The pandemic has taught EU to play hardball on trade

The European Commission has responded to trade threats by producing its own big stick. Under proposals laid out this week, the European Union could swiftly retaliate against foreign governments that attempt to use "economic coercion".

An EU official said the measures would address “the weaponisation of trade and investment links ... at a time when we see geopolitical tensions increasingly spilling over into these trade and economic relations”.

“The instrument is there to fend off any third country from pressuring the EU or its member states in a way that would seek to interfere with our domestic affairs,” the official said. Counter-measures could include freezing governments out of contracts, exclusions from research funding and controls on imports.

Officials have been careful not to name any particular country or situation. The tool, which requires the approval of EU governments, was requested by the European Parliament and has been under development for some time.

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But observers don't need to look far for a potential example. Lithuania – population 2.8 million – has found itself squeezed by China after it accepted an offer by Taiwan to set up a diplomatic office.

The step is somewhat characteristic of the plucky pose of Lithuania towards autocrats in recent years. It's currently host to the exiled opposition of neighbouring Belarus, and previously quit the "17+1" Chinese outreach effort to central and eastern European states after losing patience with elusive economic rewards and expectations to laud Beijing.

The Chinese Communist Party views Taiwan as a breakaway province, and reacted with typical vehemence to a step nodding towards its autonomy. An editorial in the state Global Times described it as an act of "wanton provocation" that interfered with "China's internal affairs", and Beijing downgraded its diplomatic presence in Vilnius.

Locked out

Lithuanian exporters then found themselves effectively blocked from sending goods to China, according to the Lithuanian government. It appealed for help from the EU this week, complaining that it had been deleted from China’s customs system, leaving companies unable to select “Lithuania” for customs clearance.

Internal markets commissioner Thierry Breton told The Irish Times: "We need to defend ourselves in this new world."

“We have some countries which are using supply chains as a geopolitical tool to pressure the EU or some member states, to push policy, to generate hybrid threats, to sometimes blackmail countries,” he said.

The EU also found itself stung by allies during the pandemic. The United States' Defense Production Act "blocked de facto all our supply chains in terms of vaccine production", Breton said. "They not only blocked the export of vaccines to Europe and everywhere in the world, but they also de-facto blocked vaccine components."

In response, the European Commission required vaccine manufacturers to notify national authorities of vaccines leaving the EU, and receive permission for export. Only one shipment was ever blocked – Italy barred 250,000 AstraZeneca vaccines due for Australia – but the effect was to give the EU oversight over where vaccines were going, and allow the commission to demand reciprocity for exports.

“This is a tool that we learned that we need to use when we see that some countries are not playing the game,” Breton said.

Plugging holes

The EU is also applying the lesson to address vulnerabilities elsewhere. There is currently a shortage of semiconductors, required to make any electrical product. Europe is reliant for its supply on manufacturing in Asia.

Enter the European Chips Act – no, not the kind with mayonnaise – which will promote EU semiconductor research and home-turf supply chains that would be resilient against any potential disruption. Ireland has a role to play: this is why Breton is this week visiting Intel, which has a manufacturing plant in Leixlip.

This kind of trade talk can unsettle the coterie of EU countries that are fondest of free trade, Ireland included. There’s a whiff of ‘strategic autonomy’ – a phrase that has become toxically divisive in EU circles, as to its opponents it has come to signify French protectionism.

“Strategic autonomy, sovereignty, call it what you want,” Breton said. “In today’s world you can have interferences ... a pandemic, a geopolitical situation ... we just need to guarantee what is needed for us.”

Asked about the proposed new EU anti-coercion tool, Minister for Finance Paschal Donohoe said he didn't see a conflict.

“Any initiative that the European Union is bringing forward to deal with levels of corruption or market abuse, I don’t see ever being inconsistent with how we can drive the openness of the European Union; or support trade in the EU, or between the EU and other parts of the world.”