EU-made high tech should not prop up China’s military, von der Leyen says in new economic strategy

Exports of state-of-the-art products, such as quantum computing, semiconductors and artificial intelligence, deserve an additional layer of supervision, the European Commission has recommended in its first-ever economic security strategy.

“We’re looking at a limited, small set of cutting-edge technologies. And here we want to make sure that they do not enhance the military capacities of some countries of concern,” Ursula von der Leyen said on Tuesday afternoon.

While the European Commission chief insisted the strategy was “country-agnostic” and respected open markets, it soon became evident the main target of the document was China, the world’s second-largest economy and one of the bloc’s main trading partners

Von der Leyen has pioneered the concept of “de-risking” to deal with Beijing, a  middle ground that is supposed to fall somewhere between close engagement and total detachment. The term, first introduced in a landmark speech in late March, was later endorsed by the Group of Seven (G7) in Hiroshima, reflecting its growing appeal.

The strategy unveiled on Tuesday can be considered an attempt to clarify what “de-risking” actually looks like in practice.

“Given the changing nature of the risks, we now need a strategic vision for how we are going to handle these risks,” von der Leyen said.

XXXX

Relations between the EU and China have become severely strained over the past year as a result of Beijing’s continued refusal to condemn Russia’s invasion of Ukraine, its belligerent rhetoric around Taiwan, trade retaliation against Lithuania, online disinformation campaigns and what von der Leyen has previously described as the “explicit fusion” of the country’s military and commercial sectors

But despite the litany of friction points, the bloc remains highly dependent on China for certain products that are essential to thrive in the 21st century, including solar panels, batteries and rare earths.

Brussels worries that if relations deteriorate any further or an armed conflict breaks out in the South China Sea, these entrenched dependencies will backfire and wreak havoc across the entire European economy – a bleak scenario that is rooted in the aftermath of Russia’s invasion of Ukraine when the Kremlin actively manipulated gas pipelines in retaliation for Western sanctions.

The lessons learned from the COVID-19 pandemic, which saw prosperous countries scramble to secure basic goods like face masks and hand sanitisers, also resonate loudly across the new strategy.

“Many of the issues (…) have revealed inherent vulnerabilities in our economies. And they have opened our eyes to the increasing – and increasingly complex – risks to national security and economic resilience,” von der Leyen told reporters.

“The world has become more contested and geopolitical.”

Greater coordination and oversight

The economic security strategy, which is non-binding, has three overarching objectives: promote Europe’s competitiveness, protect Europe from potential risks and partner with allies to diversify Europe’s supply chains.

The second goal – protection – is arguably the central element of the 14-page-long document and focuses on the major threats against Europe’s supply chains, critical infrastructure, technology and economic coercion.

The strategy does not propose banning or restricting exports of any specific product, a prerogative that remains the exclusive competence of member states. 

Instead, the Commission puts together a series of policy tools – both existing and forthcoming – that can help governments improve their oversight over sales of sensitive technology and flows of foreign investment, with the goal of detecting harmful side effects and acting before the damage is done.

The executive plans to come up with a common list of dual-use technologies – those that can be used for both military and civilian purposes – by September and ask member states what degree of extra protection the selected products should be granted, if any.

A preview of this debate was offered earlier this year when the Netherlands moved to curb sales of machinery to manufacture ultra-advanced semiconductors that were destined for the Chinese market. The decision, meant to prevent “undesirable purposes,” prompted Washington’s applause and Beijing’s condemnation. 

Following up on the Dutch case, which perfectly encapsulates the geopolitical stakes of the technological race, the Commission makes the case for stronger and faster coordination at the EU level to avoid a free-for-all landscape of bans and restrictions.

“An uncoordinated proliferation of national controls by member states would create loopholes and undermine (the) integrity of the single market,” the strategy reads. “Possible divergences between member states would weaken the economic security of the EU as a whole.”

Besides exports of goods, Brussels also intends to reinforce its surveillance over investment projects involving countries that “operate civil-military fusion strategies,” coded language for China.

The Commission already has legal instruments to oversee foreign investment coming into the bloc and foreign takeovers of domestic companies. Now, it wants to have a new tool to monitor investments flowing from the EU towards other nations where technology secrets and know-how might be leaked or stolen.

“Outbound investment means we need to ensure that European companies’ capital, their knowledge, their expertise, their research, is not abused by countries of concern for military application,” von der Leyen said, promising to put forward a legislative proposal before the end of the year.

The idea of screening outbound investment, however, is highly contentious and faces an uphill struggle to get off the ground. It is still unclear how the Commission could track, or even block, the corporate decisions taken by European companies while respecting their freedom to do business.

The first reactions to the strategy are set to land next week, when EU leaders will gather in Brussels for a two-day summit. The discussions are expected to be intense as governments have been traditionally reluctant – or downright opposed – to let the European institutions meddle with aspects of national security.

Tobias Gehrke, a senior policy fellow at the European Council on Foreign Relations (ECFR), welcomed the Commission’s document and the selection of potential risks but said it fell short of addressing “the great power race for techno-industrial leadership” between China and the United States.

“The EU’s division between trade instruments controlled by the European Commission and security instruments controlled by member states is increasingly inadequate in the face of technological and industrial rivalry where economic security and national security are intertwined,” Gehrke said in a statement.