For all the vagueness of its recent 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.
The European Council on Foreign Relations’ Task Force for Strengthening Europe against Economic Coercion brings together high-level European public and private sector actors 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.
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 – and not just in relations with the EU. China is Japan’s biggest trading partner, for instance, but Tokyo is an important US ally. Japan refrained from imposing human rights sanctions on China last month, with Beijing warning Tokyo and the world that they would face dire consequences if they joined Washington. As China’s foreign minister, Wang Yi, put it: “if under the guise of multilateralism, countries engage in bloc politics or big power confrontations, or even arbitrarily impose unilateral and illegal sanctions on other countries based on false information, the world will regress to the law of the jungle of right and wrong.” 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 with its recent sanctions. And the incident 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. As China sets out to build Chinese economic champions that replace their foreign counterparts, the EU also needs to avoid stark asymmetries in its trade relations that Beijing could weaponise. The EU should be much more active in identifying, and expanding upon, sectors and areas in which it is already strong, or has the potential to be strong. The EU also needs like-minded countries to join it in taking a determined stances vis-à-vis China. Like Japan, Australia did not impose human rights sanctions on 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.
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 andthe 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.
A Collective Defence 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 create 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. A Collective Defence Instrument could give the European Commission the power to react to economic coercion swiftly. Indeed, the Commission has launched a process to propose an “anti-coercion instrument”. As there remain many unanswered questions about this process, the Commission will have to be very careful. But such a last-resort instrument could involve European tariffs, investment screening measures, or data or services restrictions as countermeasures against grave forms of economic sanctions or coercive measures such as those China imposed on Australia. China’s recent boycotts of European companies are a warning that it could take bolder action soon.
A digital currency
The digital renminbi that Beijing is gradually introducing makes it possible to transfer funds across borders without a bank account – in other words, outside the global banking system. This could spell trouble for European companies that, in a few years, might have to use the digital renminbi to engage in trade with China or deals involving Chinese-led projects around the globe. This is because the US could suspect these firms of circumventing its financial sanctions that are based on the traditional banking system. Most importantly, the digital renminbi could provide China with vast insights into transactions, and potentially even the opportunity to threaten exclusion from the system as a tool of economic coercion. Coupled with the fact that a digital currency might allow for significant efficiency gains in transactions, the EU needs to think much more determinedly about designing a digital euro around geopolitical considerations – in other words, a currency that is attractive to companies and that shields European firms from economic coercion.
A joint strategic assessment
The EU and the US need to engage in a transatlantic assessment of the cost of economic coercion for both Europeans and Americans. This should focus on both losses of market share and damage to Western policies – such as, for example, how much market share the transatlantic partners have jointly lost in strategically important regions because of economic coercion by third countries, and divergences in policy between the US and Europe. On Iran, this is already happening, as Washington and Tehran enter indirect talks about reviving the full nuclear deal that the US left in 2018, under then-president Donald Trump. Part of this effort will likely involve sanctions relief for Iran. As things stand, US secondary sanctions are barring France, Germany, Italy, India, Japan, and other D-10 countries from engaging with Iran economically – to the detriment of not just their narrow economic interests but also, arguably, US interests. Iran and China recently concluded an agreement on establishing a joint bank to facilitate trade denominated in yuan. Trade volumes financed this way may remain insignificant for now, and the bank will not change the US dollar’s dominance by themselves. But they come with great risk, especially given that China is trying to establish a digital renminbi.
Meanwhile, Europe should view America’s use of secondary sanctions on Nord Stream 2 in a similar way (whatever the merits of the pipeline). Such sanctions incentivise countries to reduce their dependence on the dollar-based financial system. Strong support for secondary sanctions from decision-makers such as Ted Cruz signals to the world that the US could continue to misuse these measures against allies when its policies diverge from theirs.
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 recent sanctions, that would have meant backing down on human rights and accepting a setback in its efforts to rebuild transatlantic relations.
This commentary reflects the opinions of the author only, not a consensus among members of ECFR’s Task Force for Strengthening Europe against Economic Coercion.
The European Council on Foreign Relations does not take collective positions. ECFR publications only represent the views of its individual authors.