Strengthening Europe against economic coercion
A proactive approach to minimize European vulnerabilities
/ By Jonathan Hackenbroich, Head of Task Force and Policy Fellow, European Council on Foreign Relations (ECFR)
This article was originally published as part of the 2021 edition of Bled Strategic Times, the official gazette of the Bled Strategic Forum (BSF) international conference. You can access the full version of this and other BSF publications by visiting our official website.
It could be a taste of things to come. China in March imposed personal sanctions on European policymakers and think tanks. Among other things, the measures introduced prevent Chinese people and organisations from doing business with the European entities and individuals and ban them from entering Chinese territory. Beijing could have responded reciprocally to the European Union’s listing of four Chinese officials with links to the repression of Uyghurs in Xinjiang province, by simply listing four EU officials of similar (local, low-level) importance. Instead, it chose an asymmetric approach, acting against the United Kingdom, Canada, and the United States, but first and foremost against Europeans (and even their families). At the end of the same week Beijing also engaged in a bout of economic punishment: although there was no explicit link to the personal sanctions face-off, retailer H&M suddenly disappeared from a vast range of Chinese consumer and e-commerce apps. Alongside many other retailers from Europe, America and Canada it became faced with “popular boycotts” — an increasingly common Chinese sanctions tactic — because of a pledge it had made to stop using cotton from Xinjiang. Just as with personal sanctions, China hit European companies hardest: Adidas disappeared from app stores, too, although no one faced as harsh a punishment as H&M.
For all the vagueness of its sanctions on Europeans, China could not have been clearer in its resolve to counter any more determined European stand against the country, including through economic punishment. China’s sanctions were likely intended to send a message to Europeans: their asymmetric character might be a clear warning that China will respond vigorously to even moderate European attempts to adopt stronger policies and close ranks with the US. The economic punishment of H&M and other companies comes months after they made their pledges on cotton but right after the EU’s sanctions. This drives home the point to the business community that China is ready to use economic coercion in direct response to European policy choices whether by governments or companies.
China’s sanctions were likely intended to send a message to Europeans: their asymmetric character might be a clear warning that China will respond vigorously to even moderate European attempts to adopt stronger policies and close ranks with the US.
At the same time, the economic damage is negligible for now, especially compared to the fallout Australia is still facing for doing less — namely, Canberra’s call in 2020 for an independent inquiry into the Covid-19 outbreak, which led China to curb imports on key Australian products in 13 sectors, amounting to 10 per cent of Australian exports overall. In the recent past, China has also threatened or imposed coercive measures on Canada, Germany, the Netherlands, and Sweden.
Beijing will be more potent in the future. Chinese sanctions have increased in magnitude in parallel to the country’s growing weight in the international arena. They are likely to continue to do so as China grows stronger. Chinese scholars are contemplating how Beijing could identify several areas, or economic networks, where it wants to occupy a critical central position in the global economy — their writings are suggestive of government thinking. This would also allow it to use chokepoints and dependencies for political advantage in much more sophisticated ways than today. If everyone needs access to the Chinese market, systems, or technologies, Beijing can try to split Transatlantic partners, water down ambitious human rights positions, or restrict Europeans’ freedom of trade where it views its national security as threatened.
European businesses already had cause to worry. China recently adopted a new export control law which has significant extraterritorial reach. Under this new law, European companies may have to ask Beijing’s permission to sell their products to other European firms or to third countries even if they are not for military use (as is American or European practice). China can deny re-export on national security grounds in such cases. In fact, China might already be doing this through informal pressure.
China’s efforts also include a “Blocking Statute” recently enacted by Beijing. This law prohibits companies from complying with rules or sanctions imposed by other countries without stating which rules these are. European subsidiaries in China could now get into trouble if they comply with a European or US sanction or export control measure. Most importantly, European companies have to provide compensation to Chinese counterparts for damages they cause by complying with European or American laws that China identifies. H&M essentially just experienced what the Blocking Statute could do to other European firms. The company cited international supply chain standards for reconsidering its dealings in Xinjiang. Many of these standards will soon be firm rules under new laws that oblige firms to ensure labour and human rights are respected along their supply chain. For H&M and others, adherence to those already brought punishment in China.
At the European Council on Foreign Relations, we have put in place a Task Force for Strengthening Europe against Economic Coercion which brings together high-level European public and private sector actors from the Czech Republic, France, Germany, the Netherlands, Sweden, and Spain to analyse a range of policies Europe could adopt to improve its resilience. Drawing on this systematic consultation process, the ECFR toolbox analysed concrete options for the EU to resist economic blackmail and punishment such as Chinese sanctions, and to avoid them in the first place.
Close Transatlantic relations, mindful of a squeeze
Many of China’s new instruments for economic coercion are difficult to implement if Europe and America are closely aligned with each other, and with their like-minded partners, from Japan to India and Australia. China’s Blocking Statute and export controls, for instance, could make life incredibly challenging for European companies if the European Union was on its own. This is one of many reasons why it is important to rebuild the Transatlantic relationship.
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At the same time, China could easily exploit Europe’s vulnerability of relying much more on trade than America does. In 2019 trade accounted for more than 40 per cent of the EU’s GDP and wealth, significantly more than America’s (26 per cent of GDP) or any other big market’s. This is an important lever for Beijing. As underscored by a strikingly detailed statement released by the Chinese regime following a phone call between President Xi Jinping and Chancellor Angela Merkel, China would like Europe “to make correct judgments independently”.
But open strategic autonomy for Europe, which Xi explicitly refers to according to the statement, has never meant equidistance between the US and China, even if Beijing might want to view it like this. It means the capacity to act, even under pressure from great powers, with Europe’s own strategic situation in mind. It will be important for Europe to resist the (economic) pressure that China is threatening to place Europe under. And the incident in march shows that the EU cannot simply rely on the US to take care of the threat for it. Europe faces a slightly different situation — and is, in fact, more vulnerable — than the US. It needs to create its own tools, firstly by building up its economic strength. China’s new dual circulation strategy will make Europe more dependent on China and will replace European companies (or make them more Chinese) unless Europe now begins to invest heavily in its own innovative base, and its protection of data and intellectual property. The EU also needs like-minded countries like Japan and Australia to join it in taking a determined stances vis-à-vis China. And the US and Europe could both benefit from clarifying that it is legitimate to have a difference of interest or opinion in a particular situation, without calling into question their joint stance or shared values. A narrative of division — in which the US is a bully under President Joe Biden or the EU is a slacker — could help China drive a wedge between America and Europe.
An EU Resilience Office
While other countries use uncertainty in their sanctions policy, China’s sanctions are particularly vague, and come without any guidance or legislative basis. They establish travel bans on MPs and academics, but everything else is highly unclear. And where China lists entities such as the EU’s Political and Security Committee, there is not even clarity about who has been banned. Economic punishment of businesses has come through “popular boycotts” — which obscure the policy and its impact. Economic coercion in China often involves even more subtle and informal methods of pressuring companies.
By making clear that grave forms of economic coercion against Europeans are likely to come at a cost, Europe could dissuade third countries from engaging in such coercion in the first place.
The EU could establish a Resilience Office that would provide more clarity. It could comprise experts from different fields and systematically assess instances of coercion against Europeans, and identify subtle and informal forms of coercion, as well as their cost to European businesses. The office could issue guidelines on what Chinese measures mean and how Europe views them in cases of uncertainty. It could serve as a central European interlocutor with Chinese State Export Control Administrative Departments and other Chinese agencies responsible for potentially coercive tools.
Levelling the playing field
Regardless of whether it creates a Resilience Office, Europe needs regular, systematic assessments of the cost and market distortions caused by economic coercion. Such assessments could look at the direct costs of coercive policies, disadvantages incurred relative to Chinese companies, and opportunity costs. After careful evaluation, EU institutions could use a new measure to offset the impact of these distortions, treating them as market access barriers or unfair competition practices — even ones that affect the European market.
Blocking European compliance with Chinese measures
European companies might soon be in a position where they have no choice but to comply with Chinese regulations that harm them, Europe’s trade, or European policy. For instance, Chinese export controls could prevent re-export to third countries if a European company had imported goods from China — potentially as a way of significantly interfering with European trade in sensitive goods. The only tool the EU has for such situations is a dysfunctional Blocking Statute, which prohibits companies from complying with certain identified measures (and thereby puts them between a rock and a hard place, facing punishment in both a third country and the EU). The EU could adopt a more strategic approach to the instrument and prepare it for possible use on Chinese measures. It could do so by making the instrument more about protecting companies than punishing them; inserting an obligation into the instrument to provide information to regulators, possibly enabling countermeasures against the coercive actor; and providing compensation to European companies in select cases.
An Anti-Coercion Instrument
The EU could establish a deterrent against economic coercion, threatening countermeasures based on violations of international law. By making clear that grave forms of economic coercion against Europeans are likely to come at a cost, Europe could dissuade third countries from engaging in such coercion in the first place. The EU currently lacks tools to rapidly react to coercion. Typically, the tools that it has created division between member states. Even China’s boycotts (which may not be designed to divide the EU) hit some member states much more than others. An Anti-Coercion Instrument could give the European Commission the power to react to economic coercion swiftly. Indeed, the Commission has launched a process to propose such an instrument. Such a last-resort instrument could involve European tariffs, investment restrictions, or data or services restrictions as countermeasures against grave forms of economic sanctions or coercive measures such as those China imposed on Australia.
There are many difficulties and challenges that come with some of these policy options. Europe is facing a dilemma as a union of trading nations: it needs to uphold the rules of free trade as much as possible, but it also needs to be prepared to resist stronger and more frequent economic coercion. It cannot just give in to such coercion by changing its policies. In the case of China’s March sanctions, that would have meant backing down on human rights and accepting a setback in the efforts to rebuild Transatlantic relations.
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