Director
Institute for Security and Development Policy
Sweden
Economic coercion by states has always been present in one form or the other, but the challenges have escalated to an unprecedented level in today’s globalized economy. Most notably, as China’s economy has strengthened its global leverage and Russia has weaponized its energy exports, authoritarian states have increased their coercive capabilities. This has been especially apparent for Europe in its relations with both China and Russia, but also Australia and South Korea, among others, have all experienced extensive economic coercion, according to reports from the Australian Foreign Policy Institute and European Council on Foreign Relations. Norway and Sweden, among several states, have been in the freezer for having the audacity to have opinions on China and have subsequently been targeted with economic sanctions and threats. Most recently, Lithuania has been exposed to Chinese coercion for asserting its sovereign right to make independent decisions on diplomatic matters. Russia has, of course, been utilizing its large deposits of fossil energy as a way of weaponizing its economy, something that has led to robust and necessary responses from the European economies, but also to immediate costs.
The backdrop to the current situation has been self-inflicted damage due to the diffuse hopes from the West that China and Russia would transition into more liberal and democratic societies if we trade with authoritarian states and encourage them to open up as they integrate with liberal economies. The hopes have ended in the self-evident realization that this has been nothing but a pipe dream. Instead, many liberal states have become dependent on authoritarian states in all segments of the supply chain, including extraction and refinement of energy and minerals, but also innovation and transport. This was possible as many companies and governments have assumed that they could successfully balance reliance on authoritarian-controlled politicized economies and cheap production Now, their supply lines are indirectly or even directly in the hands of Beijing and, to some extent, Moscow. Unrestricted liberalization of economies, and subsequent outsourcing of the supply chains and energy imports, have put liberal economies in a difficult situation. This said, blame must not only be placed on the authoritarian states who have acted as could be expected. The blame should also be directed to the naivety of politicians and companies in the West, as well as consumers’ constant search for cheap consumer goods and short-term gains in exchange for long-term insecurity. This points to the need for a major rehaul of the economic strategy in Europe, both to make it more independent and to respond appropriately to threats to our own economic and political security.
Realizing that the ability to successfully resist economic coercion relies on a strong domestic economy, the ability to react swiftly and consistently and build international networks amongst like-minded nations, there is a need to look at this challenge more holistically. Considering the internal deficits with the EU shortly. To state the obvious, a reliable defense against economic coercion is a strong and independent European economy. European companies, consumers, and politicians will have to be ready to accept economic costs, sometimes substantial, in this transition to break critical dependencies on authoritarian states. This is not to say that a complete halt of trade with China is possible, or even desirable, but it is necessary to end dependencies in critical and sensitive industries. If states adhere to international rights and freedoms, fair and free trade and accepts that economic coercion is an illegal act there will be no reason not to engage in free trade. Russia is a different matter as the full-scale invasion of Ukraine should only be meet with full economic isolation, and this until Russian troops have left Ukrainian territority and the Russian government has taken responsibility for its actions.
Reducing, and eventually marginalizing, the energy dependencies from Russia and supply chain dependencies on authoritarian states overall has been costly, and it will continue to be costly, at least in the short term. This is even more true in the case of China. Still, no change would be devastating for the economic and, ultimately, political independence of Europe. There is no such thing as a free lunch, and short-term economic gains have proven to have long-term challenges to our independence.
Unrestricted free trade is, if not dead, severely damaged and to regain free trade worth its name, international institutions need to be reworked, transparency improved, and government manipulations of “private” companies stopped. This is only considering the political and economic impact on EU. Breaches against human rights, intellectual thefts, invasion of foreign states will just add more arguments to the need to distance ourselves from economics controlled by authoritarian leaders, no case is better than Russia to underline this
The necessary transformation will not be possible for some economies, as they are too closely associated with kleptocratic or authoritarian regimes, a case in point being Putin and Russia’s war economy. Until a more transparent and fair system exists, restrictive trade must be enforced against states manipulating the economic system. This will come at a high cost, and to decrease the short and long-term costs, there is a need to remove internal trade restrictions, improve investment opportunities, and significantly increase research and development within Europe and the U.S., but also among likeminded nations, i.e., democracies, to balance the costs of the economic shift. Without a doubt, a polarization of the economic system will follow from the economic coercion that is underway, and we should not expect authoritarian states to adhere to international norms and values based on democracy and freedom. Giving in to pressure is not an option, as the stakes will increase as the economic dependency increases.
The EU needs to develop a way of dealing with authoritarian states from a position of strength, and Europe’s strength primarily stems from its economy. The question that arises is, does Europe have enough political and economic cohesion to rise to the occasion? The Russian invasion of Ukraine has forced Europe to cooperate and coordinate to an unprecedented degree, even if both Germany and France have shown tendencies to bulge under pressure from China and Russia on occasion. The most recent being French President Emmanuel Macron buying into the Chinese narrative, and threaten to weakening the transatlantic link, a link that is absolutely essential for Europe. This for populist reasons related to his own dwindling popularity and fear of China. Despite this, the European unity following the invasion of Ukraine shows promise for Europe, even if President Macron made the European split on China painfully apparent. There is always a risk for political populism that not only centrist politicians use but also left- and right-wing populist parties tend to use the increased costs of living as a reason for their political rise, as they argue for compromises with authoritarian regimes for their individual political benefits. That said, there are no alternatives if economic self-determination is to be secured.
It is beyond doubt that China’s coercive economic measures directed towards Europe have escalated. Such measures could be described as “wolf warrior trade” and have included, for example, sudden tariff hikes, restrictions in agricultural imports, refusal of export or import, and sanctions against individual countries – and Russia is not far from following suit with energy black-mail. Neither Beijing’s nor Moscow’s objectives tend to be economical; instead, they seek to influence the policies of other states by instrumentalizing economic relations. As a result, China’s and Russia’s coercive economic actions pose a threat to all segments of society and is on no small part economic warfare. With this in mind, the EU and its democratic allies should be able to reply with collective defensive economic measures at all institutional levels.
An attack on an individual within the EU needs to be considered an attack on the community at large. A case in point is the Chinese attack on the Lithuanian economy through its sanctions of Lithuanian companies and products, but also Russia’s invasion of Ukraine and the impact on the energy sector. Unless the EU can produce a coherent and consistent response against foreign attacks, the Union is only as strong as its individual members. A coordinated European economic response is a good start but there is a need to develop an extended collective economic self-defense among like-minded states in addition to Europe. The EU is only one part of the economic equation, the U.S. South Korea, Japan, India, Taiwan, and other democracies around the world need to be engaged to strengthen the free and transparent trade that would benefit all, but also supporting states that experience economic coercion on their end, but are economically weak, or dependent on international trade. Contrary to Macron’s belief Europe is dependent on our allies, and then particularly on the U.S. that share our norms and values, by distancing ourselves from Washington we are only strengthening the grip of the authoritarian states even if it could entail short-term political gains for individual leaders.
The EU, along with its democratic allies, needs to enforce trade restrictions against states that utilize economic warfare as a policy instrument, but also against states that assist rouge states in their economic activities. This could be targeting banking systems and international payments, but also weakening economic coercion measures by assisting the targeted sectors, such as the energy sector. International institutions are essential components in this policy, this is not only referring to the need to strengthening democratic institutions but also institutions that guarantee transparency, judicial independence, innovation, and competitiveness. By strengthening our own, and our allies’ institutions we ensure resilience, but it is also ensuring that international trade with Europe is adhering to high international standards. There is much to be gained in terms of transparency and genuine free trade, and EU should be in the forefront of this development.
Economic self-defence is not only limited to the case of direct trade, but also about its impact on the security of the whole supply chain. Currently supply lines are to a concerning degree controlled by companies that are closely associated to, or directly controlled, by authoritarian regimes and there is a need to decrease such influence on the supply chain. It is not sufficient to only develop measures against economic coercion when it happens, but also to ensure that the situation never occurs in the first place. This can partly be accomplished by home shoring of critical industries, near-shoring or alliance shoring of necessary industries and create a blue supply line that could revoke the dependency on the current red supply chain controlled by China. This is not necessarily arguing for halting all trade with China and other authoritarian regimes, but it must be a more conscious decision and when it comes to critical and sensitive industries the shift has been initiated but would need to be strengthened, and supply chains that could create dependencies in long-run.
In short, there is not only a need to develop an ability to stand up as one against foreign economic coercion, but maybe more importantly strengthen the European, and allied, economies to the extent that economic coercion is no longer possible. This is made possible by not only reducing dependencies on authoritarian economies, but also home-shoring critical industries to safeguard our economic independence and develop a blue supply line that is based on transparency and democratic and legal institutions. We are entering a new age where economic, political, and military warfare are closely integrated, and Europe needs to wake up to the new reality and see the value of its allies and friends.