Where is Europe’s place in the new age of geo-economics?


The world economy has become the central battleground for hegemonic rivalry between Washington and Beijing. Several factors have led to this development, first and foremost the economic rise of China.

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“It’s the economy, stupid!” This infamous phrase also holds true for international relations. Over the years, the spheres of security and economy have become increasingly interlinked. It is the world economy, which has become the central battleground for hegemonic rivalry between Washington and Beijing. Several factors have led to this development, first and foremost the economic rise of China.

The People’s Republic has become an economic magnet slowly displacing the United States. While in the 1980s China’s share of world trade amounted to a meagre one per cent, that figure has risen to about 13 per cent. For more than 130 countries in the world it is the most important trading partner. Numerous trade deals and its Belt and Road Initiative (BRI) are cementing this situation, contributing to the establishment of a Chinese sphere of economic influence. The COVID-19 pandemic is also likely to accelerate this trend as China’s economy is boasting positive growth rates, while Western nations are stuck in a lockdown-induced economic recession. Beijing knows that it is currently unlikely to displace the US (geo)politically, hence it aims to displace the US economically and translate economic influence into geopolitical leverage. This policy of “buying friends” was already advocated by Yan Xuetong, one of China’s most influential analysts on international relations, in 2015.

China’s economic rise is also leading to technological progress. Beijing is massively investing in key technologies ranging from artificial intelligence to quantum computing. The aim is to move up the value chain and dominate the industries of the future, the very areas where the United States and Europe derive their economic competitiveness from.

China is making a run for the commanding heights of the world economy, giving it political leverage. This is a challenge to the West and particularly the United States, who have thus far dominated the existing economic order. Ideologically, it is also a challenge between two different systems of political economy – the Chinese authoritarian state capitalist system on one hand and the Western liberal democratic free market economy on the other.

Second – on a fundamental level – economic strength is the basis of military strength. It was America’s economic and technological superiority that gave the country an edge in the Cold War with the Soviet Union. China’s Xi Jinping knows that and wants to ensure economic and innovation leadership, also to increase Beijing’s military advancement. China is actively encouraging civil-military dual-use technologies and translating its economic power into military capabilities.

Last but not least, due to globalization, the nature of geopolitical confrontation has changed. The Cold War was defined by an isolated, binary bloc confrontation between the United States and the Soviet Union. In the 21st century, where interdependence is the defining feature, such a confrontation is less feasible. In this networked world order where countries are interconnected economically, technologically, socially, ecologically, and politically, it is difficult to wage a grand, open Manichean conflict; it is hard boxing, when you’re in a clinch with your opponent.

In such a situation, hegemonic struggle becomes less a direct contact confrontation via proxy wars and more an indirect, fluid game of strategic networking with the aim of expanding one’s connections, creating orders in economic, digital and political spheres, and shutting out adversaries.

This approach, chosen by both the United States and China, is playing out in numerous spheres.

Within the trade realm, the initial Trans-Pacific Partnership (TPP) was a US attempt to exclude China from an Asian free trade zone. However, Trump’s withdrawal from the TPP torpedoed this initiative. China has grabbed this opportunity, flipping the table with the Regional Comprehensive Economic Partnership (RCEP), creating its own Asian free trade zone without US participation.

With regards to technology, the export controls that Washington has enacted against Beijing, for example in the case of critical semiconductors, are designed to shut China out of supply chains necessary for its technological advancement and economic prosperity. The People’s Republic has in turn reacted by advancing a policy of indigenous technological development and building up a homegrown semiconductor industry.

In the digital sphere, China is promoting its model of digital authoritarianism abroad, particularly amongst developing countries, while Washington has been adamant that allies should ban Huawei from their 5G networks, fearing that China might otherwise gain open access for espionage and sabotage, which could effectively move those countries into a Chinese digital sphere of influence. Eric Schmidt, CEO of Google, has predicted a scenario where the world will see a Chinese-led internet and a non-Chinese internet led by America.

And when it comes to finance, the US has used the dollar as a weapon against Iran, shutting Tehran out of the world’s most important financial network, and barred Americans from investing in companies with links to the Chinese military, leading to several de-listings among the New York Stock Exchange. China’s response is to boost its own currency in the world. Major-General Qiao Liang from the People’s Liberation Army noted in a speech that China “should promote the Renminbi to be the primary currency of Asia, just as the US dollar first became the currency of North America and then the currency of the world.”

Trade wars, tech wars, and finance wars – this is what the father of geoeconomics, Edward Luttwak, called “the logic of conflict, translated in the grammar of commerce”. Connectivity is power, interdependence can be weaponized and the state with the most effective connections, able to exclude others, will be the central mover and shaker.

In such a new age of geo-economics, the European Union should be in a favorable position. After all, the EU is by nature a connectivity power, consisting of a network of 27 Member States. It has a large economic market, a shared currency and a common research area. This also gives it global regulatory influence. When the EU enacts new legislation, such as the General Data Protection Regulation (GDPR) or – most recently – the Digital Services Act, companies need to adhere to these standards in order to continue doing business in Europe, and other countries oftentimes follow suit with similar legislation.

Yet, the European Union, and in particular Germany, are playing a one-sided geo-economics game, where they are mostly adapting to geopolitics to defend economic interests rather than using economic means to advance a geopolitical agenda as the US and China are doing.

That’s because Brussels and Berlin are primarily economic, not geopolitical, actors. The US security umbrella gave Germany the freedom to focus exclusively on advancing its commercial interests like an enlarged Switzerland. A hardnosed commercial realpolitik was pursued, which generally placed the country’s economic interests over all other interests.

The EU, on the other hand, finds it difficult to achieve agreement amongst its 27 Member States on geopolitical goals. Some want a reset with Russia, others don’t. Some are friendly towards China, others wary. In such a situation, it is difficult to pursue economic means to achieve geopolitical ends. After all, what are the EU’s geopolitical interests? Calling yourself a “geopolitical Commission” as President Ursula von der Leyen has done sounds good on paper, but needs to be filled with life. Without an agreement on geopolitical interests and goals, Europe is unable to fully engage in geo-economics. Hence for Brussels, geo-economics is less the use of economic means to achieve geopolitical ends and more adapting to geopolitics to defend economic interests. The EU’s Strategic Foresight Report speaks volumes in this regard, focusing exclusively on the protection of “economic sovereignty” in a geopolitical environment, rather than considering how economics can also advance geopolitical interests.

The EU’s geo-economic policies are therefore mostly defensive in nature. The EU has tightened its foreign investment screening mechanisms to protect critical EU companies and technologies from hostile takeovers. Its blocking statute and INSTEX, the special-purpose vehicle set up to facilitate non-US Dollar and non-SWIFT transactions with Iran, are designed to facilitate EU business with Iran; the idea that it would salvage the Iran deal was always rather illusory.

The EU’s political conclusion with China on a Comprehensive Agreement on Investment (CAI), rushed through by Germany during the Christmas holiday, is also a case in point. The deal might arguably be an economic win for the EU, but it’s not a geopolitical one – unless one would define the EU’s geopolitical interests to be closer alignment to authoritarian China, which would be more than questionable. This stands in stark contrast to China, where the economic deal is handing Beijing an important geopolitical victory in its competition with the US. It decreases the chances of a common transatlantic front against China, which the incoming Biden administration had offered Brussels. CAI is Chinese geo-economics par excellence – using the attraction of its giant economic market to shape geopolitical realities.

One of the few geo-economic policies that could be offensive and allow the EU to increase its geopolitical influence abroad, pushing back against China’s Belt and Road strategy, would be the EU’s Connectivity Strategy. Reinhard Bütikofer, Chair of the European Parliament’s China Delegation and Rapporteur for the EU’s report on the strategy, however, has argued that the strategy has been little more than a paper tiger to date, with few EU decision-makers paying any attention to it, leading to the result that it has not been included in the Commission’s Work Program for 2021.

Europe needs to ask itself what place it wants to take in this new geo-economic world. Is it content with a purely defensive strategy that only defends economic interests, or should it also employ economic means to advance geopolitical interests?

Playing a purely defensive game in today’s geo-economic age seems insufficient. It would allow other actors, particularly China, to extend its influence in the world, as indeed Beijing is already doing in many regions surrounding Europe. This surely cannot be in the interests of the EU. In this context, if the European Commission wants to lend credence to its claim that it is a “geopolitical Commission”, it would be well-advised to update its foreign and security policies and strategize how economic means could contribute to them.