The EU Package on Economic Security with Tobias Gehrke

On the 24th of January the European Commission published a package of five initiatives on economic security. The package includes a proposal for a new regulation for foreign investment screening, a white paper on export controls, a white paper on outbound investments, a white paper on the support for research and development in dual-use technologies, and a proposal on enhancing research security. The guest of this episode is Tobias Gehrke, Senior Policy Fellow at the European Council on Foreign Relations (ECFR) and an expert in European economic security, with him we will explore the evolution of the EU's economic security agenda and its challenges. 

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SPEAKER_00 0:11

Welcome to Geoeconomic Competition. I'm Francesca Giretti, your host, and in every episode I will dive into the intricacies of geoeconomics with a different topic and a different guest speaker. In this episode, we'll have a look at the European Union's economic security package. The package contains five initiatives on foreign direct investment screening, on export controls, on outbound investments, on the support for research and war-use technologies, and on research security. Today I have the pleasure of discussing all of these and much more with Tobias Gerke, Senior Policy Fellow at the European Council on Foreign Relations. Welcome, Tobias.

SPEAKER_01 0:52

Hi, Francesca.

SPEAKER_00 0:54

Hi. So a few days ago on the 24th of January, the European Commission published a package on economic security, economic security package. And that came after an intense year for the European Union Economic Security Agenda. We had the launch of de-risking at the beginning of 2023. Then we had the publication of the Economic Security Strategy on the 20th of June. And throwing there also the list of critical technologies in October, and then fast forward to January 2024, we have this package. Now I'm sure I skipped quite a few important steps there, but this was just to give a bit of a broad picture of what has happened in the past year. And I keep mentioning this economic security package. So, Tobias, since you are an expert on economic security, geoeconomics, can you tell us a little bit what this package is and what it contains?

SPEAKER_01 1:49

So this package is the first big follow-up to the strategy, the economic security strategy document that the European Commission released in June, about seven months ago. As you said, there were a lot of uh lot of work in those months. And now a first package of different bits was released. I think you know it really focuses this package on technology security. Um, it doesn't have much on all the elements of the economic security agenda, it's really focused on the technology side. So it has two bits on research security, um, and it has three bits on the wider security instruments to ensure that the leakage of technology is prevented. So it's like five elements um in total, and um um yeah, this forms a package really around technology technology security.

SPEAKER_00 2:48

So it is sort of lacking the economic security element. Do you think that there's been sort of a transition of the economic security focus, therefore, of the European Union from economic security to technology security?

SPEAKER_01 3:04

It's definitely the focus, I think, uh, right now. It's definitely the focus that I think the European Commission had very much in mind already half a year ago with the strategy. There are, of course, different elements, as you know, the coercion part, the sort of resilience of supply chains. Work is ongoing there, no doubt. But I think indeed the more political salience is on the technology side for different reasons. I think one of them being that this is also very much in focus for the United States, I think, for China. Um there's a lot of demand to coordinate on the technology side internationally, and so the European Commission leadership has really put the focus um on here. Um, yeah, some of the highlights I think of this package um is, as I said, it has two bits on sort of the research security side. I think that's quite interesting because it's a bit of a new terrain for the European Commission. Um, it's uh you know following on a lot of reports you see in the media um and and research outlets that really show that European universities have been cooperating um quite extensively with Chinese counterparts in particular, often in projects where there is dual-use technology at play. We have reports of technology leakages through these um university corporations at large. And so this is a gap, I think, that is now trying to be addressed. It's fair to say that some member states have done something on that already. We have some national strategies, for example, in the Netherlands, but other member states have, I don't think, much on this yet. And so here the European Commission tries to really um um push this, um, give recommendations, give guidelines to universities, um, to European universities, and say you need to um put some measures in place, you have to really analyze with whom you're cooperating, what kind of projects you're getting into, do your due diligence um more actively. But again, of course, these are recommendations. Um this is not a not a field for the EU to regulate. And so um it's for now, it's more you know, bringing the urgency into this discussion, but really relying on the member states, but particularly the universities, to take up this agenda.

SPEAKER_00 5:24

So basically, sort of the usual problems, right, of the European Union, a bit of a lack of cohesiveness, of consistency, and at the same time the usual problem of European Union initiative, and then member states having to somehow do something, otherwise, these initiatives don't really translate into actions. And we see this in the economic security agenda, but we see these so many, so many at a time. So not surprised there. Um, there's been quite a bit of fuss right around this economic package, a lot of uh time spent waiting for this 24th of January economic package, at least in the expert community. Um, why do you think, or do you think it is actually as important as many thought it would be?

SPEAKER_01 6:15

Well, I think it's not as bold and it lack it it it suffers from exactly what you just described. Um the eternal issue of of all of these topics is um the lack of competences in Brussels to really do much. So in Brussels relies a lot of uh you know putting out guidelines and uh pushing member states to do something. Um and so a lot of the elements, these five elements that are in this package now also suffer from this. I just gave the the example of research security. That's a um pretty difficult view, perhaps, because there's really a lot of um risk of overstepping in innovation community. So maybe here um that's quite a good approach, but also on on FDI screening. You know, we had an FDI screening um regulation in Europe now for a few years. This has been the most substantive update in this package. The commission has included a review of the FDI screening regulation that is already quite detailed. Yeah, I think it tries to get to some of the technical issues in this. You know, member states, some member states don't have any screening mechanism at all. So now in this update, the commission says um these now have to become mandatory. I think there's five member states that don't have one yet. So at last, uh, if this is agreed, they will also have one. That's a that's a bigger one, of course. But then there's of course also very different scopes within the national screening regulations. Um, so in this update, the commission suggests uh a bigger scope of what sectors should be screened nationally. Um, and especially also includes the critical technology list, this list of 10 technologies, right? So this is, yeah, I think quite a good development. It goes a little bit on the technical details. Well, how do we align risk standards between the member state mechanisms? And there's especially some administrative issues and um notification issues between the different member state authorities, you know, who sends whom the information. So, yes, there's definitely more ambition here. Um, however, you know, the bigger, the bigger elements, let's say, um, were perhaps then uh not enough. I mean, one thing we watched out for, I think, uh Francesca was where the Greenfield FDI would be captured, right? So um uh for an investor building basically on the on the empty plane. And while it is included, um uh it's only a recommendation to member states that they should potentially consider Greenfield FDA FDI uh in their national security strategy. And you saw some of the political communications in the cut in the days before the Hungarian trade minister, I think, when he came to Brussels, he made some pretty strong arguments that this is a protectionist measure of uncompetitive member states, right? Hungary, of course, receiving a major FDI from China in the last couple of years, um, France equally. And so um, yeah, it's a lot of it's more on the recommendation side again than on the really um uh um centralized actions.

SPEAKER_00 9:35

Yes, and I mean we could spend a lot of time talking about whether these are protectionist moves or not. We could talk about the love of the European Commission for Technicalities. Um, I guess that what I would I personally appreciated about the upgrade was that now European companies who are actually owned by non-EU owners and companies can be screened as well. So I do think that is a bit of a step forward, but I do agree with you. Um, for example, I would have loved to see something about more responsibilities to the European Commission, especially in uh projects that have a European impact rather than a national one, right? So we were all perhaps expecting something a little bit more ambitious, but again, usual. And a few months ago, just moving on to the very last perhaps element of this package, which is export controls. A few months ago, you and a colleague of yours wrote a piece uh on export controls. So I would love to hear your opinion about where European Union's export controls are, especially after the white paper in the economic security package.

SPEAKER_01 10:49

Yeah, so export controls, I mean, a bit of context, I think we have to really reiterate that export controls are now the perhaps the number one national security tool for the United States. This is not just my interpretation, you know. Um the Under Secretary of Commerce just last week said something to the effect, um, but also for China. And so it this instrument is really has moved from sort of a technical gray backroom to the forefront of strategic competition, and and um we have to also address it as such. The United States has really you know um scaled export control from a tool that was in the last years really a limited tool that had a specific task to mostly to address the proliferation of dual-use technologies. That's a very specific kind of risk that was quite narrow. Today it's clear that export controls are, as I said, like quite a strategic tool that the United States is actively using to pursue its understanding of economic security and national security. Um and so it has imprinted quite a lot of this thinking um on its partners already. There's this famous deal with the Netherlands and Japan uh a few months ago that you know had quite a big impact, I would say. Um it regulated Europe's most important technology company, which is of course a Dutch company, but has a huge European supply network. It has so it has economic consequences beyond the Netherlands, it has strategic consequences beyond the Netherlands because um you know withholding such an important technology, of course, has political and strategic implications for China. So it's not to say we shouldn't do it, but uh the the consequences of these actions were were quite dramatic. Um and more recently, the United States has upgraded this approach, it has done a uh you know, implemented uh basically a 0% de minimis rules on on lithography machines, which basically means any lithography machine in the world um is under American laws, even if they have no US content and they don't. So that is the use of extraterritorial export controls on Dutch machines. And I think that's a really important development in the last year that that puts a lot of pressure on Europe to um to move this topic of export controls to the very political level, to the very strategic level. What does this mean for Europe's position vis-a-vis the Americans, vis-a-vis the Chinese? Likewise, you know, the Chinese have also been using export controls much more as an as a strategic tool. Um, these controls on raw material, particularly for example, graphite in the last year, right? Um have been withholding graphite via export controls to Sweden for a long time, not least to sort of game the supply chain of the battery supplies to the Swedish battery company Northwold. So there's a lot of gaming of supply chains that export control tools are used for, and that's um quite a significant development. So that's a kind of bigger context of why Europe really needs to think this more European and to think it more strategic and not only technical. So have we achieved this? That's a big question, right? Um, I would say certainly not. Um there's some I think some positive developments and and some um yeah, some some shortcomings. I think on the good news, it export controls is really has become much more political. There's a lot of interests, I think. Um there's a lot of understanding that um it has quite significant implications for the European Union, for different member states. Um companies are also supportive of a more European approach, which is always important, right? Not all companies are supportive of economic security, but on export controls, there's actually quite some support from many companies who say the main risk for them is actually that um Europe has two different um two different controls, national controls that are that are not harmonized that would then um make for them much more difficult. So they want a level playing field. So they want some of them want more better harmonized utility controls. So that's good news. I think we have achieved on sort of the political discussion it, I think quite a lot. But yeah, it goes back to I think the competence issues. Um this this package that was now released, I don't think made any strong suggestions that this must change. There has been clearly pushback from member states. Um there are some things that that the commission wants to do, like do some controls, unilateral controls that were not possible in Vassenar, this international regime that is blocked due to Russia. Um, so that's sort of fixing some of the risks, right? Some of the issues that have that have um affected the proper function of the system, but it's kind of just fixing the ails rather than really thinking um ahead of what of where Europe needs to go. Um so yeah, not yet the big breakthrough, but um I'm kind of still hopeful.

SPEAKER_00 16:45

We're always hopeful. So much to unpack in uh in this, you know, in this answer. Um, definitely positive. The companies are for harmonization of export controls. Companies and member states are often a bit uh of the obstacle when we talk about economic security, as you mentioned. Glad you mentioned China. You know, it was perhaps one of the first experiences I've had in EAS where we were not mentioning China in an economic security context. So thank you so much for mentioning it. Um, and of course, the US, which leads me to my next question. Um, you mentioned the Netherlands as well. And it was reported that a senior representative of ACEML, the technological company at the center of the export control debates in in the Netherlands, said that the European Union is not in the Champions League of economic security and it even struggles at Europe League level. Now, let's set aside for a second the football, uh the use of football for the comparison. Um, I would like to know what what you think. Do you think the United States is actually so fundamental to drive the European Union's economic security agenda, or this is more specific to export controls because of what happened in the past couple of years in relation to export controls?

SPEAKER_01 18:14

I think the um this analogy is somewhat fitting. I probably use a little bit of a different one because if the United States is in a Champions League, it backs to the question who else is in this Champions League. And I don't see many. I think the US are in a league by themselves in terms of um what they uh how they conceptualize this this economic security world, what they want, um, what kind of capacities they're building nationally to analyze technologies, to um um to to build to go really deep into the technology stacks to understand um where China is building uh advantages and so on. So they've been really expanding a lot of resources, I think, uh in this economic security world. In that sense, they're very much, I think, um, in a league of their own. Um, so maybe the better analogy would be um that sort of it's the what is this in baseball, I think the the United States call it the the world championship or something like this, but no one else is in the world championship, you know, no one else plays really baseball. Um, so maybe that's the better analogy. Um behind that, um I think you know there's there's everyone is then in the Europe League. Uh, if you want to stick to this analogy, I think, yes, you know, there's a lot of reference always to Japan, which has done a lot on this on the structure on economic security with famous law and uh architecture and so on. But um, you know, I think there's a lot of experimentation going on in in in many places. Um, how ministries talk to each other, how um the governments talk to the private sector, and so there's a lot of places in this world, including the UK and Canada and Australia and Korea, where I think there's a lot of experiment experimentation ongoing, and the Europeans are part of this. I think it's hard to tell yet who is where at the table, I would say. Um, except the United States. And so, you know, um, yes, there's a big imprint, I think, from the United States in this discussion. They have been clearly driving this discussion um in international fora. The G7 has become quite a popular one where Japan is driving so much discussion, but the Americans, I think, are really supporting that. But also in bilateral deals. Um, you know, there are very specific bilateral deals, especially on semiconductor security, not just with the Dutch and the Japanese, but also with places like um Malaysia and Korea to diversify the supply chain, uh to really de-risk the supply chain, helping Malaysia build capacity. Um, so there's a really a much stronger focus already on how to really do the de-risking, whereas perhaps for us it's sometimes still a bit more conceptual. Um, so yes, big imprint, I think.

SPEAKER_00 21:23

Okay, well, then we're coming to a close, and uh I want to leave you with a very easy question. And well, thank you first of all for mentioning analogy. I was using the wrong figure, I said comparison, much more correct. Thank you so much to Via. Um But you know, we've seen this um development in economic security in the European Union, and you rightfully mentioned, you know, actually, we saw this in the world, not just in the European Union. But the question that perhaps we haven't quite been able to answer yet is as this made The European Union more competitive? And in both cases, whether you answer yes or not, what should the European Union invest on in order to increase its competitiveness?

SPEAKER_01 22:13

So I think these debates are unfortunately moving in different tracks, mostly in Europe. I think sort of the economic security debate has been in the past months in particular quite separated from the competitiveness debate. It's become much more narrow, I feel. Where the competitiveness angle is very important in the European debate, but I think there's a conscious uh effort by some to separate these two. Um fairly successful, I would say. Um I don't think that's necessarily the right direction. I think too narrow of a uh focus on really very specific risks of how a technology is traded is really not helping us understand the bigger picture, um, which is, I think, about uh this fierce competition for a wide range of technologies and who innovates, produces them and trades them. And I think the United States, China, but also Japan subscribe to a bigger understanding of economic security that goes beyond this dual use kind of um risk. So I think we need to go back to that um and not make this uh conversation too too narrow as it's currently becoming. Has it made us then more competitive? I I'm I'm not sure. That's I think uh it has made us perhaps it's trying to make us more resilient, perhaps, um, as a first matter, but as a second matter indeed, it needs to focus, I think, on building capacities in our in these technologies in particular, and in um the industrial scale-up of these technologies. That's really the long-term challenge to make sure that Europe is well represented here. Um and this shouldn't be a separate agenda, this should be married with the more targeted security agenda that that we're currently focusing on. Um, but that's a political debate also that needs to be had and won.

SPEAKER_00 24:42

Yeah.

SPEAKER_01 24:43

So that will be the topic perhaps to watch.

SPEAKER_00 24:46

Yes, we have a topic to watch. So sort of to wrap up um the European Union in order to become more competitive, should broaden the debate on economic security to include matters of competition and competitiveness. I will add, once again, because it's my fixation, prosperity, and then you know, perhaps uh working a little bit more on the promote pillar of the economic security strategy, not just protect, which has been widely developed, partner a little bit, uh, but the promote pillar is sort of lacking quite a bit at the moment. Would you agree?

SPEAKER_01 25:28

Yeah, absolutely. Um unfortunately, not for lack of willing in Brussels, I think, but the politics are unfortunately becoming more difficult as um yeah, as we're going back to austerity and um national spending focus in Germany and so. Um, but yes, promote agenda is lacking.

SPEAKER_00 25:53

Well, thank you so much to BS, and uh thank you for being here and for spending some time to look into European Union's economic security, many topics that we could have spent a lot more time talking about and explore. We also want to remind you that this is the European Union selection here, European Parliament. So that will also maybe drive a bit of the attention away from some of the elements in the agenda. But once again, thank you so much, Toby. And uh this was the first episode of Geoeconomic Competition. Thank you for being here.

SPEAKER_01 26:28

Thanks for having me for this first episode.