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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
There are some questions that people have long asked themselves at a deep psychological level. How secure do I feel? Who is threatening me? How could I be safer? These days, every trade-dependent economy in the world is searching within itself for answers.
Three years after Covid-affected supply chains starting freezing up, and as US-China geoeconomic rivalry intensifies, “economic security” is a buzzphrase in the ministries of big trading powers such as Japan and the EU. Brussels started to look at it in earnest over the summer under the snappily alliterative rubric of “promoting, protecting, partnering” (respectively encouraging growth, defending against unfair trade and working with allies).
It’s a massively elastic concept — in fact a fresh framing of a longstanding issue — that’s going to need a lot of refining. Economic security could remain limited to controls on sensitive technology, such as the high-end semiconductor production equipment of which the Netherlands will restrict sales to China after being leaned on by Washington. It could extend into value network-critical inputs like rare earth minerals. Or it could expand, as some more dirigiste European officials would like, into building a broad industrial base including products with relatively few national security implications such as electric vehicles.
The problems of designing and implementing policy are legion. European trade officials are bracing themselves for their territory to be invaded by battalions of securocrats with no sense of trade-offs between promoting growth and reducing vulnerability. (A hunter-gatherer society living in caves would be perfectly resilient to Chinese infiltration of 5G networks.) A broad definition will also be expensive, either through public investment and subsidies or by European consumers paying more for taxed or restricted imports.
Taking as an example EVs — which would surely come under a wide view of economic security — the returns to promoting growth are likely to be bigger, more durable and better for the planet than protecting from competition, or partnering with allies.
The EU is certainly having a go at the latter two. It recently announced an investigation into China’s subsidies to its EV exports to Europe. And after Joe Biden’s Inflation Reduction Act created the tax credits for EV manufacturers in the US, the EU expended a great deal of diplomatic energy making its companies eligible.
But both of these are partial and defensive. EU officials accept that the anti-subsidy duties, if granted, will do no more than slow imports of Chinese vehicles. The duties are likely to be around 10 per cent. Even on top of an existing 10 per cent tariff, that probably doesn’t cancel out all China’s cost advantage. And hitting China with really serious tariffs (perhaps expanding the action into antidumping, which typically produces higher duties) could make EVs sufficiently expensive to deter European consumers from buying them, undermining the EU’s green credentials.
As for partnering, the European car industry has to have better alliances than scrabbling around for fiscal scraps thrown by a US administration rescuing some semblance of transatlantic co-operation from a bill written in the supremely parochial US Congress. The White House itself is not a reliable ally on economic security, whether or not Donald Trump gets elected again. The Biden administration is currently threatening the EU with reinstating Trump-era tariffs unless Brussels trashes its carbon emissions regime with a plan to block imports of Chinese steel that is very likely illegal under World Trade Organization rules.
The EU’s best strategy is to promote growth and the single market. It’s the creation of super-efficient supply networks, especially in central and eastern Europe, that has maintained the German car industry against lower-cost competition. The fact that Germany’s automotive-government complex dropped the ball on EVs over the past decade doesn’t stop it catching up.
Business associations have long warned that single market rules are applied unevenly and often weakly across member states. The decision of Poland, Hungary and Slovakia last month unilaterally to block imports of Ukrainian grain, an unprecedented deliberate fracturing of the market, should be a serious warning. One of the many reasons Donald Tusk’s election as Poland’s prime minister is a massive relief is the stronger instinctive commitment to collective EU responsibility over such issues that he brings.
EU markets in capital, energy and banking remain fragmented and inefficient, reinforcing other fissures. The EU economy is still vulnerable to fractures along member state lines: witness the intra-EU trade restrictions on face masks during the early months of Covid.
It’s much less glamorous grinding through the detail of financial services regulation and harmonising goods inspection procedures than setting up high-level technology task forces armed with exciting new powers of intervention. But it’s the right thing to do irrespective of where the Commission and EU governments want to draw the line on more coercive action.
Defining economic security, let alone creating policy and a means of implementing it, has a long way to go. But one guiding principle is clear. High-productivity growth and the application of technology are the first places to look when making economies more resilient. The EU cannot just regulate its way to security. Its companies must first be able to compete.
