and its member states primarily cater to their own needs and take unilateral measures that risk damaging the interests of the developing world, such as the EU’s Carbon Border Adjustment Mechanism, a tariff on carbon-intensive imports. On climate finance, the first pledges to a new international loss-and-damage fund for developing countries were made at the 2023 United Nations Climate Change Conference (COP28), and Europe accounted for almost half of these.⁴⁴ However, investment falls far short of the estimated requirements. The EU will have to forge a leadership coalition to increase funds to meet developing countries’ needs in coping with climate change and advancing their energy transitions.

Finally, the EU’s global infrastructure development agenda will be an important test of the union’s ability to shape new partnerships based on mutual interests and generate corresponding public-private finance. The Global Gateway provides a useful framework but needs to be scaled up, owned by EU member states, accompanied by a strong focus on the rule of law and accountability, and better connected to foreign policy and development goals.⁴⁵ The ongoing debate on how to reform multilateral development banks—specifically, how to ensure their adequate funding given fast-expanding lending needs—will be another important aspect of cooperation-driven economic statecraft for Europe.⁴⁶

Conclusion

A new European economic statecraft has been in gestation for some time and is not yet fully dovetailed with broader strategic interests. On the one hand, a fresh EU approach to economic security has been taking shape since 2023 and meets real needs. On the other hand, a wider EU economic strategy based on a comprehensive understanding of long-term strategic interests is so far less evident. Contrary to now-ubiquitous official EU claims, the former does not necessarily imply the latter. The union still needs to work out and specify how economic statecraft can contribute to wider strategic priorities.⁴⁷ If it fails to do so, economic security measures could unwittingly weaken the EU’s foreign policy goals, as opposed to help advance them.

This redefinition of interests needs to avoid economic statecraft focusing too heavily on immediate imperatives at the expense of more diffuse, order-related, and long-term goals. The EU may, in some measure, be justified in striking ad hoc and pragmatic deals as it seeks to manage interdependence defensively. Yet, it also needs a statecraft that aims to deepen and improve the multilateral order and contain illiberal power. While European economic security rightly eschews the kind of hard-security primacy that some see gaining ground in U.S. economic statecraft, it faces the different challenge of still having to incorporate a clearly defined political-strategic logic.⁴⁸ The now gathering debate over foreign economic policy just might provide a framework for fine-tuning strategic priorities in this direction.

At present, the emerging security-driven approach to EU economic statecraft seeks primarily to insulate Europe from geostrategic challenges and mitigate its dependencies on critical supplies. The EU has moved away from its erstwhile faith that market globalism axiomatically benefits strategic goals, but the bloc should not go to the other extreme of letting defensive interests marginalize efforts to sustain international cooperation and shape the norms that underpin it. Balancing different dimensions of economic statecraft will require institutional and policy agility, depending on the evolution of the strategic context and the behaviors of other major powers, including their reactions to EU initiatives.

Overall, EU economic statecraft needs to work more concertedly to uphold the union’s interests in the international order—not only by fending off challenges and threats but also by preserving strong multilateral agency. The latter effort will not always deliver, but it should be the proposition of first resort to a wide range of partners.

Giovanni Grevi is a senior fellow in the Centre for Security, Diplomacy, and Strategy of the Brussels School of Governance at the Vrije Universiteit Brussel (VUB).

Richard Youngs is a senior fellow in the Democracy, Conflict, and Governance Program, based at Carnegie Europe.

Notes

Since 2021, the European Union (EU) has begun to adopt the concept of open strategic autonomy (OSA) with the aim to maximize the opportunities of economic openness while assertively defending the EU’s interests both internally and externally.¹

Three major factors lay behind this move. The first was the shift from post–Cold War unipolarity to the current multipolar order, which is marked by growing U.S.-China rivalry. Contrary to the expectation that China’s multilateral engagement would quietly align the country with the U.S.-led, rules-based, liberal international order, traditional balance-of-power dynamics have resurfaced. Even in areas where compatible goals existed, faltering policy cooperation has hampered the functioning of multilateral institutions, notably the World Trade Organization (WTO). That has increased disconnects in technological standards, supply chains, and export markets. In response, the EU seeks to assert itself as a champion of a new global order, in which openness is rules-based, fair, and sustainable, but in which strategic economic policies and regulations are routinely adopted to maximize political autonomy in interstate relations.

The second factor was Europe’s declining weight in the global economy. Three decades ago, Europe accounted for a quarter of the world’s wealth; by 2023, its share had decreased to 17.4 percent.² Multiple policy tools have been developed under the OSA umbrella to enhance the EU’s trade and investment competitiveness in this evolving scenario and maximize the union’s attractiveness as a strategic partner in international networks while also providing it with new tools to tackle unfair practices.

The third driver behind the EU’s move toward OSA was technological innovation, particularly in digital transformation and sustainable industrial development. The EU’s relative decline in the world economy has increased the benefits that Brussels can derive from technology-oriented policies, which can provide crucial incentives to regain shares in trade volumes and leadership in investment partnerships. Europe currently faces unprecedented pressure to innovate in critical future technologies, such as artificial intelligence and quantum computing. OSA-sponsored incentives for technology-driven transnational partnerships may be key to help the EU meet this challenge.

Together with the EU’s 2016 Global Strategy, the concept of OSA has shaped Europe’s evolving climate change and technology policies. The European integration process has tilted toward autonomy, and the EU has carefully crafted its technological cooperation to preserve Brussels’s capacity to act independently.³ As such, OSA has set the union a goal that is both ambitious and, in the current global context, unavoidable.

Critics believe that OSA-driven minilateralism, such as the incentives provided for strategic green- and high-tech partnerships outside the WTO framework, shows that the EU is reneging on its commitments to economic freedom and openness as key drivers of prosperity.⁴ Supporters, by contrast, praise the beneficial effects of the EU’s new approach in a context of growing market segmentation.⁵ While some observers have argued that OSA will unnecessarily weaken the transatlantic compact, others have suggested the concept has a strategic value for the union with regard to both partners, such as the United States, and adversaries, such as China.⁶ Meanwhile, evidence from specific policy areas unveils how OSA-related EU regulation can trigger internal fragmentation, pushing member states to prefer national solutions and shun EU-led initiatives altogether.

Redefining EU Foreign Economic Policy

OSA embodies a new EU approach to the making of foreign economic policy in several ways. The concept signals both Brussels’s distancing from the neoliberal excesses of past decades and its attempt to manage the challenges of an increasingly geopoliticized world. As such, OSA aspires to meet different needs and incorporates complex, potentially conflicting priorities. In many respects, then, OSA policies are the EU’s strategic response to evolving power dynamics in the international system, which have also led to an intellectual rethink of EU foreign policy making. Incipient research on OSA has increasingly looked at the influence of external forces—most notably, the U.S.-China rivalry, the COVID-19 pandemic, and, more broadly, the weaponization of interdependence—on the EU’s allegedly protectionist shift.⁷

In the unipolar age, the transatlantic consensus on multilateral trade liberalization gained momentum, leading to the creation of the WTO in 1995.⁸ Ideological homogeneity and U.S. tutelage paved the way to the EU’s ambitious approach of democratic anchoring through economic support—that is, the provision of economic benefits to help prospective EU member states along their democratization paths.⁹ The current multipolar order, instead, is characterized by major ideological heterogeneities—between North and South and between free-market and state-led capitalism—and by widespread unilateralism, including in the transatlantic camp. U.S.-China competition and former U.S. president Donald Trump’s aggressive stance toward both adversaries and allies pushed Brussels farther toward a more autonomous foreign economic policy.

On the domestic front, the EU’s supranationalization of investment competencies allowed the European Commission to take the lead on industrial policy.¹⁰ Brexit, in turn, weakened the EU’s free-marketeer camp and enhanced the weight of sovereigntist countries, such as France. Since the advent of populist regimes, the EU has been keener to protect the so-called losers of globalization, striking deals with China even in defiance of U.S. requests. Over time, however, perceptions of unfair Chinese competition mounted, shifting the balance of arguments toward greater autonomy and self-reliance.

Overall, OSA is not so much an EU strategy to renege on past commitments to an open economic system as an adaptive response to a changing external environment. While not amounting to pure protectionism, OSA has reoriented the EU’s approach to openness in a targeted fashion. Both the feasibility and the consequences of the concept remain to be seen. Global economic integration is deeper than in previous decades, so severing profitable ties for political reasons entails higher costs for businesses and consumers. The excesses of neoliberal austerity and the COVID-19 shock have further increased these costs and elicited calls for renewed embeddedness—that is, state intervention to regulate market dynamics, reduce inequality, and maximize welfare-enhancing outcomes of economic policies.¹¹

The EU can rely on two dimensions to chart a more autonomous course: its economic policies and its distinctive model of sociopolitical progress based on liberal ideals. The EU can choose whether to carve out a role as a more autonomous leader vis-à-vis the United States or continue to operate as a mostly passive follower. While the concept of OSA will inform the economic and technological elements of the EU’s foreign economic policy strategy, the EU can also count on its reputational capital as a model for responsible democracy by externalizing its version of liberal solidarity to attract like-minded countries in the Global South.

Brussels has cast its new economic policy in terms of both autonomy and openness. Unsurprisingly, this is the result of two opposing influences in the EU institutions: neomercantilist, protectionist voices in the European Commission Directorate General for Internal Market, Industry, Entrepreneurship, and Small and Medium-Sized Enterprises and in the EU Council, on the one hand; and neoliberal, free-market voices in the commission’s Directorate General for Trade and the commission more broadly, on the other.¹² Based on its distinctive approach to solidarity-based liberalism, the EU could play a leading role in bringing together a coalition of like-minded partners to enlarge the minilateral design of OSA. Yet, whether the EU can chart a coherent course of external action in both economic and ideational terms—combining selective protectionism and a rules-based, progressive approach to global governance—remains to be seen.

Examining the Impact of Open Strategic Autonomy

To delineate the likely implications of OSA for the future global economic order, this chapter examines nine OSA-related acts, regulations, instruments, and mechanisms. The analysis tracks each measure’s expected impact on, first, the EU’s autonomy from the United States and, second, the EU’s alternative coalition choices and preferred negotiation forums, particularly given the measures’ compatibility with WTO regulations.

The first dimension of the analysis refers to the degree to which a particular measure is likely to impact—or has already impacted—the EU’s autonomy from the United States. OSA-related actions may entail either minimal or major changes to the EU’s current status as a follower of the United States in energy, technology, trade, and investment policies. Uncoordinated, adverse EU measures that lead to negative market impacts on the United States or open criticism from the United States are treated as evidence of increased EU autonomy. By contrast, when measures that are adopted in response to existing U.S. schemes—so-called catch-up measures—have complementary policy designs and are expected to create synergies, these suggest a continued follower role for the EU and therefore low autonomy. Meanwhile, contrasting or symmetric catch-up measures that are unlikely to generate synergies count toward higher EU autonomy. Finally, when EU-U.S. complementarity is likely to result instead from U.S. adaptation to EU-led solutions, this again suggests greater European autonomy.

The second dimension relates to the impact of each OSA measure on the EU’s choice of negotiation forum and the likely changes in coalition dynamics that this choice entails. The measures are assessed in terms of their compatibility with existing WTO regulations and their support for different negotiation venues and coalition dynamics. These venues can be either multilateral; plurilateral, such as sectoral agreements; minilateral, as with preferential trade agreements; bilateral, such as cooperation agreements, association agreements, or thematic tables; or unilateral.

Concretely, each of these two dimensions is examined in terms of the expected impacts of the following nine recently enacted EU initiatives:

1.     the Carbon Border Adjustment Mechanism (CBAM);

2.     the Critical Raw Materials Act (CRMA);

3.     the European Chips Act;

4.     the Net-Zero Industry Act (NZIA);

5.     the Foreign Direct Investment (FDI) Screening Mechanism;

6.     the EU’s export control regime;

7.     the Single Market Emergency Instrument (SMEI);

8.     the Foreign Subsidies Regulation (FSR); and

9.     the Anticoercion Instrument (ACI).

The first four of these initiatives fall within the remit of environmental or technology policies, while the last five belong to the domain of more traditional trade, investment, or industrial policies.

Combining variations in the two dimensions outlined above produces three possible scenarios. In the first, OSA is regulated in ways that only marginally increase the EU’s autonomy from the United States, so the EU’s choice of negotiating forum is determined mostly by U.S. policies. In short, the EU is mostly a passive follower of the United States. The result can be either open stabilization or deeper bipolar competition, depending on how the United States approaches the EU and other partners, on the one hand, and China and other adversaries, on the other.

In the second scenario, OSA is implemented in ways that strategically enhance the EU’s autonomy from the United States, allowing the union to realign itself in selected economic areas with countries outside the U.S.-led bloc. In essence, the EU is an active follower. Tripolar coalition dynamics could emerge in multilateral forums, but there could also be a rise in plurilateral, minilateral, and bilateral agreements in which the EU is a party and the United States is not. If Brussels can exert influence over Beijing through EU-U.S. agreements and over Washington through EU-China initiatives, the union could become a third pole in the international system with a positive impact on global stabilization and openness. However, tripolar competition could also trigger destabilization and a heightened preference for minilateralism.

In the third scenario, OSA has a regressive impact on the EU’s ability to act cohesively on the external front, as the adoption of new measures drives EU member states to shun OSA altogether and favor national solutions. This scenario is compatible with a broad drift toward economic nationalism, trade restrictions, and greater instability.

All other things being equal, progressive outcomes—EU joint action and cooperative, rules-based, welfare-enhancing achievements—will depend on the union’s ability to capitalize on the selective nature of OSA and creatively marry the goals of openness and autonomy. Such outcomes will also depend on how the EU’s partners and competitors react amid ongoing changes in economic, environmental, and technology politics.

Strategizing Between Openness and Autonomy

The first dimension along which OSA can be assessed is the way in which the nine measures identified above affect the EU’s autonomy from the United States. Examining all nine measures together offers a checklist to support decisionmakers, private-sector actors, and concerned citizens who seek an informed understanding of the implications of OSA.

The Carbon Border Adjustment Mechanism

After discussions that lasted a decade, the EU adopted CBAM in 2021 to accompany the European Green Deal, a set of initiatives that aim to make the EU carbon neutral by 2050. When it is fully in force from 2026, CBAM will impose tariffs on carbon-intensive imports into the EU, with the goals of containing carbon leakages that arise from such imports and aligning exporting countries with the union’s goal of carbon neutrality.

International reactions to the scheme have ranged from competitive approximation, as in China, to an openness to joint schemes, as in Canada, Turkey, and the United Kingdom (UK). However, there has also been mounting criticism, particularly from developing nations, of CBAM’s alleged discrimination against carbon-intensive exporters to the EU.

CBAM has increased the EU’s autonomy from the United States, which has shifted from outright opposition to consideration of a similar polluter import fee.¹³ But discussions of a Global Arrangement on Sustainable Steel and Aluminum (GASSA), a proposed zone of joint import tariffs on these two metals, have stalled as Washington seeks a CBAM exemption for its aluminum and steel exports.¹⁴ In turn, Brussels has loaded the GASSA talks with grievances against allegedly discriminatory nontariff barriers to trade introduced by the 2022 U.S. Inflation Reduction Act. Amid these stagnant negotiations, the EU has proceeded along its timeline for the introduction of CBAM.

The Critical Raw Materials Act

Since December 2023, the CRMA has set minimum targets for the EU’s extraction, production, consumption, and imports of seventeen raw materials that are deemed critical in the manufacture of technologies such as semiconductors.¹⁵ At present, however, the initiative appears underfunded and potentially divisive among EU member states, as the union has no common procurement strategy, dedicated budget, or business case to attract FDI in critical raw materials.¹⁶ Less affluent member states risk remaining in the backseat, clearing the way for richer countries to engage in an EU race for scarce incentives. Internal fragmentation within the EU would delay the bloc’s alignment with the United States, narrowing Brussels’s policy margin in a critical raw materials alliance.

These weaknesses should not be underestimated, as both the EU and the United States are heavily dependent on Chinese supplies of critical raw materials, while Beijing depends on the United States and the EU for the design and manufacture of advanced semiconductors.¹⁷ To manage such interdependence, since 2021 Brussels and Washington have strengthened their bilateral cooperation through the Trade and Technology Council.

The European Chips Act

In force since July 2023, the European Chips Act aims to double the EU’s share in the global semiconductor market, reversing the course of events in the 1990s, when Europe accounted for 15 percent of global chip production and member states then relocated most of their chip manufacturing to Asia.¹⁸ Far from attempting to regain control of the market, the act merely seeks to secure basic chip supplies for the EU through geopolitical controls on dual-use technologies and avoid critical shortages, such as those experienced during COVID-19-related lockdowns.

While representing a first step to align the EU with the 2022 U.S. CHIPS and Science Act, The European Chips Act lags behind the United States’ planned efforts: the EU has pledged to mobilize €43 billion ($47 billion), against the U.S. goal of $52 billion, excluding private funds.¹⁹ As a result, the European act will likely not alter the EU’s status as a follower of U.S. primacy in the transatlantic partnership.

The Net-Zero Industry Act

Like the European Chips Act, the NZIA supports investment in EU-based cutting-edge manufacturing of green technology. The NZIA sets a target for the EU’s overall manufacturing capacity in strategic net-zero technologies to cover 40 percent of the union’s needs by 2030.²⁰ The act is both a response to the green components of the U.S. Inflation Reduction Act and a counterbalance to Chinese primacy in specific clean-tech sectors. The NZIA supports EU net-zero strategic projects through targeted financing and reduced red tape for clean tech, deep tech, and biotech.²¹

However, the NZIA is minimally resourced—even more so than the European Chips Act. An accompanying instrument, the Strategic Technologies for Europe Platform (STEP), is to be financed through the EU budget. The commission estimates that the total new investments through STEP could reach up to €160 billion ($175 billion).²² Yet, this amount is dwarfed by the green financing package in the U.S. Inflation Reduction Act, which, according to global consultancy McKinsey, will “direct nearly $400 billion in federal funding toward clean energy.”²³ Not surprisingly, the downgrading of EU funding for the NZIA objectives attracted fierce criticism from some member states, such as France, and from centrist members of the European Parliament, who support a sovereigntist interpretation of OSA.²⁴

The risk of internal fragmentation within the EU is particularly high. Richer member states, such as Germany, have wider fiscal margins to comply with the NZIA provisions even without EU funding, while poorer states will likely fall behind in the race for investment in clean tech.

A Green Leader in the Making?

On the external front, all four of the measures examined so far—CBAM, the CRMA, the European Chips Act, and the NZIA—have elicited criticism for amounting to disguised protectionism. To contain the rise of anti-EU sentiment, Brussels will have to rethink the current underfunding of its green-tech initiatives. In particular, the CRMA and the NZIA require a greater effort to shore up domestic support and expand the EU’s autonomy when it comes to building coalitions with the Global South.

CRMA-sponsored EU strategic projects between the union and third partners are financed mainly through the Global Gateway infrastructure investment initiative and member states’ resources. Yet, it is unclear how the CRMA—and the many other new acts that tap into preexisting EU facilities—will help the union reach the targets set by its critical raw materials policy. Global Gateway support for sustainable infrastructure development in third countries has already borne fruit in terms of the EU’s search for green critical raw materials, for example through EU preferential agreements with the Democratic Republic of the Congo, Kazakhstan, and Kenya.

On the autonomy front, CBAM represents an innovative EU tool for fairer pricing of carbon-intensive imports, an area in which the United States has been caught off guard and seems to be lagging behind. By contrast, the CRMA and the NZIA are reactive steps by the EU to contain the impacts of measures in the U.S. Inflation Reduction Act on self-sufficiency in critical raw materials and on trade and investment in clean tech, respectively. These two EU acts also strengthen the deterrent effect of EU-U.S. economic cooperation against coercive practices by China and Russia in critical supplies and enhance the resilience of supply chains in the event of global shocks.

Going forward, the EU and the United States should adopt a comprehensive strategy to coordinate their investment procurement and the resilience-enhancing measures of their respective legislative packages. Upgrading the transatlantic cooperation agenda—beyond the current consultations within the Trade and Technology Council on an agreement on clean and deep tech—would be a step in the right direction. Brussels and Washington should also encourage plurilateral deals in the wake of new multilateral rules for trade in clean tech–intensive goods. That means forging partnerships with like-minded countries, such as Australia and Taiwan, within the Climate Club created in December 2022 under the German presidency of the Group of Seven (G7).

At the same time, the EU and the United States need an honest assessment of the impacts of their green packages on global markets. For example, the combined effects of subsidies, export restrictions, domestic content requirements, and limits on intellectual property rights in the NZIA are suboptimal compared with an unrestricted scenario of lowest-cost sourcing. In economic terms, subsidizing domestically based joint ventures and imposing local content requirements are regressive choices. Politically, however, this is the strategy chosen by major players seeking a greener, more tech-intensive future.

To make this approach viable on a multilateral basis, Brussels and Washington should offer gradual phaseouts and compensatory measures to suppliers in developing countries. After decades of EU industrial development through emissions-intensive sourcing from developing countries, production patterns cannot be reoriented without incentives for the EU’s developing partners. Beyond the issue of climate justice, this should be a political and economic priority for a union that will always depend on third countries for critical raw materials that are both emissions intensive and key inputs for clean-tech products.

The FDI Screening Mechanism

Adopted in October 2020, the EU’s FDI Screening Mechanism moves the governance of FDI inflows to the supranational level to protect national security and public order. More specifically, this coordination mechanism among member states seeks to guard against further expansion of Chinese investment into Europe.²⁵ The mechanism was particularly welcomed by France, Germany, and Italy, which receive Chinese FDI in high-tech sectors, as the initiative has mitigated their concerns about technology leakages. Conversely, recipients of Chinese FDI in low-tech infrastructure, such as Cyprus, Greece, and Portugal, have resisted the mechanism’s adoption for fear of jeopardizing potential future Chinese investment.²⁶ As of this writing, twenty-two of the twenty-seven EU member states have established national FDI screening regulations.²⁷

Contrary to expectations of higher barriers and more red tape, early evidence indicates that the EU mechanism is neither overly restrictive nor burdensome.²⁸ In addition to successfully blocking several sources of mostly Chinese FDI, the mechanism has been more effective in terms of its economic selectivity than its geopolitical targeting.

The EU’s Export Control Regime

The EU has further substantiated its deployment of OSA through two export-related tools. In 2021, the EU updated its export control regime for dual-use items; and in its July 2023 Economic Security Strategy, the union issued a longer, constantly updated list of exports that are subject to controls on national security grounds. The EU has also hardened its restrictions on semiconductors to contain the theft of vital technology and catch up with Beijing in the race for semiconductor development.

In this area, the EU has closely followed the United States, where in 2018 export controls were effective in banning the use by the U.S. government of technology developed by Chinese firms Huawei and ZTE. Since Russia’s 2022 invasion of Ukraine, Brussels has aligned itself even more closely with Washington by prohibiting exports of all military supplies to Russia as well as exports of dual-use microelectronics to Russia and its allies. Despite tighter EU-U.S. alignment, however, bilateral ties between the United States and certain EU member states—such as the Netherlands, the main EU producer of semiconductors—indicate that unilateral moves persist despite the EU’s regulations.

Overall, combined with closer U.S.-Japan coordination on export controls for semiconductors, the EU’s economic balancing has strengthened the transatlantic front against China and Russia. The future strength of this alliance will also depend on the EU’s ability to engage South Korean and Taiwanese producers, which have agreed to build new-generation manufacturing plants in the United States, to deter Beijing’s coercive practices against Taiwan, the top producer of raw semiconductors and a trusted EU supplier.²⁹

The Single Market Emergency Instrument

Proposed by the commission in September 2022, the SMEI is the EU’s response to the shocks to the European single market that occurred during the COVID-19 pandemic, when member states restricted critical supplies on the grounds of a national emergency. The instrument seeks to enhance the union’s preparedness for EU-wide critical shortages.³⁰ Under the SMEI, the commission can request that companies voluntarily disclose data on critical items if disruption is expected within six months or in the event of a severe disruption. If critical disruptions persist, the EU Council can invoke the so-called dual emergency procedure, under which the commission can request formal justifications from firms that refuse to comply with the EU’s binding orders.

The SMEI’s expected impact on the single market is ambiguous, however. On the one hand, the commission considers the instrument to be far less ambitious than crisis-management tools adopted by the EU’s partners, such as the U.S. Defense Production Act, which has been in force since 1950 and regularly updated during crises since. On the other hand, the commission has highlighted the SMEI’s relevance as a permanent guard against member states’ protectionism in the European single market.³¹

Critics, on the contrary, have lamented the commission’s lack of expertise and sectoral knowledge needed to interact effectively with players in complex supply chains, particularly in critical conditions.³² Instead of supporting a more resilient and effective internal market, the SMEI may therefore fuel member states’ resistance and encourage bureaucratic battles within the EU. Overall, while enhancing the union’s autonomy from the United States, the SMEI puts the EU on a par with several of its partners. As such, the instrument is a catch-up response rather than an assertive display of protectionist dirigisme.

The Foreign Subsidies Regulation

The FSR, which came into force in July 2023, extends the EU rules on state aid to foreign entities that subsidize non-EU companies or intermediaries that carry out certain economic activities in the EU. As a bold move toward greater European autonomy, the FSR addresses a rise in distortive subsidies entering the EU not only from nonmarket economies, most notably China, but also from the United States. Modeled as an instrument of competition policy, the FSR is nonetheless geared toward the EU’s external counterparts. The regulation’s reach is both deep and broad: It potentially applies to any step in a foreign public procurement process, covers all sectors, and includes multiple undertakings, such as concessional loans, unlimited guarantees, and capital injections.

The FSR is likely to increase the EU’s autonomy from the United States because it endows the union with its own mechanism to scrutinize foreign subsidies. Together with the EU’s digital and green regulations, the FSR should counterbalance U.S. support for companies that invest in the EU under the Inflation Reduction Act. While essentially a defensive tool, the FSR will allow Brussels to negotiate with Washington on a more equal footing, including when it comes to revising WTO regulations on foreign subsidies. Joint—or, at least, coordinated—action to redefine the rules on foreign procurement systems would be compatible with the WTO Agreement on Subsidies and Countervailing Measures (SCM).

However, a sustainable FSR requires the EU to step up its financial commitments and expertise. The EU task force dedicated to the FSR comprises only five staffers, even though the commission had originally envisaged that 145 positions would be needed to make the regulation fully operational.³³

The Anticoercion Instrument

In force since December 2023, the ACI raises the EU’s ambitions in the field of OSA. Amid the prolonged stalemate at the WTO Appellate Body, WTO rules allow the organization’s members to adopt countermeasures against partners that do not comply with the adjudication of a WTO panel. The ACI empowers the union to anticipate and respond to economic coercion, which the EU defines as existing “where a third country applies or threatens to apply a third-country measure affecting trade or investment in order to prevent or obtain the cessation, modification or adoption of a particular act by the Union or a Member State, thereby interfering in the legitimate sovereign choices of the Union or a Member State.”³⁴

This wording clarifies the instrument’s intent, which is to allow mercantilist reactions to potential or actual mercantilist practices by others against the EU or its members. The ACI therefore permits compensatory restrictions in response to economic pressure by third countries against the union. In other words, the ACI, which is defensive in nature, seeks to contain the influence of aggressive third-country policies.³⁵ As the instrument’s proponents have noted, the ACI is in fact a tool of deterrence and has maximum value when it is not used.³⁶ If employed in this way, the instrument should be activated only in critical situations short of outright trade wars. Yet, as defensive tools can lead to offensive action when conditions worsen, the EU should guard against both preemptive and preventive uses of the ACI in the event of an actual trade war.

Restrictive countermeasures under the ACI would certainly reduce global openness. Unlike anti-China measures by the United States, the ACI is not country specific and does not have safeguards to exempt allies and target nonmarket economies. Overall, the instrument enhances the EU’s autonomy from the United States. In most respects, though, the ACI is a reactive move: EU officials have stated that one of the instrument’s triggers was the United States’ aggressive reliance on Section 301 of the 1974 U.S. Trade Act, which authorizes an extensive range of measures in response to certain foreign trade practices.

In fact, the EU’s approximation to the U.S. anticoercion approach would be in Washington’s interests. A stronger and more resilient EU is essential to counter economic intimidation from China. From an EU perspective, the ACI can be regarded as an insurance mechanism should the United States become less open on the grounds of domestic policy. If the ACI is successfully employed as a deterrent and in cooperation with a like-minded U.S. administration, Brussels and Washington could greatly enhance their anticoercion synergies against Beijing and Moscow.

Internally, the ACI marries EU trade and security policies and could lead to an expansion of the commission’s powers into areas that currently fall under the EU’s intergovernmental Common Foreign and Security Policy (CFSP), which sits under the purview of the EU Council. Like the SMEI, the ACI establishes the commission and the council as parties in a complex process that involves the selective triggering of different phases. While giving the commission extensive authority, the ACI entails multiple interactions between the EU institutions, whereas decisions made under the CFSP exclude the commission and may be faster in critical circumstances.

Compliance With Multilateral Rules

The second dimension of the EU’s panoply of OSA-related instruments is their impact on the EU’s choice of negotiation forums and, in particular, their compatibility with multilateral trade rules. There are inherent tensions between the initiatives motivated by the EU’s willingness to enhance OSA, on the one hand, and the multilateral order, which the EU has traditionally championed, on the other.

The Carbon Border Adjustment Mechanism

Various actors, such as India’s Minister of Finance Nirmala Sitharaman, have criticized CBAM for being a green protectionist policy disguised as climate action.³⁷ In response, the EU argues that the mechanism is not a protectionist measure because its pricing will be the same as that imposed by the EU on domestic industries, so local and foreign products will be treated equally.³⁸ According to the WTO’s most-favored-nation principle, an importer should apply equal treatment to any given imported product, regardless of its origin. But CBAM applies different treatment based on each import’s carbon content. In addition, inconsistencies between CBAM and the distribution of emissions allowances under the EU’s Emissions Trading System could create concerns about the mechanism’s compliance with WTO rules.

CBAM could also have negative economic and developmental impacts on third countries.³⁹ This risk is particularly acute for developing and least developed countries whose exports to the EU either play a significant role in their economies or are major sources of income in sectors covered by the mechanism. In addition, developing and least developed countries tend to have more carbon-intensive economies than developed nations and often lack advanced, low-carbon production methods; as a result, they may lose their competitive advantages over their developed counterparts.

What is more, CBAM places an obligation on exporting companies to report the amount of emissions generated during the production processes of affected exports. This requirement has the potential to put additional burdens on the private sectors of certain developing or least developed countries, as their administrative and statistical capacities are more limited than those of developed nations. CBAM’s disproportionately negative impacts on certain developing and least developed countries are also contrary to the principle of common but differentiated responsibilities, which asserts that the burden of climate change mitigation should be distributed equitably, taking into account nations’ levels of development.

The Critical Raw Materials Act

The CRMA provides financial support and incentives to EU-based companies—an arrangement that could be seen as discriminating against foreign firms. The WTO’s SCM Agreement prohibits subsidies that are contingent on the use of domestic over imported goods or are limited to certain enterprises or industries. The CRMA’s support for EU-based companies may be seen as a violation of these rules.

There are also several concerns and criticisms about the CRMA’s environmental and social justice implications. One of these concerns stems from the act’s lack of a global justice approach to international partnerships. The CRMA’s focus on supply security could jeopardize sustainability standards in international investments, the participation of civil society, and the protection of human rights, especially for local populations. To prevent these potential risks, the act should be accompanied by monitoring mechanisms and regulations that ensure civil society participation and transparency.⁴⁰ Additionally, the act’s streamlined procedures for greenlighting critical raw materials projects in the EU could increase environmental and health risks and decrease public participation by shortening the time frames of important procedures, such as environmental evaluations.⁴¹

The European Chips Act

It could be argued that the European Chips Act violates several key WTO principles and, as such, may be incompatible with multilateral trade rules. Four aspects stand out.

First, the act provides financial support and incentives for companies that produce microchips in the EU. This could be seen as a form of local content requirement, which is prohibited under WTO rules. The organization’s Agreement on Trade-Related Investment Measures (TRIMs) forbids provisions that require the use of domestic content, the export of domestic goods, or the substitution of domestic goods for imported ones. More generally, the act’s support for EU-based companies could also be seen as discriminatory against foreign companies and therefore a violation of the WTO’s SCM Agreement.

Second, the act includes provisions that restrict the export of certain types of microchip, particularly those used in critical infrastructure, such as energy, transportation, and health care. These provisions could be interpreted as a breach of the Agreement Establishing the WTO and the General Agreement on Trade in Services (GATS), which prohibit restrictions on the export of goods and services, except in certain circumstances.

Third, the act’s provisions on intellectual property rights could be seen as a violation of the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which sets out the rules for the protection of patents, copyrights, and trademarks. The act could potentially violate the TRIPS Agreement by limiting the ability of foreign companies to protect their intellectual property rights in the EU.

Fourth, the act could be understood as a protectionist measure that carries the risk of a trade war, this time between allies. Europe, Japan, South Korea, Taiwan, and the United States may seek to outbid each other with ever-larger subsidy handouts to entice global companies to make new investments. The results would be the duplication of supply chains among allies, inefficiencies in global semiconductor production, a waste of taxpayers’ money, and a race to the bottom that would be incompatible with WTO guidelines.⁴² The paradox is that the success of the European Chips Act will be measured against the backdrop of a zero-sum mentality, including among Europe’s geopolitical allies. According to a 2022 report by the Brookings Institution, approximately $164 billion of semiconductor capital expenditure is required to achieve the EU’s ambition of a 20 percent share of the global market by 2030.⁴³

The Net-Zero Industry Act

Like the CRMA and the European Chips Act, the NZIA provides financial support and incentives for EU-based companies, which could be seen as discriminating against foreign firms and a violation of the SCM Agreement. Critics see the NZIA’s target for the EU to become 40 percent self-sufficient in the manufacturing of strategic net-zero technologies by 2030 as a protectionist signal.⁴⁴

The act also requires that a certain percentage of the value of renewable energy equipment be produced in the EU. This could be seen as a local content requirement, which is prohibited under the TRIMs Agreement, which forbids measures that require the use of domestic content or limit the participation of foreign investors in a particular sector.

Further provisions in the NZIA restrict the export of certain renewable energy technologies, such as solar panels and wind turbines, to countries that do not have free-trade agreements with the EU. These provisions could violate article 11 of the General Agreement on Tariffs and Trade (GATT), which prohibits export restrictions that are not based on legitimate reasons, such as conservation or national security.

The NZIA also includes clauses that restrict the use of certain intellectual property rights, such as patents and trademarks, for renewable energy technologies. These provisions could be seen as a breach of the TRIPS Agreement.

Finally, there is a growing concern that the NZIA might trigger an intra-EU subsidies race because the act lacks provisions that encourage cooperation among member states. Similarly, there are fears that together, the NZIA and the U.S. Inflation Reduction Act could lead to a subsidies race between the EU and the United States. Therefore, instead of accelerating decarbonization, the transatlantic partners’ increased subsidies and protectionist policies risk slowing decarbonization efforts and raising the costs of necessary materials and components globally.⁴⁵

The FDI Screening Mechanism

The FDI Screening Mechanism applies only to non-EU investors and, as such, could be seen as a violation of the GATS, which states that countries must not discriminate against foreign services or service providers, including investors.

The mechanism gives the EU the power to restrict or prohibit foreign investments in sensitive sectors, such as critical infrastructure and critical technologies. This power could be understood as a violation of the TRIMs Agreement, which prohibits restrictions on the movement of capital and investment, except in certain circumstances.

Although the mechanism applies to foreign investments in the EU, it could be seen as extending to investments outside the bloc. For example, it could be interpreted as applying to EU-based subsidiaries of non-EU companies, or to investments in non-EU countries that have a link to the EU. This arrangement could be seen as a breach of the TRIPS Agreement, which forbids extraterritorial application of intellectual property rights, again except in certain circumstances.

The EU’s Export Control Regime

Historically, the United States and the EU have been the main proponents and guardians of a multilateral, rules-based order with the WTO as the main forum for resolving problems and disputes in international economic relations. However, both actors have consistently used trade and economic relations as an effective geopolitical tool in the form of unilateral and geostrategic sanctions. To be permitted under WTO rules, such measures need to be condoned as exceptions that are justified by national security concerns. WTO panels have so far had limited experience in interpreting the scope of these exceptions.

The new era of global geopolitical tension has rekindled interest in export controls. After a hiatus of almost twenty-five years, the WTO has handled four such cases since 2021, including when a WTO panel rejected the United States’ invocation of article 21 of the GATT in disputes brought by China, Norway, Switzerland, and Turkey.⁴⁶ So far, the WTO approach has proved to be much more restrictive than the trend in both the United States and the EU toward expanding the scope of export controls. This situation raises the question of how compatible these measures are with WTO rules.⁴⁷

As export controls remain a gray area under WTO rules, increased reliance on these instruments will trigger criticism that the United States and the EU are becoming more inclined to impose unilateral measures based only on their own assessments and with too broad a definition of national security.

The Single Market Emergency Instrument

The WTO’s most-favored-nation principle requires that the organization’s members treat all other members equally and in the same way as they treat their closest trading partners. The EU’s use of the SMEI could be seen as a violation of this principle if the instrument is deemed to discriminate against certain countries or industries. If deployed in a protectionist or discriminatory way, the instrument could also be interpreted as a breach of article 21 of the GATT, which allows WTO members to take emergency measures to protect their domestic industries but only in limited circumstances.

The WTO’s Agreement on Import Licensing Procedures includes a requirement that such procedures be transparent, predictable, and fair. The SMEI could therefore be seen as a violation of this agreement if it is deemed to be opaque, unpredictable, or unfair.

Meanwhile, the WTO’s Agreement on Technical Barriers to Trade requires that technical regulations be based on relevant international standards and not create unnecessary obstacles to trade. The SMEI could thus be seen as a breach of article 3 of this agreement if the instrument is found to create unnecessary obstacles to trade or be based on noninternational standards.

The Foreign Subsidies Regulation

At present, trade-distorting aspects of subsidies are covered by the WTO’s SCM Agreement. The scope of the FSR, however, goes beyond this agreement, and there are no binding multilateral rules on the nexus between subsidy regimes and domestic investments. In addition, while the WTO has specific rules on subsidies, these generally apply only to goods and do not cover services.⁴⁸

The Anticoercion Instrument

The essentially mercantilist nature of the ACI—a selectively restrictive economic tool in service of broader, political-economic goals—counters the free-trade philosophy that permeates all WTO regulations. The instrument has its origins in the current decade-long paralysis in the WTO Appellate Body. The ACI’s creation of a substitute mechanism for mediation between affected EU member states and alleged third-party infringers and a sanctions procedure may appear to signal an end to the multilateral apparatus built by WTO members.

In response to these criticisms of the ACI, the EU has argued that the instrument’s mechanisms deal specifically with cases of economic coercion not covered by WTO rules and agreements, and that the ACI is a different tool that addresses illegal economic coercion.⁴⁹ However, the stage at which economic coercion becomes illegal is a highly controversial issue in international law. One of the main problems in this regard is the lack of a clear definition of what even constitutes economic coercion. As a result, concepts such as intervention, interference, and coercion are used in different and varied ways in international law.

In addition, international court rulings on this issue have held that certain actions that the EU defines as economic coercion do not violate the principle of nonintervention, which prohibits states from intervening in the affairs of others.⁵⁰ In a case between Nicaragua and the United States, the International Court of Justice found that economic coercion by the United States, including trade embargoes and the suspension of aid, did not breach this principle.⁵¹ As a result, economic coercion by means of trade and investment restrictions does not necessarily constitute illegal intervention.

Toward Increased EU Autonomy

The EU’s pursuit of OSA is leading the union toward increased autonomy from the United States. Furthermore, OSA-related measures espouse a clear preference for unilateral, bilateral, or minilateral schemes over WTO-based multilateralism, resulting in lower levels of openness than in the past.

Through OSA, the EU has carved out a more autonomous role from the United States in green policies while embracing a more adaptive approach in traditional trade and industrial policies. Moving forward, increased EU autonomy—punctuated by occasional frictions but grounded in general agreement with the United States on broad objectives—appears the most likely scenario. The EU remains on a course of reluctant geopoliticization based on an ostensible preference for multilateralism but in reality pursued through unilateral, bilateral, or minilateral solutions.⁵²

The EU as a Responsible Climate Leader

Through CBAM, the EU’s shift from a reactive follower to a more proactive player shows that there is space for a more assertive EU role in global climate policies. The impact of the mechanism, however, depends on the union’s ability to widen its coalition options beyond the transatlantic partnership. To minimize CBAM’s incompatibility with core WTO norms, Brussels should ensure that the mechanism complies with the GATT provisions on special and differential treatment, which give developing countries special rights and allow other WTO members to treat them more favorably.

At the same time, the EU should introduce targeted carbon-financing schemes, including through the Global Gateway, to compensate developing exporters during CBAM’s transition phase. Such targeting would not only strengthen the EU’s image as a responsible climate leader but also enhance the union’s reach toward potential new partners and major exporters of carbon-intensive goods, including Egypt, India, Kazakhstan, Mozambique, and South Africa.

Financial support for decarbonization could mitigate criticisms of EU double standards when it comes to Ukraine, which is a major carbon-intensive exporter to the union but is currently exempt from CBAM, unlike the bloc’s developing partners. Overall, coupling CBAM with compensatory measures for developing exporters could advance the EU’s economic and strategic goals as well as its objective of a green and just transition. If China aligns with the EU by adopting its own domestic emissions-trading system, Brussels could fine-tune CBAM and become a global leader on decarbonization, exerting pressure on both Washington and Beijing.

However, if CBAM, the CRMA, the European Chips Act, and the NZIA are to jointly advance green transitions worldwide, the EU needs to make a bigger effort to realize its potential as a green and just coalition leader. This requires a twofold strategy of bargaining with the United States for a more ambitious approach to global equitable development, on the one hand, and prioritizing Global Gateway resources for green projects, on the other.

As in global development finance, excellent internal coordination will be needed if the EU is to lead multilevel, multiactor initiatives to promote clean transitions.⁵³ Yet, this effort appears worth making: The combination of a solid EU-U.S. partnership and an EU-led green coalition that includes targeted developing partners may be crucial if the U.S.-China rivalry hardens further. The economic, environmental, and strategic implications of such a repositioning may prove vital for the future of Europe.

The EU as a Third Economic Pole

Similarly, the early impacts of the EU’s OSA-related trade and investment measures also indicate that Brussels may strengthen its role as a third pole beyond the U.S.-China duopoly in the global political economy. The ACI provides the union with unprecedented authority to deter third countries’ economic manipulation and retaliate against distortive practices, even before a case has been concluded at the WTO. The SMEI, meanwhile, should manage the domestic implications of disruptions in complex critical supply chains, empowering the EU Council and the commission to deal with sudden shortages through an EU mechanism.

The FDI Screening Mechanism, the EU’s export control regime, and the FSR are also expected to lead to enhanced EU capacity, but in the form of greater loyalty to the United States rather than more independence as a third pole. As mostly reactive moves to catch up with established U.S. practices, these instruments are likely to enable the EU’s alignment with the United States’ top foreign policy priority of outcompeting China in the global race for technological and, ultimately, security primacy.

Most of the EU trade and investment instruments discussed in this chapter are partly or even fully contrary to existing WTO rules. The EU’s green-tech tools, however, are similar to their U.S. counterparts and may provide a basis from which the EU and the United States can deepen their dialogue on revising current WTO regulations.

Some measures, such as the FDI Screening Mechanism and the export control regime, may reduce the EU’s internal cohesion and increase fragmentation—or even escalate state- or company-specific disagreements over their intended goals to the global level, with potentially destabilizing effects.⁵⁴ Although unlikely at the moment, a scenario of outright fragmentation is a possible outcome of the competitive dynamics that have emerged among EU member states when it comes to green-tech initiatives. Under the NZIA, the European Chips Act, and the CRMA, the challenges of scarce funds, embryonic strategies, and the lack of an EU-wide procurement system, respectively, have raised major concerns within the EU.⁵⁵

Further worries stem from the commission’s lack of in-house expertise to implement crisis-management tools for complex supply chains, meet the private sector’s many demands, and ensure effective coordination with the EU Council. These challenges have exposed the risk that the SMEI, the FSR, and the ACI may harm the EU’s internal cohesion. While the aim of these instruments is to attract foreign partners and forge alliances between EU producers and non-EU suppliers, Brussels will have to carefully assess the risks that arise from the union’s internal differences.

A fragmented EU would weaken support for rules-based economic governance and mean greater global instability. In the short term, international economic regulations will become more heterogeneous and more complex. More global exchanges than ever before now involve countries that are aligned neither with the West nor with China, as evidenced by a 2024 International Monetary Fund (IMF) study, so any steps the West can take to increase the traction of transparent, rules-based governance are particularly important.⁵⁶ For any meaningful economic activity, the worst possible outcome in a contested global context is regulatory uncertainty.

The Implications of Selective Protectionism

The EU is overhauling OSA-related policies across different domains, from trade to climate change, to better equip itself to respond to perceived geopolitical needs. As highlighted by Giovanni Grevi and Richard Youngs in this compilation, the EU has started to devise a different kind of economic statecraft in which geopolitical factors increasingly shape economic policies.⁵⁷

Except for specific initiatives, most notably CBAM in the broader context of the European Green Deal, OSA policies substantiate Brussels’s adaptive response to distortive practices, especially from China, and regulatory changes, particularly from the United States. Mostly defensive in nature, these policies embody a catch-up approach that in principle aligns the union with the United States, rather than widening the distance between Brussels and Washington.

The EU’s policy shift to a more assertive version of selective protectionism, while potentially incompatible with WTO regulations, is rules based and more transparent than most protectionist measures adopted by nonmarket economies. This not only makes the EU’s approach more actionable but also means it represents a sensible strategy for the EU amid the politicization of economic exchanges and the militarization of long-standing geostrategic cleavages.

Only by relying on solid instruments to protect its internal market and promote its competitiveness can the EU minimize its vulnerabilities to the further weaponization of interdependencies by China. Similarly, only by negotiating from a position of relative strength can Brussels exert influence on Washington to begin a review of the WTO system and engage developing partners in a shared effort to advance multilateral solutions fit for the twenty-first century.

At the same time, the shift in EU policies has taken place in an environment that has tended to downplay the external reactions to this transformation. In this respect, two issues are especially salient. The first relates to the EU’s traditional position as the champion of the multilateral trading system. Even more so than the United States, the EU has distinguished itself as the economic power intent on maintaining and consolidating this multilateralism. Thus, the EU’s possible departure from multilateral norms is an area of concern for many nations eager to protect these rules.

A second and related issue is the perception that the modernization of the EU’s legal and regulatory arsenal—allegedly to prepare the EU to better deal with a more challenging geopolitical order—in fact amounts to trade protectionism in disguise. For instance, many least developed countries have labeled the EU’s CBAM “green protectionism.”⁵⁸ Going forward, the union should become more receptive to these concerns, especially in the context of its evolving relationships with the Global South. To address these issues, the EU should consider a holistic strategy that combines a political track and a policy track.

Political Objectives

With respect to politics, the EU’s first objective should be to recast OSA as a beacon for like-minded countries. In doing so, the union’s aims should be to increase the reach of its coalitions and to maximize the benefits of selective partnerships. In addition to the United States, the UK, and other long-standing partners, such as Australia, Canada, and Japan, the list of like-minded nations includes Indo-Pacific states such as India, South Korea, and Vietnam.⁵⁹

This objective entails not only building wider coalitions but also paying particular attention to the multiple cleavages over OSA, both within the EU and when it comes to the concept’s external projection. EU policymakers will have to engage foreign interlocutors to weave shared strategies for mutually beneficial goals. This effort should involve political partners, particularly Australia, Japan, and the United States, especially in strategic sectors, such as dual-use technologies, semiconductors, and critical raw materials. Crucially, the success of the EU’s assertive projection of OSA also depends on the degree of convergence that will materialize with the policies of the post-2024 U.S. administration.

The second objective of the political track should be to engage in high-level political discussions, in a bilateral or plurilateral format, with leading members of the Global South. The aim would be to foster a mature deliberation of the ongoing transformation of the EU’s approach. The trap to avoid is Western-centrism: It would be a dangerous fallacy for the EU to assume that its political initiatives will be accepted by the rest of the world merely because they are justified by moral and ethical considerations, like fighting climate change or preventing social dumping.

This connection has been established among the European policy community and European public opinion; EU leaders now need to make the case convincingly to a global audience. This thought leadership should also aim to engage the U.S. policy community, given how potentially damaging certain U.S. initiatives—such as the U.S. CHIPS and Science Act, with its large reliance on domestic subsidies, or the increased use of Section 301 investigations—can be to the integrity of the multilateral regime.

Policy Goals

The policy track, in turn, should involve a work agenda focused on identifying possible revisions to multilateral rules. Many nations are moving to enact domestic measures on the basis of geopolitical considerations that are not necessarily compatible with those nations’ commitments to multilateral norms. In many respects, the WTO rules that were adopted in the unipolar international system of the early 1990s now appear out of sync with today’s competitive, multipolar, and ideologically heterogeneous context.

At present, there is no real effort to foster a policy dialogue that will address this thorny question. The panoply of geopolitically motivated domestic measures seems to reflect strong political tendencies in the West and beyond. These measures are likely to remain in force even if they are largely incompatible with multilateral norms. Reforming these norms is therefore vital to protect the integrity of multilateralism.

This agenda should focus on four elements. The first is reform of domestic subsidy regulations to carve out space for so-called good subsidies. The idea of such subsidies is that provided they could be justified by an accepted set of shared objectives, such as climate change mitigation or other collective aims, they would be impossible to countervail, even if they created trade distortions.⁶⁰

Second, while proponents of the green transition should take the accusation of green protectionism seriously, the WTO will have to adapt to the greener trade and production needs of the twenty-first century. This could be done by providing for an exception under article 20 of the GATT to allow selective carbon tariffs and targeted domestic sourcing of clean tech–intensive goods.⁶¹

The third element is a reinterpretation of core WTO norms, such as special and differential treatment, the dispute settlement framework, and the national security exemption. The WTO allows exceptions to its trade rules for national security emergencies, but such exceptions have been abused several times in the past, most recently in the U.S.-China trade war and by Trump’s aggressive mercantilist approach to U.S.-EU relations.⁶² Indeed, maintaining a multilateral rule on national security exceptions to free trade may prove unrealistic in the current context. Instead, the increased geopoliticization of economic exchanges and the intensification of conflicts on the EU’s borders and at strategic trade choke points push the union toward more limited goals. A bilateral EU-U.S. consensus and support from other transatlantic partners for a revision of WTO regulations would be steps in the right direction.

Finally, the EU should be more confident in pursuing openings toward new partners in emerging market economies. Now and in the future, the cooperation of such partners is vital to ensure continuous innovation, stable supply chains, and EU access to critical markets. In return, the EU will have to offer wider and fairer—although still selective—market access to Indo-Pacific partners while incorporating China in green efforts downstream. A group led by the EU and the United States could steer the course toward greener, more open technologies and catalyze a wider, gradually more inclusive group of green exporters in line with the United Nations Sustainable Development Goals. However, the EU should still carefully select its partners based on its political priorities, not only to balance China, but also to avoid economic emasculation by the United States and distance the union from coercive actors.

Eugenia Baroncelli is an associate professor of political science in the Department of Political and Social Sciences at the University of Bologna.

Sinan Ülgen is a senior fellow at Carnegie Europe.

 Notes

The term “supply chain resilience” has come into vogue of late to highlight the many strategies being deployed across various sectors to mitigate supply chain disruptions. In the past few years, the European Union’s (EU’s) globalized supply chains, especially in critical sectors, have come into focus. Some of this attention was spurred by the coronavirus pandemic, which exposed the EU’s deep vulnerabilities, given how reliant the bloc is on global supply chains—much more so than the United States or China.¹ Certainly, the EU’s dependence in this area has come at a heavy cost: In 2021, for example, the eurozone lost €112.7 billion ($122.3 billion) because of supply chain challenges.²

At the same time, a host of other factors have exacerbated the EU’s vulnerabilities to supply chain disruptions: Russia’s war in Ukraine, the crisis in the Middle East, and the unpredictability of Europe’s future relations with the United States. Yet, these vulnerabilities have also created opportunities for the EU to ramp up its response mechanisms. Within a relatively short space of time, the EU launched an array of initiatives as part of its industrial policy strategy with the aim of shoring up businesses’ capacities to adjust to shocks in the global trading system: the Net-Zero Industry Act, the Critical Raw Materials Act, the European Chips Act, and REPowerEU, to name a few.³

At their core, these initiatives reflect a set of resilience-building strategies that marry the EU’s approach to the twin challenges of the climate and digital transitions, on the one hand, with efforts to increase diversification and reduce reliance on individual actors or entities, on the other. While the jury is still out on whether these policies will achieve their intended purpose, it is clear that the EU’s ambitions to build strategic autonomy are well and truly underway.⁴

The notion of strategic autonomy—or its cousin, open strategic autonomy—denotes the EU’s policy of protecting itself while simultaneously upholding its liberal values. It is a critical concept in the context of supply chain resilience because it affects the union’s current and future terms of engagement both internally and externally, as supply chains are created with the union’s geopolitical strategy in mind. These terms of engagement set the bloc’s approaches toward trade agreements, mutual dependencies, technological integration, and geopolitical alliances. This is important because the vulnerabilities of critical supply chains across industries globally have seemingly created an arms race toward supply chain resilience, which is exacerbating geopolitical pressures.

Efforts to relieve these pressures have yielded proposals such as the highly divisive U.S. decoupling strategy and the EU’s slightly more palatable strategy of de-risking. Both approaches include elements of protectionist tactics based on a risk assessment that moves away from—or, at least, minimizes—reliance on actors such as China. Yet, as far as the EU’s de-risking efforts and broader economic statecraft are concerned, the evidence suggests a sobering picture: Instead of the EU mitigating the risks of supply chain disruptions, it appears that China has been the one to do so.

Three Tensions: Definitional, Temporal, and Political

European efforts to improve supply chain resilience face several distinct yet interlinked tensions that have so far been poorly understood by EU policymakers, who need to acknowledge these factors if they are to advance their understanding of how to improve supply chain resilience. Much recent research has examined EU-level policies in supply chains, highlighting their advantages and disadvantages. Analysts have also studied the initiatives and strategies being developed by corporate actors.⁵ What is less available is an overview of the underlying tensions that hamper efforts to build supply chain resilience—tensions that can be definitional, temporal, or political.

Tension One: A Definitional Gap

The first tension stems from a lack of consensus on what resilience means in the context of supply chains. The importance of a consensual framing of resilience cannot be overstated: Without this, there is a real risk that the current divergence between businesses and policymakers on how to address the same fundamental challenges will become entrenched.

Strikingly, this divergence has not always existed. The gap between stakeholders’ understandings of the term “resilience” has widened in the past few years and been compounded by today’s global pressures. The initial premise for factoring resilience into supply chains in Europe was the notion of climate sustainability. The 2016 Paris Agreement—the first global, legally binding climate agreement of its kind—paved the way for the 2020 European Green Deal, which signaled the union’s intent to achieve net-zero emissions and for Europe to become the first “climate-neutral continent” by 2050.⁶ These goals effectively put the EU at the forefront of the climate challenge and the green transition.⁷

The EU’s effort to steer a “transformation to a more sustainable, digital, resilient, and globally competitive economy” has imbued all aspects of the union’s industrial strategy.⁸ In the years before the Paris Agreement, businesses were already thinking through—or, at least, becoming increasingly aware—of their obligations to transition to net zero and minimize their carbon footprint. The steps taken by companies to meet these obligations ranged from sourcing sustainable raw materials to adjusting to cross-border pollution tariffs that had been unthinkable in the heyday of globalization.

Regardless of where businesses fell on the values spectrum of the climate debate, the Paris Agreement set the goalposts and provided a clear, if not coherent, vision for the global direction of travel on climate change. Yet, these goals—and the initiatives that have succeeded them—were set during a period that was markedly different from today. And despite the tectonic geopolitical and economic shifts in recent years, by 2021 only 12 percent of leading global companies had managed to adjust to future disruptions.⁹ This is largely because the business community sees resilience through the lens of business continuity—essentially, an organization’s ability to maintain or resume acceptable levels of product or service delivery after an event that disrupts normal operations.¹⁰ Business resilience rests on the premise of predictability, with room for maneuver to adjust to foreseeable, long-term situations or small-scale, isolated incidents.

For the policymaking community, however, resilience has come to mean something quite different. The EU’s focus on securing its supply chains has become motivated by wider geostrategic considerations. First, Donald Trump’s first term in the White House signaled the beginning of a major shift in the global approach to the climate crisis, with the United States announcing its withdrawal from the Paris Agreement.¹¹ Although the administration of President Joe Biden rejoined the accord in 2021, the uncertainty of U.S. domestic dynamics has altered the ways in which trade and foreign policies interact. Second, the United States rebranded its relationship with China from engagement to strategic competition.¹² The EU eventually followed suit in 2019 by adopting a trifecta strategy in dealing with China, labeling the country either a partner, a competitor, or a rival, depending on the circumstances.¹³

This was the geopolitical background for fervent debates in the EU about the bloc’s strategic autonomy.¹⁴ Combating supply chain disruptions has therefore become not only an economic necessity for the EU’s green and digital transitions but also intricately linked to the EU’s goal of achieving strategic autonomy. All of this is based on an understanding that the world has become more hostile and that, to safeguard the European way of life, the EU needs a more protectionist and introverted approach to its external engagement.

Thus, the difference between businesses’ and policymakers’ approaches reflects two divergent attitudes to the same fundamental problem. While the latter group is trying to negate or minimize the effects of globalization, the former accepts its longevity.

Tension Two: Temporal Dynamics

The second tension stems from the timescales involved in making changes to global supply chains. These are extremely complex processes that rely on a host of interlinked factors, including the availability of supplies, such as raw materials and processed goods; physical infrastructure and the reliability of logistical channels; and border and customs regulations at the national and international levels. These variables are linked by an interdependent ecosystem that has taken years, if not decades, to mature into today’s global trading system. As such, attempts to untangle this system will create a domino effect that will unfold over many years. Yet, as the supply chain environment becomes more volatile and climate and digital objectives spur the need to reinvent existing processes, investment in long-term solutions becomes an existential imperative.

Long-term solutions, though, require huge investments of both capital and human resources. They also require a healthy dose of hedging. The role of the European Battery Alliance (EBA) in shoring up the EU’s supplies of clean transition materials is a useful illustration of the temporal challenges facing the Union as it tries to extricate itself from global value chains.¹⁵ The EBA was introduced in 2017 to strengthen the EU’s battery supply chains and has been lauded by observers as a successful example of how the Union is harnessing Europe’s green and digital transitions to enable a technology that is essential to the EU’s competitiveness.¹⁶ However, despite building four lithium-ion gigafactories in the EU  between 2017 and 2022, the European Commission admitted in 2023 that the EU still faced important “structural challenges, such as the lack of 800,000 skilled workers by 2025, high energy, land, and permitting costs, as well as the fact that Europe is now home of only 1% of the production of key battery raw materials.”¹⁷

This situation is not forecast to change anytime soon. Human capital needs time to be trained—or imported, which means reevaluating migration policies. Government bureaucracy needs to be better aligned with the innovation needs of various sectors. New infrastructure needs substantial amounts of financing and investment. All of these elements are risky and time-consuming.

Given the EU’s vulnerabilities to irregularities in global supply chains and the union’s exposure to global markets, any geopolitical variations may have a one-two effect that not only has a significant impact on the EU’s overall balance sheet but also threatens the EU’s transformation toward a green and digital economy.

Tension Three: National Politics and the Geopolitical Landscape

The third tension is political and affects two layers of policymaking, as supply chains are undergoing intense politicization at both the national and the international levels. A key challenge for the EU’s ambition of open strategic autonomy is that the union remains a primarily economic, trade-based bloc, not a political federation. While the commission has many exclusive trade and economic powers, there are important areas of so-called shared competence that remain beholden to member states’ decisionmaking, which is driven by national interests.

This is why, for example, the United States and Japan have been better able to buttress their national economies by introducing investment review frameworks well before the EU. Japan’s Foreign Exchange and Foreign Trade Act was originally enacted in 1949 and has undergone several revisions since.¹⁸ Meanwhile, the Committee on Foreign Investment in the United States has been operational since 1975.¹⁹ By comparison, the EU—not its member states—was a relative latecomer to this field, introducing an EU-wide mechanism only in 2020 with the Foreign Direct Investment (FDI) Screening Regulation, which aimed “to make sure that the EU is better equipped to identify, assess and mitigate potential risks to security or public order.”²⁰

The consequences of this lag and the incoherence among EU member states’ foreign policy priorities have affected the union’s relationships with other global players, creating strategic dependencies on increasingly hostile actors and limiting the EU’s room for maneuver. In the years before the introduction of the FDI Screening Regulation, China made substantial headway into EU member states’ markets, buying significant shares in the European automotive industry. For example, Brilliance Auto Group, a Chinese auto manufacturer, owned a 50 percent stake in Germany’s BMW until February 2022—a partnership that was established in the early 2000s, well before the FDI Screening Regulation.²¹ Similarly, since 2010, the Swedish auto manufacturer Volvo has been owned by the Chinese multinational automotive company Zhejiang Geely Holding.²²

The absence of a clear and coherent EU framework for supply chain resilience has allowed the member states to pursue different priorities based on national interests.²³ The exposure of the member states, even the bigger ones, like Germany, to countries such as China and Russia has not been conducive to fostering a coherent EU-level policy. In many ways, the EU’s FDI Screening Regulation was a watershed moment in helping move toward bridging the gap between national and EU-level approaches because the law is directly applicable and binding in all member states. The litmus test for the regulation, however, will be its implementation and effectiveness, which remain uncertain given that the EU’s trifecta strategy toward China is likely to conti