European Security Strategy by Bundesverband der Deutschen Industrie e.V.

POSITION | EXTERNAL ECONOMIC POLICY | ECONOMIC SECURITY

Economic Security Strategy Europe needs more than trade controls

October 11, 2023 Lacking in strategy and a wasted opportunity At the end of June 2023, the European Commission (COM) and the High Representative of the Union for Foreign Affairs and Security Policy published their communication for an economic security strategy. The main characteristic of the strategy is the emphasis on trade control instruments to enhance economic security. The need for such a strategy is indisputable because interdependence in a world of globalized trade flows has created vulnerabilities that undoubtedly need to be addressed. In this respect, these efforts are to be welcomed. What’s missing is a positive agenda At the same time, the strategy lacks a positive trade agenda, which is why it appears static and inflexible. The political ambition must be to develop a fully comprehensive strategy that integrates trade controls, their costs, and the opening of markets urgently needed to diversify European interdependence. The Economic Security Strategy in its current form articulates aspirations for trade controls. However, it lacks a positive agenda to give Europe the economic flexibility to counter "weaponized interdependence" in a meaningful way. Worse, according to an analysis by the think tank ECIPE, by 2035 the economically measurable difference between the EU and the U.S. will equal the difference between Ecuador and Japan. Thus, The strategy fundamentally lacks the understanding that mass is still class in international (economic) relations. Against the backdrop of the above-mentioned deficits, the BDI will constructively support the development of meaningful defense instruments. But we will also insist on a positive economic agenda being an integral part of Europe's economic security strategy.

Economic Security Strategy

Table of Content Lacking in strategy and a wasted opportunity ................................................................................. 1 Economic Security .............................................................................................................................. 3 Strategy Priorities ............................................................................................................................... 3 Detailed Evaluation of the EU Economic Security Strategy ........................................................... 3 „Partnering on Economic Security“ ....................................................................................................... 3 Digital Aspects of Economic Security .................................................................................................... 4 Critical Infrastructure Protection ............................................................................................................ 4 Raw Materials Policy ............................................................................................................................. 5 Global Gateway ..................................................................................................................................... 5 Export Controls and Dual-Use Goods ................................................................................................... 5 Outbound Investment Screening ........................................................................................................... 6 Conclusion ........................................................................................................................................... 7 Imprint .................................................................................................................................................. 8

Economic Security Strategy

Economic Security The strategy employs the vocabulary of protection and defense intensively and due to the lack of adequate economic perspectives hardly does justice to an integrated and comprehensive understanding of security as used by the German government in its National Security Strategy. From an industry viewpoint, this is a missed opportunity, since the COM has an explicit political mandate on location, industrial, and trade policy. It is therefore unclear why the strategy lacks the right balance of "keeping your foes at a distance while running faster". Instead, the Commission states at the beginning of the strategy: "[...] only by completing traditional approaches to national security with new measures to safeguard our economic security can we ensure our prosperity, sovereignty, and safety in the current age." What the strategy does not do, however, is to meaningfully clarify - beyond an abstract notion of protection - the connection between national security goals and prosperity. Prosperity is thus not a threatened variable for the Commission, but a constant that can be used in political conflicts. The Commission is trying to "securitize" economic policy issues, i.e. to link them almost exclusively with the areas of foreign and security policy. This is regrettable because the EC in particular should have a strategic approach based on classic economic policy instruments to promote locational and industrial development.

Strategy Priorities The criticism above enables an in-depth evaluation of the priorities of the EC within the strategy's framework. These priorities are "Promote", "Protect" and "Partner". This conceptual triad has the potential to formulate new answers for Europe's place in the world in the face of challenges and opportunities of global economic interdependence. Unfortunately, the EC focuses on economic security and safety. Identifying and analyzing risks are, of course, important. However, this one-sided emphasis means that the strategy lacks a concept for economic growth and diversification of procurement and sales markets. The aim should have been to create positive incentives for cooperative behavior with potential trading partners, to offer fallback options in geopolitical crisis scenarios, and thus to forcefully link economic stability and resilience measures with market-opening policies. In the following, the BDI evaluates the individual substantial plans of the EC.

Detailed Evaluation of the EU Economic Security Strategy „Partnering on Economic Security“ As mentioned above, the remarks on "partnering" as a priority are not balanced, because partnering is contextualized with and constricted on security issues and is, therefore, not aimed at strengthening trade policy. The only positive example of trade policy exchange cited by the Commission is the U.S.EU Trade and Technology Council, and that in particular is seen critically by business stakeholders because of the timid progress it has made. Free trade agreements (FTAs) are referred to three times in the entire document and only in the context of a so-called "geo-economic toolbox." This is misleadingly worded to say the least, because FTAs are supposed to ensure rules-based trade. They are explicitly not a means of enforcing political interests. The EC also misses the opportunity to address the difficulties of negotiating and ratifying new agreements. The political complexity of market opening processes is neither addressed nor are politically new or even creative solutions proposed.

Economic Security Strategy

Digital Aspects of Economic Security R&I cooperation and technological security concerns BDI welcomes the EC's insistence that the EU must remain open to international cooperation in the field of research and innovation. In justified individual cases, the EU can already exclude third countries from participation in R&I programs or programs for the development of “[...] digital capacities deployment projects [...]” as soon as strategic interests are affected. It is important to maintain the difficult balancing act between necessary innovation through international research cooperation on the one hand and security interests on the other. The exclusion of third countries should therefore only take place in justified individual cases. Standardization Standardization is another important lever for protecting Europe's economic security. The aim should be to strengthen the EU's role in creating international standards. German industry also welcomes the EU Cyber Resilience Act proposed by the EC, which will introduce horizontal cybersecurity requirements for all products with digital elements. 5G-Toolbox Digital infrastructures are the backbone of the digital transformation. Their resilience and integrity must be protected from the influence of third countries. If a manufacturer does not meet the EU’s and German government’s technical, political, and legal criteria, it must be excluded from participation in the deployment of the 5G network. In this regard, the German industry welcomes the 5G toolbox framework in principle. However, telecommunications providers often lack the necessary intelligence information to verify the providers' claims and their trustworthiness. Henceforth, close cooperation between government and industry is required. Should the federal government decide to ban a provider, a sufficiently long transition period would be required. In addition, replacing a provider's components would tie up scarce resources that would then no longer be available for building new infrastructure projects. Critical Infrastructure Protection The BDI welcomes the fact that the EC has set the definition of critical infrastructure very broadly and also takes into account the secure and reliable provision of goods and services in the EU. A holistic approach seems necessary: Neither criminal attacks nor state-controlled economic and scientific espionage distinguish between physical and digital. These attack vectors are systematically and synergistically linked. Given the increasing danger of hybrid threats, especially in the context of Russia's war of aggression against Ukraine, there is a need for close interlinking of measures to protect against analog and digital threats in the European and national legal framework. A clear focus must be placed on preventing duplication of regulation. Uniformity, consistency, and transparency of obligations for industry must be ensured at European and national levels. A convergent and coordinated regulatory situation both nationally (ITSiG / National Cyber Security Strategy on the one hand, KRITIS umbrella law / National Security Strategy on the other) and at the European level (NIS / CRA on the one hand, Critical Facilities Resilience Directive (CER) on the other) is necessary to ensure optimal protection of the infrastructure. Against the background of numerous national and European regulatory instruments, some of which overlap or contradict each other, there is an urgent need for better coordination between national (German) and European policies.

Economic Security Strategy

Raw Materials Policy The strategy refers in general to the risk that highly concentrated supply chains and one-sided dependencies limit Europe's strategic options for action. In this context, explicit reference is made to the Chips Act, the Net Zero Industry Act, and the Critical Raw Materials Act. With these initiatives, the EU Commission aims to increase the resilience of supply chains on the one hand and to prevent coercive economic measures on the other. The Critical Raw Materials Act, raw material partnerships, and the Raw Materials Club are defined as central instruments in this context. The announced supply chain stress tests should be treated with caution. They pose a wide variety of challenges (higher complexity in industry than in the financial sector, supply chain opacity due to trade secrets or conflicting legislation, confidentiality of data, disproportionate bureaucracy, etc.). Although the strategy paper only envisages a structured dialogue with the private sector, which, in addition to a common understanding of economic security, should encourage companies to exercise due diligence and risk management, more far-reaching obligations for companies cannot be ruled out. Such possibly newly added due diligence, risk management, and reporting obligations for companies that analyze supply chains in detail to derisk certain trade relationships, if necessary, would represent a far-reaching encroachment on entrepreneurial freedoms - without necessarily having a risk-reducing effect. For this reason, the development of a set of instruments to increase economic security must be carried out in close consultation between politics and industry. Global Gateway From the perspective of German industry, the EU's Global Gateway Initiative is a key building block for new strategic partnerships and economic diversification. It is in the EU's economic and political selfinterest to make developing countries attractive offers for infrastructure development and climate change management that are adapted to their needs and take European standards and values into account. Therefore, Global Gateway must be part of the EU's economic security strategy. However, it is not enough to limit Global Gateway to a guarantee instrument. What is needed is the willingness of the EU and the member states to participate in the financing of infrastructure projects, in competition with the financing and guarantee instruments of other countries. The Global Gateway Initiative must realize concrete projects with benefits for both sides. German industry is ready to develop and implement such projects. The EU Commission is currently working to involve the private sector more closely in the management and implementation of Global Gateway. However, it is only of limited help if new structures are created but we do not move from "talk to action". Export Controls and Dual-Use Goods In the chapter "Better EU coordination on export controls of dual-use items," the first thing that stands out is the lack of a definition of what exactly dual-use should look like outside the non-proliferation of weapons of mass destruction and their delivery systems. Instead, the strategy implicitly equates the U.S.' eclectic (ex-post) approach to identifying emerging and foundational technologies with the EU's normative approach of defining dual-use items ex-ante. No explanation is provided in this regard. So far, dual-use goods can serve either a civilian or a military purpose. This distinction is important because it is the basis for subsequent operational and regulatory export licensing procedures and thus for the functioning of export controls. A dual-use item is one for which the specifications of a purchase order indicate either a controlled use or a non-controlled purpose. Thus, the specification of a purchase order - in combination with the end user - plausibly suggests a controlled or non-controlled end-use.

Economic Security Strategy

Therefore, the use of the term "dual-use" now before us raises the question of scope. As it stands, a list of such goods could be conceivable. However, it remains unclear from which regime this list would be drawn and which other markets and jurisdictions would be involved in the listing processes. From the industry's point of view, EU-autonomous controls pose a high arbitrage risk. Outbound Investment Screening The introduction of state controls on foreign direct investment would be a major interference in entrepreneurial decisions and international investment flows. German companies open up new sales markets worldwide with their foreign direct investments. This strengthens the German economy, secures jobs, and promotes prosperity. Based on principle, the BDI therefore rejects the introduction of state controls on foreign direct investment. Export controls should be the prime effective instrument for preventing any technology outflow in areas critical to national security since existing goods controls can also take technology transfers into account. Compared to controlling entire investments, this would also be a less invasive market intervention. The BDI therefore suggests that existing mechanisms at the EU and national levels should be evaluated first before considering the introduction of stricter conditions for checking European investments abroad. In principle, existing instruments should be given time to be thoroughly applied and evaluated. Where existing instruments may not be sufficient, it should first be worked out why they are not effective. Only in exceptional cases, when genuine concerns for national security are demonstrated, could government intervention be a last resort. In any case, the private sector should be consulted to ensure that the measures adopted are effective and have as little impact on competitiveness as possible.

Economic Security Strategy

Conclusion The Economic Security Strategy in its current form makes demands, particularly on trade control. However, what it lacks is a positive agenda to provide Europe with the economic flexibility to meaningfully address "weaponized interdependence." 1 Moreover, it lacks a commitment to measuring the impact of (a) trade controls and (b) the restructuring of entire supply chains. Therefore, the strategy fails to link these findings to a strategic trade policy that would open relevant markets, enable diversification, and increase resilience. Finally, there is no concept of how to create incentives for economic cooperation through attractive location conditions and a forward-looking industrial policy. In short, defensive instruments are planned and others are announced, but the costs incurred are neither specified nor are alternative trade flows identified that would substitute controlled trade flows. This observation is fatal also against the background of transatlantic economic relations. As Frederik Erixon, Oscar Guinea, and Oscar du Roy noted in July 2023: „EU and US GDP per capita behaved similarly until 2000 when the gap between both lines started to widen visibly. The path of divergence continued and became particularly acute from 2010 onwards when US GDP per capita grew at an average of 3.4 percent while EU GDP per capita increased by 1.6 percent on average. Such a sustained difference matters a lot: In 2010 US GDP per capita was 47 percent larger than the EU while in 2021 this gap increased to 82 percent.“2 Consequently, the world of trade and economic policy is treading water only in Europe. How are markets to be opened - and these markets to enable entrepreneurial activity - if Europe does not provide good reasons for deepening economic relations with old and new partners in these times of upheaval? The EC's communication has no meaningful answer to this central and strategic question. The document merely ends with the generic statement: "The key to success will be to act in unity." Such unity will also have to include serious dialogue with the European business community. Against the backdrop of the above-mentioned deficits, the BDI would like to constructively support the development of meaningful defense instruments. However because resilience is not the ability to defend oneself but a property to revert to a state of origin, we will also and emphatically insist on a positive economic agenda as an integral part of Europe's economic security strategy.

1 Drezner, Daniel W.; Henry Farrell, Abraham L. Newman (Hg.) (2021): The Uses and Abuses of Weaponized Interdependence. Brookings Institution Press. 2 The authors continue: If the current trend of GDP per capita carries forward, in 2035, the average GDP per capita in the US will be USD 96,000 while the average EU GDP per capita will be USD 60,000. This is the same difference in GDP per capita as between Japan and Ecuador today. And even though the difference in levels between the US and the EU-15 is smaller, the trend and the widening gap are very similar.“ See: Erixon, Frederik; Oscar Guinea, Oscar du Roy (2023): If the EU was a State in the United States: Comparing Economy Growth between EU and US States, European Centre for International Political Economy (ECIPE) Policy Brief No. 07/2023, pp. 14-15; URL: https://ecipe.org/wp-content/uploads/2023/07/ECI_23_PolicyBrief_072023_LY04.pdf (accessed August 24,.2023).

Economic Security Strategy

Imprint Federation of German Industries (BDI) Breite Straße 29, 10178 Berlin www.bdi.eu T: +49 30 2028-0 German Lobby Register: R000534 EU Transparency Register Identification Number: 1771817758-48

Editorial Matthias Krämer Abteilungsleiter Außenwirtschaftspolitik T: +49 30 2028-1562 m.kraemer@bdi.eu Dr. Nikolas Keßels Stellvertretender Abteilungsleiter Außenwirtschaftspolitik T: +49 30 2028-1518 n.kessels@bdi.eu

BDI Document Number: D1832