Strategic Autonomy and the Geopolitics of Trade and Industry · European Law Blog – Go Health Pro

The EU finds itself in a dangerous and unpredictable world. For several years now, the EU has faced several external challenges, including the war in Ukraine that started in 2014 and turned into a full-scale invasion in 2022. This, coupled with other major international crises, further intensified the discussion about the dismantling of the rules-based global order and recently sparked debates about the increasing divergences in the transatlantic alliance, casting also doubts on whether the United States is still fully committed to providing security for the European continent. Apart from these existential threats, trade policy is also a victim of such changes and, as a result, security concerns have started to dominate commercial issues. This includes supply chain disruptions caused by increased geo-economic competition and the weaponization of trade relations. Unlike in the previous decades, when there was a strong belief that mutual interdependence would make direct conflicts between states less likely, nowadays we are witnessing the increasing importance of self-reliance and the return of more assertive, less dependent and more autonomous policy-making. At the EU level, the manifestation of this new approach is often called strategic autonomy which is being incorporated into nearly all EU policies, including trade policy. Greater autonomy is indeed essential due to uncertainties in supply chain reliability, which disrupt mutually beneficial trade relations, and especially when one state dominates all stages of supply chains in strategic sectors (e.g., China in battery production). More assertiveness is also required in cases when third states are increasingly resorting to all sorts of economic instruments to exert political pressure on the EU and its Member States. The objective of this blogpost is to examine some of the recommendations of the Draghi and Letta Reports and how those impact the EU’s economic security. This blogpost explores EU trade policy and supply chain resilience, with a particular focus on battery production.

Security concerns play a central role in EU trade policy

The Draghi and Letta Reports include several reform proposals that seek to improve EU external relations law. Nevertheless, these reports should not be seen as the EU’s first attempts to react to the ever-changing security environments. For instance, the 2003 European Security Strategy or the 2016 Global Strategy were also efforts to somehow understand the nature of (external) security threats and to identify potential EU instruments that could address those challenges. However, one major difference between these old(er) strategies and the new EU reports is that, nowadays, there is a growing recognition that the economic dimension of EU security should be a constituent element of broader EU security discussions. Traditional security threats, like armed conflicts, continue to exist and are sometimes existential, but the concept of security has now expanded to encompass additional components. In the early 2000s, for instance, the EU identified terrorism, the proliferation of weapons of mass destruction or state failures as major security threats. Most of these challenges were addressed through the EU’s Common Foreign and Security Policy that allowed the adoption of EU measures, like sanctions, to fight against terrorism. These security threats were also identified by the Global Strategy but the latter also emphasised the importance of resilience-building in the EU’s neighbourhood and the need for external conflict management.

Nowadays, economic security has become an essential component of the overall EU security architecture. The discussion on economic security started already a few years ago which, among others things, led to the adoption of the 2023 European Economic Security Strategy. As a result of the COVID crisis and intensifying geo-economic competition, this strategy already identified risks relating to supply chains, infrastructure, technology security and the weaponization of trade relations. Indeed, both the Draghi and the Letta reports talk about the necessity to better link foreign and economic policies to be able to respond to new types of challenges in an effective way.

The Draghi Report, for instance, argues that the ‘geopolitical stability under US hegemony allowed the EU largely to separate economic policy from security considerations’ (p. 13). Indeed, such a separation is no longer a viable option, especially in cases when third countries promote their foreign economic objectives unilaterally often at the expense of the EU’s interests. That is the reason why the EU, as a response, has adopted a number of trade measures with a clear foreign and security policy objective. These trade policy measures include, for instance, the FDI Screening Regulation or the Anti-Coercion Instrument. The objective of the FDI Screening Regulation is to assess whether investments pose security threats, especially in strategic sectors, such as energy or financial sectors. This Regulation is currently being revised to create better harmonised national rules for screening mechanisms and to identify minimum sectoral scope for screening foreign investments. The Anti-Coercion Instrument aims to equip the EU with tools that could be necessary to respond to all forms of economic coercion, including trade embargoes applied by third states. Trade is getting a clear geopolitical dimension and the terms used in relation to these trade measures nowadays come from military vocabulary. For instance, the Anti-Coercion Instrument works almost like Article 5 of the NATO Treaty – economic coercion against one Member State should be considered a coercion against all Member States. Also, while the notion of deterrence has been used mostly in military context, the Commission now emphasizes that the main objective of the Anti-Coercion Instrument is to ‘deter’ third states from using economic coercion against the EU and its Member States and only in last resort the EU will respond to some third country measures. More recently, Commissioner Hansen argued that the Anti-Coercion Instrument could be deployed against the potential US tariffs that are supposed target a number of EU sectors.

While recent trade measures with a foreign and security component were adopted without any legal challenge before EU Courts, the adoption of these instruments may cause internal tensions in the EU. The reason they may create such tensions is that trade has traditionally been separated from foreign policy issues. These policy areas are constitutionally separated from each other and are subject to different procedural requirements. In other words, when the EU acts internationally, it may face internal legal challenges on competence-related questions because there is no single EU external policy. The Common Foreign and Security Policy is, for instance, subject to the requirement of unanimity (Arts. 24(1) & 31(1) TEU), whereas unilateral trade measures are adopted by qualified majority voting (Art. 207(2) TFEU). EU institutions may disagree concerning the choice of appropriate legal basis, thereby further delaying some EU measures. This is by no means purely legal theory; in the case of the Anti-Coercion Instrument, two Member States argued that when the EU responds to economic coercion, such a decision should not be separated from wider foreign policy discussions, implying that EU Member States must be in a position to articulate their preferences on the EU’s responses.

The EU’s difficulties in competing for battery production

Apart from trade questions, both the Draghi and Letta Reports emphasise that the EU needs to reduce dependence on certain third states, as these dependencies easily become vulnerabilities (Draghi, pp. 7, 15, 17, 54; Letta, pp. 42-43, 55, 62, 78). As these Reports note, such dependence extends to digital products, semi-conductors, chips, cloud services, etc. Too often, there is the belief that the EU is only dependent on China but in fact this dependence goes beyond one country and extends sometimes to allies, like the US. In particular, the dependency concerning raw materials is crucial, as they are needed for the so-called green transition and to enable key EU industries to compete globally. This is especially the case concerning the production of batteries for electric vehicles (EV). As the EU is making its transitioning to EVs, the EU’s needs for some raw materials have increased considerably.

Diversifying the supply chains will be necessary, as the Draghi and Letta Reports also emphasise (Dragi, p. 52; Letta, p. 8). However, the challenge for European EV producers is that the EU continues to import approximately 80% of lithium from Chile. Furthermore, it is projected that due to the renewable energy transition, it will need 18 times more lithium by 2030, and almost 60 times more in 2050. The reason Europe’s automotive industry is critical is that 14 million people work in that industry, accounting for seven percent of the EU’s GDP. Meanwhile, China has become a huge competitor in the automotive industry that received large-scale subsidies from the state. According to some estimates, in a few years Chinese carmakers will have 10 percent of share in the European market. For producing EVs, the EU will continue to heavily rely on international supply chains to fulfil its needs which brings further uncertainties concerning this green transition. And while several investments have been made in the continent’s battery ecosystem, EU companies are either facing financial difficulties, or they move their investment in the US. In addition, not only lithium is missing for the production of batteries, but the EU is also dependent on getting cathodes, anodes, electrolytes and separators, and seemingly China controls 80 percent of the global component market in these fields. Only some Polish, German and Finnish companies started producing cathodes, while anode production is completely missing.

No wonder that access to raw materials relating to the production of batteries has become a key question in today’s geoeconomics competition. China is now ready to withhold critical components necessary to key technologies and to use supply chains as a weapon. As the Draghi Report notes, the Critical Raw Material Act and the Battery Act may help securing some needs for the production of EVs, but there are several reasons why the future of Europe’s battery industry seem pessimistic: this ranges from declining demand for EVs in Europe, China’s dominance in innovation and manufacturing excellence, its potential to produce at a loss, and overcapacity in battery cell production, implying that Chinese batteries are usually 50 percent cheaper than elsewhere.

The EU therefore needs a comprehensive strategy on batteries due to these geoeconomics dynamics. As the Draghi and Letta Reports also note, diversification could be part of this strategy to find new partners. China has over 95 percent of market share for graphite anodes and the silicon-based anode production could be an alternative supply for the EU. The strategy could also strengthen the EU’s own position in this field. For instance, in 2024 Vulcan Energy begun sustainable lithium hydroxide production in Germany and it is expected that it will be able to extract resources for about 500.000 EVs. Another way to boost the EU’s position in the world would be to focus on the so-called solid-state batteries. The reason is that China is has already won the race regarding the mass production of lithium-ion batteries. Therefore, while the EU is developing its capacities for solid-state batteries, it could protect its nascent industry with tariffs.

It is clear that an effective EU external policy is necessary to tackle all these challenges. At the time when Europe’s great battery hope filed for bankruptcy, there is even a greater need to implement some of the reform proposals in the Draghi and Letta Reports. The adoption of these recommendations is likely to intensify the securitisation of several EU initiatives, strengthening the connection between security and economic policies. The EU’s internal market plays a crucial role in this dynamic, as shown by legislation such as the Battery Act and the Critical Raw Materials Act. All these demonstrate that economic security is now an inevitable component of security discussions and highlight the EU’s shift towards more resilience, competitiveness and supply chain control as central pillars for the protection of geopolitical interests.

Viktor Szép is Assistant Professor at the Faculty of Law, University of Groningen. He is interested in EU economic security, sanctions and the EU’s Common Foreign and Security Policy.