One year ago, Russia invaded Ukraine. This has highlighted the vulnerabilities of global supply chains to political shocks. It has also put a new focus on the geopolitical risks through over-dependencies on autocracies – relating to future trade relations with Russia and China.
As such, globalization is currently being reorganized – with significant consequences for the global competitiveness of European companies and the common market, where 38 million jobs depend on foreign trade. Economic nationalism and protectionism are on the rise. Regulatory barriers and tariffs, government subsidies, and investment restrictions are increasingly putting fair competition to the test. In addition, the role of the state in the economy is increasing and trade policy is used to achieve geopolitical goals. This leads to important decisions about the future direction of EU trade policy, which relate to the diversification of supply chains, the reduction of critical economic dependencies, new trade defense instruments, and closer international economic partnerships.
The question we want to ask is whether there was a turning point on these issues after the Russian invasion or whether this has been more of a gradual change.
1. EU foreign economic policy in the context of the open strategic autonomy
In response to the changing trade policy environment, the EU has introduced a new guiding principle for European trade policy, the concept of open strategic autonomy.
This includes three core areas for future European trade policy: (1) the reduction of critical dependencies (especially in the areas of energy, critical raw materials, and high technologies); (2) the strengthening of defensive trade instruments; and (3) a strategic openness to form economic and political coalitions with like- minded international partners. These three areas are examined for the period before and after the Russian war of aggression in order to examine whether there has been a turning point in EU trade policy with regard to these objectives.
2. European trade policy before the new era (marked by the Russian aggression)
2.1. The identification of strategic dependencies
Already in May 2021, one year before the Russian invasion, the EU Commission published a “Staff Working Document on Strategic Dependencies and Capacities“, which analyzed the areas of security, health, green and digital transformation for existing dependencies. The EU Commission concluded that around six percent of EU imports (137 products), mainly from China, were affected. 0.6% of these imports (34 products) were considered to be extremely vulnerable, as they have a low potential for diversification or production in the EU. This includes many raw materials, but also semiconductors and batteries. In a follow-up document from February 2022, more detailed strategic dependencies were examined. These included rare earths, chemicals, solar panels and technologies, and IT software.
Even before February 24, 2022, the EU took its first steps to reduce strategic dependencies and to enhance Europe’s sovereignty. The analyses focused primarily on raw materials and goods from China, which was characterized as a “strategic rival” since April 2019. Dependencies on Russia, still the EU’s number five trading partner in 2021 and an important energy supplier, were not yet discussed.
2.2. Expansion of EU trade defensive measures
With the new trade strategy, the EU Commission decided to shift its focus even before the Russian war toward a more “robust” presence in global trade affairs and to use the economic strength of the single market as a lever. The majority of EU trade reforms revolved around the defensive EU trade agenda, with the aim of creating a level playing field with regard to the “strategic rival” China. This led to the introduction of several defensive trade instruments:
- Rising concerns about foreign investment in key European industries led to the introduction of a European investment screening regulation in the spring of 2019. While there are still EU member states without foreign investment review mechanisms – such as Bulgaria and Cyprus – many others have now introduced them. To this end, the common EU framework allows for the systematic exchange of information between member states and the EU Commission and facilitates a common external presence.
- In addition, the EU Commission renewed its proposal for an international procurement instrument (IPI) in 2019 with the aim to create fair competition in the procurement market. The regulation enables the EU to deny third-country companies access to public tenders in the EU if European companies do not receive comparable access. The aim was to fight against a loss of competitiveness for European industry with regard to economic powers such as China, which keeps its own market closed.
- In December 2019, the European Commission also proposed a tightening of its enforcement regulation, which came into force in February 2021. The changes allow the EU to impose countermeasures against third countries if the EU has received a positive WTO panel ruling, and the third party rejects an arbitration (despite the deadlocked Appellate Body).
- In addition, the EU initiated a large number of trade defense proceedings and WTO complaints and used anti-dumping measures to protect producers from unfair competition from third countries. In 2020, anti-dumping duties were even imposed for the first time on products from Egypt that had indirectly benefited from Chinese subsidies.
In terms of defensive trade instruments, it is clear that even before the Russian war of aggression, the European “toolbox” for more robust enforcement capability had already been strengthened – with a clear focus on China.
2.3. Difficult times for an open trade agenda
Compared to previous years, when major trade agreements were concluded with countries such as Korea, Japan, Canada or Singapore, the EU’s offensive trade agenda had fallen behind for some time for domestic political reasons. Some trade negotiations made progress, for example with countries in the Indo-Pacific, such as Australia and New Zealand, and with the US in the framework of the Transatlantic Trade and Technology Council (TTC). The EU also pushed for the long-overdue reform of the WTO. However, it was not foreseeable in February 2022 whether any new agreements would enter into force before the 2024 European elections. The open trade agenda thus fell short of its potential.
3. After the Russian aggression: A turning point in EU trade policy?
3.1. Increased activities in reducing strategic dependencies.
Since February 2022, the previously rather theoretical discussion in the EU on the reduction of strategic dependencies has become vital, especially with regard to Russia. The country is one of the most important energy suppliers for many EU states, in the areas of gas, oil and nuclear – as well as for certain raw materials. There is also the global dimension: Russia and Ukraine are extremely important food exporters for many developing countries. The same applies to fertilizer exports from Russia and Belarus. The impact of trade restrictions on these commodity flows must be taken into consideration by the EU in its analysis of critical dependencies.
Given the extremely difficult geopolitical situation, the European reduction of energy dependencies has been very successful: Both availability and price levels have moved away from worst-case scenarios – although the situation remains tense. Russia has now been replaced by Norway as the EU’s most important energy supplier, and Germany no longer buys Russian gas and oil. Foreign trade with Russia is also increasingly decoupled.
At the same time, the EU is discussing to what extent trade with China contains similar shock risks. The US in particular is stepping up its decoupling from China and urging the EU to follow suit. The EU is now planning to strengthen local value creation and to reduce the risk from external shocks through industrial policy initiatives such as the Chips Act and the Critical Raw Materials Act. It is clear that since February 2022 there has been an extraordinary quantitative but also qualitative increase in EU activities in the area of trade dependencies, not only with regard to Russia, but also China.
3.2. Expansion and new focus on the defensive trade agenda
Since February 2022, the EU sanctions policy has undergone an extraordinary development: Both the speed and the unity of European member states have been surprising. Negotiations are now underway on the tenth EU sanctions package. At the same time, there is close international coordination with like-minded partners in the G7 and in the TTC (with the US) on export controls. There is also an intensified discussion in Europe on the control of outbound foreign investment.
The legislative project launched in December 2021 for an anti-coercion instrument has also taken on a new dimension in the context of the Russian war of aggression and is expected to be adopted in 2023. The new instrument provides for deterrence and countermeasures if third countries attempt to influence internal decision-making processes in the EU or in EU member states. The sticking point is the decision-making procedure, as sanctions policy requires unanimous Council decisions. This will be an important issue for the 2024 European elections. Thus, also in the case of defensive trade instruments, we can observe a sharpened activity and a shift in focus in the face of the Russian war.
3.3. Trade policy becomes more active – new boost for EU negotiations
Since February 2022, the geopolitical significance of trade agreements has become increasingly clear: They are important to forge alliances with like-minded partners and to reduce unilateral dependencies on autocracies such as China or Russia. Trade agreements also offer an important opportunity to diversify supply chains and increase the resilience of national economies.
Consequently, the EU is negotiating trade agreements (FTAs) with renewed vigor and enjoys broader support than before in the European Parliament and in EU member states. This includes a new attempt to ratify the EU-Mercosur Agreement, and restart the EU-India negotiations. Ratification of the agreements with Chile and New Zealand before the European elections is also quite possible, as well as the conclusion of the EU-Australia agreement. Thus, there is now progress and urgency to conclude agreements with key G20 countries as well as in the strategic Indo-Pacific region.
4. Conclusion: Significant reorientation toward a more geopolitical trade policy
The Russian attack on Ukraine had a profound impact on European trade policy. Some developments have already been initiated under the new EU trade strategy. However, the unprecedented joint foreign trade sanctions against Russia and the heightened European engagement to form partnerships with like-minded countries through FTAs represent a new era in European trade policy. This is also receiving stronger support from relevant actors. The EU’s trade policy response can therefore be seen, if not as a paradigm shift, then as a significant change of course and reorientation toward a more geopolitical trade policy. Since Europe has no interest in global economic bloc formation and decoupling, this coherent diversification and de-risking strategy in trade is the right way forward.