Geopolitics and Economic Statecraft in the European Union

Since 2021, the European Union (EU) has begun to adopt the concept of open strategic autonomy (OSA) with the aim to maximize the opportunities of economic openness while assertively defending the EU’s interests both internally and externally.

Three major factors lay behind this move. The first was the shift from post–Cold War unipolarity to the current multipolar order, which is marked by growing U.S.-China rivalry. Contrary to the expectation that China’s multilateral engagement would quietly align the country with the U.S.-led, rules-based, liberal international order, traditional balance-of-power dynamics have resurfaced. Even in areas where compatible goals existed, faltering policy cooperation has hampered the functioning of multilateral institutions, notably the World Trade Organization (WTO). That has increased disconnects in technological standards, supply chains, and export markets. In response, the EU seeks to assert itself as a champion of a new global order, in which openness is rules-based, fair, and sustainable, but in which strategic economic policies and regulations are routinely adopted to maximize political autonomy in interstate relations.

The second factor was Europe’s declining weight in the global economy. Three decades ago, Europe accounted for a quarter of the world’s wealth; by 2023, its share had decreased to 17.4 percent. Multiple policy tools have been developed under the OSA umbrella to enhance the EU’s trade and investment competitiveness in this evolving scenario and maximize the union’s attractiveness as a strategic partner in international networks while also providing it with new tools to tackle unfair practices.

The third driver behind the EU’s move toward OSA was technological innovation, particularly in digital transformation and sustainable industrial development. The EU’s relative decline in the world economy has increased the benefits that Brussels can derive from technology-oriented policies, which can provide crucial incentives to regain shares in trade volumes and leadership in investment partnerships. Europe currently faces unprecedented pressure to innovate in critical future technologies, such as artificial intelligence and quantum computing. OSA-sponsored incentives for technology-driven transnational partnerships may be key to help the EU meet this challenge.

Together with the EU’s 2016 Global Strategy, the concept of OSA has shaped Europe’s evolving climate change and technology policies. The European integration process has tilted toward autonomy, and the EU has carefully crafted its technological cooperation to preserve Brussels’s capacity to act independently. As such, OSA has set the union a goal that is both ambitious and, in the current global context, unavoidable.

Critics believe that OSA-driven minilateralism, such as the incentives provided for strategic green- and high-tech partnerships outside the WTO framework, shows that the EU is reneging on its commitments to economic freedom and openness as key drivers of prosperity. Supporters, by contrast, praise the beneficial effects of the EU’s new approach in a context of growing market segmentation. While some observers have argued that OSA will unnecessarily weaken the transatlantic compact, others have suggested the concept has a strategic value for the union with regard to both partners, such as the United States, and adversaries, such as China. Meanwhile, evidence from specific policy areas unveils how OSA-related EU regulation can trigger internal fragmentation, pushing member states to prefer national solutions and shun EU-led initiatives altogether.

OSA embodies a new EU approach to the making of foreign economic policy in several ways. The concept signals both Brussels’s distancing from the neoliberal excesses of past decades and its attempt to manage the challenges of an increasingly geopoliticized world. As such, OSA aspires to meet different needs and incorporates complex, potentially conflicting priorities. In many respects, then, OSA policies are the EU’s strategic response to evolving power dynamics in the international system, which have also led to an intellectual rethink of EU foreign policy making. Incipient research on OSA has increasingly looked at the influence of external forces—most notably, the U.S.-China rivalry, the COVID-19 pandemic, and, more broadly, the weaponization of interdependence—on the EU’s allegedly protectionist shift.

In the unipolar age, the transatlantic consensus on multilateral trade liberalization gained momentum, leading to the creation of the WTO in 1995. Ideological homogeneity and U.S. tutelage paved the way to the EU’s ambitious approach of democratic anchoring through economic support—that is, the provision of economic benefits to help prospective EU member states along their democratization paths. The current multipolar order, instead, is characterized by major ideological heterogeneities—between North and South and between free-market and state-led capitalism—and by widespread unilateralism, including in the transatlantic camp. U.S.-China competition and former U.S. president Donald Trump’s aggressive stance toward both adversaries and allies pushed Brussels farther toward a more autonomous foreign economic policy.

On the domestic front, the EU’s supranationalization of investment competencies allowed the European Commission to take the lead on industrial policy. Brexit, in turn, weakened the EU’s free-marketeer camp and enhanced the weight of sovereigntist countries, such as France. Since the advent of populist regimes, the EU has been keener to protect the so-called losers of globalization, striking deals with China even in defiance of U.S. requests. Over time, however, perceptions of unfair Chinese competition mounted, shifting the balance of arguments toward greater autonomy and self-reliance.

Overall, OSA is not so much an EU strategy to renege on past commitments to an open economic system as an adaptive response to a changing external environment. While not amounting to pure protectionism, OSA has reoriented the EU’s approach to openness in a targeted fashion. Both the feasibility and the consequences of the concept remain to be seen. Global economic integration is deeper than in previous decades, so severing profitable ties for political reasons entails higher costs for businesses and consumers. The excesses of neoliberal austerity and the COVID-19 shock have further increased these costs and elicited calls for renewed embeddedness—that is, state intervention to regulate market dynamics, reduce inequality, and maximize welfare-enhancing outcomes of economic policies.

The EU can rely on two dimensions to chart a more autonomous course: its economic policies and its distinctive model of sociopolitical progress based on liberal ideals. The EU can choose whether to carve out a role as a more autonomous leader vis-à-vis the United States or continue to operate as a mostly passive follower. While the concept of OSA will inform the economic and technological elements of the EU’s foreign economic policy strategy, the EU can also count on its reputational capital as a model for responsible democracy by externalizing its version of liberal solidarity to attract like-minded countries in the Global South.

Brussels has cast its new economic policy in terms of both autonomy and openness. Unsurprisingly, this is the result of two opposing influences in the EU institutions: neomercantilist, protectionist voices in the European Commission Directorate General for Internal Market, Industry, Entrepreneurship, and Small and Medium-Sized Enterprises and in the EU Council, on the one hand; and neoliberal, free-market voices in the commission’s Directorate General for Trade and the commission more broadly, on the other. Based on its distinctive approach to solidarity-based liberalism, the EU could play a leading role in bringing together a coalition of like-minded partners to enlarge the minilateral design of OSA. Yet, whether the EU can chart a coherent course of external action in both economic and ideational terms—combining selective protectionism and a rules-based, progressive approach to global governance—remains to be seen.

To delineate the likely implications of OSA for the future global economic order, this chapter examines nine OSA-related acts, regulations, instruments, and mechanisms. The analysis tracks each measure’s expected impact on, first, the EU’s autonomy from the United States and, second, the EU’s alternative coalition choices and preferred negotiation forums, particularly given the measures’ compatibility with WTO regulations.

The first dimension of the analysis refers to the degree to which a particular measure is likely to impact—or has already impacted—the EU’s autonomy from the United States. OSA-related actions may entail either minimal or major changes to the EU’s current status as a follower of the United States in energy, technology, trade, and investment policies. Uncoordinated, adverse EU measures that lead to negative market impacts on the United States or open criticism from the United States are treated as evidence of increased EU autonomy. By contrast, when measures that are adopted in response to existing U.S. schemes—so-called catch-up measures—have complementary policy designs and are expected to create synergies, these suggest a continued follower role for the EU and therefore low autonomy. Meanwhile, contrasting or symmetric catch-up measures that are unlikely to generate synergies count toward higher EU autonomy. Finally, when EU-U.S. complementarity is likely to result instead from U.S. adaptation to EU-led solutions, this again suggests greater European autonomy.

The second dimension relates to the impact of each OSA measure on the EU’s choice of negotiation forum and the likely changes in coalition dynamics that this choice entails. The measures are assessed in terms of their compatibility with existing WTO regulations and their support for different negotiation venues and coalition dynamics. These venues can be either multilateral; plurilateral, such as sectoral agreements; minilateral, as with preferential trade agreements; bilateral, such as cooperation agreements, association agreements, or thematic tables; or unilateral.

Concretely, each of these two dimensions is examined in terms of the expected impacts of the following nine recently enacted EU initiatives:

1.     the Carbon Border Adjustment Mechanism (CBAM);

2.     the Critical Raw Materials Act (CRMA);

3.     the European Chips Act;

4.     the Net-Zero Industry Act (NZIA);

5.     the Foreign Direct Investment (FDI) Screening Mechanism;

6.     the EU’s export control regime;

7.     the Single Market Emergency Instrument (SMEI);

8.     the Foreign Subsidies Regulation (FSR); and

9.     the Anticoercion Instrument (ACI).

The first four of these initiatives fall within the remit of environmental or technology policies, while the last five belong to the domain of more traditional trade, investment, or industrial policies.

Combining variations in the two dimensions outlined above produces three possible scenarios. In the first, OSA is regulated in ways that only marginally increase the EU’s autonomy from the United States, so the EU’s choice of negotiating forum is determined mostly by U.S. policies. In short, the EU is mostly a passive follower of the United States. The result can be either open stabilization or deeper bipolar competition, depending on how the United States approaches the EU and other partners, on the one hand, and China and other adversaries, on the other.

In the second scenario, OSA is implemented in ways that strategically enhance the EU’s autonomy from the United States, allowing the union to realign itself in selected economic areas with countries outside the U.S.-led bloc. In essence, the EU is an active follower. Tripolar coalition dynamics could emerge in multilateral forums, but there could also be a rise in plurilateral, minilateral, and bilateral agreements in which the EU is a party and the United States is not. If Brussels can exert influence over Beijing through EU-U.S. agreements and over Washington through EU-China initiatives, the union could become a third pole in the international system with a positive impact on global stabilization and openness. However, tripolar competition could also trigger destabilization and a heightened preference for minilateralism.

In the third scenario, OSA has a regressive impact on the EU’s ability to act cohesively on the external front, as the adoption of new measures drives EU member states to shun OSA altogether and favor national solutions. This scenario is compatible with a broad drift toward economic nationalism, trade restrictions, and greater instability.

All other things being equal, progressive outcomes—EU joint action and cooperative, rules-based, welfare-enhancing achievements—will depend on the union’s ability to capitalize on the selective nature of OSA and creatively marry the goals of openness and autonomy. Such outcomes will also depend on how the EU’s partners and competitors react amid ongoing changes in economic, environmental, and technology politics.

The first dimension along which OSA can be assessed is the way in which the nine measures identified above affect the EU’s autonomy from the United States. Examining all nine measures together offers a checklist to support decisionmakers, private-sector actors, and concerned citizens who seek an informed understanding of the implications of OSA.

After discussions that lasted a decade, the EU adopted CBAM in 2021 to accompany the European Green Deal, a set of initiatives that aim to make the EU carbon neutral by 2050. When it is fully in force from 2026, CBAM will impose tariffs on carbon-intensive imports into the EU, with the goals of containing carbon leakages that arise from such imports and aligning exporting countries with the union’s goal of carbon neutrality.

International reactions to the scheme have ranged from competitive approximation, as in China, to an openness to joint schemes, as in Canada, Turkey, and the United Kingdom (UK). However, there has also been mounting criticism, particularly from developing nations, of CBAM’s alleged discrimination against carbon-intensive exporters to the EU.

CBAM has increased the EU’s autonomy from the United States, which has shifted from outright opposition to consideration of a similar polluter import fee. But discussions of a Global Arrangement on Sustainable Steel and Aluminum (GASSA), a proposed zone of joint import tariffs on these two metals, have stalled as Washington seeks a CBAM exemption for its aluminum and steel exports. In turn, Brussels has loaded the GASSA talks with grievances against allegedly discriminatory nontariff barriers to trade introduced by the 2022 U.S. Inflation Reduction Act. Amid these stagnant negotiations, the EU has proceeded along its timeline for the introduction of CBAM.

Since December 2023, the CRMA has set minimum targets for the EU’s extraction, production, consumption, and imports of seventeen raw materials that are deemed critical in the manufacture of technologies such as semiconductors. At present, however, the initiative appears underfunded and potentially divisive among EU member states, as the union has no common procurement strategy, dedicated budget, or business case to attract FDI in critical raw materials. Less affluent member states risk remaining in the backseat, clearing the way for richer countries to engage in an EU race for scarce incentives. Internal fragmentation within the EU would delay the bloc’s alignment with the United States, narrowing Brussels’s policy margin in a critical raw materials alliance.

These weaknesses should not be underestimated, as both the EU and the United States are heavily dependent on Chinese supplies of critical raw materials, while Beijing depends on the United States and the EU for the design and manufacture of advanced semiconductors. To manage such interdependence, since 2021 Brussels and Washington have strengthened their bilateral cooperation through the Trade and Technology Council.

In force since July 2023, the European Chips Act aims to double the EU’s share in the global semiconductor market, reversing the course of events in the 1990s, when Europe accounted for 15 percent of global chip production and member states then relocated most of their chip manufacturing to Asia. Far from attempting to regain control of the market, the act merely seeks to secure basic chip supplies for the EU through geopolitical controls on dual-use technologies and avoid critical shortages, such as those experienced during COVID-19-related lockdowns.

While representing a first step to align the EU with the 2022 U.S. CHIPS and Science Act, The European Chips Act lags behind the United States’ planned efforts: the EU has pledged to mobilize €43 billion ($47 billion), against the U.S. goal of $52 billion, excluding private funds. As a result, the European act will likely not alter the EU’s status as a follower of U.S. primacy in the transatlantic partnership.

Like the European Chips Act, the NZIA supports investment in EU-based cutting-edge manufacturing of green technology. The NZIA sets a target for the EU’s overall manufacturing capacity in strategic net-zero technologies to cover 40 percent of the union’s needs by 2030. The act is both a response to the green components of the U.S. Inflation Reduction Act and a counterbalance to Chinese primacy in specific clean-tech sectors. The NZIA supports EU net-zero strategic projects through targeted financing and reduced red tape for clean tech, deep tech, and biotech.

However, the NZIA is minimally resourced—even more so than the European Chips Act. An accompanying instrument, the Strategic Technologies for Europe Platform (STEP), is to be financed through the EU budget. The commission estimates that the total new investments through STEP could reach up to €160 billion ($175 billion). Yet, this amount is dwarfed by the green financing package in the U.S. Inflation Reduction Act, which, according to global consultancy McKinsey, will “direct nearly $400 billion in federal funding toward clean energy.” Not surprisingly, the downgrading of EU funding for the NZIA objectives attracted fierce criticism from some member states, such as France, and from centrist members of the European Parliament, who support a sovereigntist interpretation of OSA.

The risk of internal fragmentation within the EU is particularly high. Richer member states, such as Germany, have wider fiscal margins to comply with the NZIA provisions even without EU funding, while poorer states will likely fall behind in the race for investment in clean tech.

On the external front, all four of the measures examined so far—CBAM, the CRMA, the European Chips Act, and the NZIA—have elicited criticism for amounting to disguised protectionism. To contain the rise of anti-EU sentiment, Brussels will have to rethink the current underfunding of its green-tech initiatives. In particular, the CRMA and the NZIA require a greater effort to shore up domestic support and expand the EU’s autonomy when it comes to building coalitions with the Global South.

CRMA-sponsored EU strategic projects between the union and third partners are financed mainly through the Global Gateway infrastructure investment initiative and member states’ resources. Yet, it is unclear how the CRMA—and the many other new acts that tap into preexisting EU facilities—will help the union reach the targets set by its critical raw materials policy. Global Gateway support for sustainable infrastructure development in third countries has already borne fruit in terms of the EU’s search for green critical raw materials, for example through EU preferential agreements with the Democratic Republic of the Congo, Kazakhstan, and Kenya.

On the autonomy front, CBAM represents an innovative EU tool for fairer pricing of carbon-intensive imports, an area in which the United States has been caught off guard and seems to be lagging behind. By contrast, the CRMA and the NZIA are reactive steps by the EU to contain the impacts of measures in the U.S. Inflation Reduction Act on self-sufficiency in critical raw materials and on trade and investment in clean tech, respectively. These two EU acts also strengthen the deterrent effect of EU-U.S. economic cooperation against coercive practices by China and Russia in critical supplies and enhance the resilience of supply chains in the event of global shocks.

Going forward, the EU and the United States should adopt a comprehensive strategy to coordinate their investment procurement and the resilience-enhancing measures of their respective legislative packages. Upgrading the transatlantic cooperation agenda—beyond the current consultations within the Trade and Technology Council on an agreement on clean and deep tech—would be a step in the right direction. Brussels and Washington should also encourage plurilateral deals in the wake of new multilateral rules for trade in clean tech–intensive goods. That means forging partnerships with like-minded countries, such as Australia and Taiwan, within the Climate Club created in December 2022 under the German presidency of the Group of Seven (G7).

At the same time, the EU and the United States need an honest assessment of the impacts of their green packages on global markets. For example, the combined effects of subsidies, export restrictions, domestic content requirements, and limits on intellectual property rights in the NZIA are suboptimal compared with an unrestricted scenario of lowest-cost sourcing. In economic terms, subsidizing domestically based joint ventures and imposing local content requirements are regressive choices. Politically, however, this is the strategy chosen by major players seeking a greener, more tech-intensive future.

To make this approach viable on a multilateral basis, Brussels and Washington should offer gradual phaseouts and compensatory measures to suppliers in developing countries. After decades of EU industrial development through emissions-intensive sourcing from developing countries, production patterns cannot be reoriented without incentives for the EU’s developing partners. Beyond the issue of climate justice, this should be a political and economic priority for a union that will always depend on third countries for critical raw materials that are both emissions intensive and key inputs for clean-tech products.

Adopted in October 2020, the EU’s FDI Screening Mechanism moves the governance of FDI inflows to the supranational level to protect national security and public order. More specifically, this coordination mechanism among member states seeks to guard against further expansion of Chinese investment into Europe. The mechanism was particularly welcomed by France, Germany, and Italy, which receive Chinese FDI in high-tech sectors, as the initiative has mitigated their concerns about technology leakages. Conversely, recipients of Chinese FDI in low-tech infrastructure, such as Cyprus, Greece, and Portugal, have resisted the mechanism’s adoption for fear of jeopardizing potential future Chinese investment. As of this writing, twenty-two of the twenty-seven EU member states have established national FDI screening regulations.

Contrary to expectations of higher barriers and more red tape, early evidence indicates that the EU mechanism is neither overly restrictive nor burdensome. In addition to successfully blocking several sources of mostly Chinese FDI, the mechanism has been more effective in terms of its economic selectivity than its geopolitical targeting.

The EU has further substantiated its deployment of OSA through two export-related tools. In 2021, the EU updated its export control regime for dual-use items; and in its July 2023 Economic Security Strategy, the union issued a longer, constantly updated list of exports that are subject to controls on national security grounds. The EU has also hardened its restrictions on semiconductors to contain the theft of vital technology and catch up with Beijing in the race for semiconductor development.

In this area, the EU has closely followed the United States, where in 2018 export controls were effective in banning the use by the U.S. government of technology developed by Chinese firms Huawei and ZTE. Since Russia’s 2022 invasion of Ukraine, Brussels has aligned itself even more closely with Washington by prohibiting exports of all military supplies to Russia as well as exports of dual-use microelectronics to Russia and its allies. Despite tighter EU-U.S. alignment, however, bilateral ties between the United States and certain EU member states—such as the Netherlands, the main EU producer of semiconductors—indicate that unilateral moves persist despite the EU’s regulations.

Overall, combined with closer U.S.-Japan coordination on export controls for semiconductors, the EU’s economic balancing has strengthened the transatlantic front against China and Russia. The future strength of this alliance will also depend on the EU’s ability to engage South Korean and Taiwanese producers, which have agreed to build new-generation manufacturing plants in the United States, to deter Beijing’s coercive practices against Taiwan, the top producer of raw semiconductors and a trusted EU supplier.

Proposed by the commission in September 2022, the SMEI is the EU’s response to the shocks to the European single market that occurred during the COVID-19 pandemic, when member states restricted critical supplies on the grounds of a national emergency. The instrument seeks to enhance the union’s preparedness for EU-wide critical shortages. Under the SMEI, the commission can request that companies voluntarily disclose data on critical items if disruption is expected within six months or in the event of a severe disruption. If critical disruptions persist, the EU Council can invoke the so-called dual emergency procedure, under which the commission can request formal justifications from firms that refuse to comply with the EU’s binding orders.

The SMEI’s expected impact on the single market is ambiguous, however. On the one hand, the commission considers the instrument to be far less ambitious than crisis-management tools adopted by the EU’s partners, such as the U.S. Defense Production Act, which has been in force since 1950 and regularly updated during crises since. On the other hand, the commission has highlighted the SMEI’s relevance as a permanent guard against member states’ protectionism in the European single market.

Critics, on the contrary, have lamented the commission’s lack of expertise and sectoral knowledge needed to interact effectively with players in complex supply chains, particularly in critical conditions. Instead of supporting a more resilient and effective internal market, the SMEI may therefore fuel member states’ resistance and encourage bureaucratic battles within the EU. Overall, while enhancing the union’s autonomy from the United States, the SMEI puts the EU on a par with several of its partners. As such, the instrument is a catch-up response rather than an assertive display of protectionist dirigisme.

The FSR, which came into force in July 2023, extends the EU rules on state aid to foreign entities that subsidize non-EU companies or intermediaries that carry out certain economic activities in the EU. As a bold move toward greater European autonomy, the FSR addresses a rise in distortive subsidies entering the EU not only from nonmarket economies, most notably China, but also from the United States. Modeled as an instrument of competition policy, the FSR is nonetheless geared toward the EU’s external counterparts. The regulation’s reach is both deep and broad: It potentially applies to any step in a foreign public procurement process, covers all sectors, and includes multiple undertakings, such as concessional loans, unlimited guarantees, and capital injections.

The FSR is likely to increase the EU’s autonomy from the United States because it endows the union with its own mechanism to scrutinize foreign subsidies. Together with the EU’s digital and green regulations, the FSR should counterbalance U.S. support for companies that invest in the EU under the Inflation Reduction Act. While essentially a defensive tool, the FSR will allow Brussels to negotiate with Washington on a more equal footing, including when it comes to revising WTO regulations on foreign subsidies. Joint—or, at least, coordinated—action to redefine the rules on foreign procurement systems would be compatible with the WTO Agreement on Subsidies and Countervailing Measures (SCM).

However, a sustainable FSR requires the EU to step up its financial commitments and expertise. The EU task force dedicated to the FSR comprises only five staffers, even though the commission had originally envisaged that 145 positions would be needed to make the regulation fully operational.

In force since December 2023, the ACI raises the EU’s ambitions in the field of OSA. Amid the prolonged stalemate at the WTO Appellate Body, WTO rules allow the organization’s members to adopt countermeasures against partners that do not comply with the adjudication of a WTO panel. The ACI empowers the union to anticipate and respond to economic coercion, which the EU defines as existing “where a third country applies or threatens to apply a third-country measure affecting trade or investment in order to prevent or obtain the cessation, modification or adoption of a particular act by the Union or a Member State, thereby interfering in the legitimate sovereign choices of the Union or a Member State.”

This wording clarifies the instrument’s intent, which is to allow mercantilist reactions to potential or actual mercantilist practices by others against the EU or its members. The ACI therefore permits compensatory restrictions in response to economic pressure by third countries against the union. In other words, the ACI, which is defensive in nature, seeks to contain the influence of aggressive third-country policies. As the instrument’s proponents have noted, the ACI is in fact a tool of deterrence and has maximum value when it is not used. If employed in this way, the instrument should be activated only in critical situations short of outright trade wars. Yet, as defensive tools can lead to offensive action when conditions worsen, the EU should guard against both preemptive and preventive uses of the ACI in the event of an actual trade war.

Restrictive countermeasures under the ACI would certainly reduce global openness. Unlike anti-China measures by the United States, the ACI is not country specific and does not have safeguards to exempt allies and target nonmarket economies. Overall, the instrument enhances the EU’s autonomy from the United States. In most respects, though, the ACI is a reactive move: EU officials have stated that one of the instrument’s triggers was the United States’ aggressive reliance on Section 301 of the 1974 U.S. Trade Act, which authorizes an extensive range of measures in response to certain foreign trade practices.

In fact, the EU’s approximation to the U.S. anticoercion approach would be in Washington’s interests. A stronger and more resilient EU is essential to counter economic intimidation from China. From an EU perspective, the ACI can be regarded as an insurance mechanism should the United States become less open on the grounds of domestic policy. If the ACI is successfully employed as a deterrent and in cooperation with a like-minded U.S. administration, Brussels and Washington could greatly enhance their anticoercion synergies against Beijing and Moscow.

Internally, the ACI marries EU trade and security policies and could lead to an expansion of the commission’s powers into areas that currently fall under the EU’s intergovernmental Common Foreign and Security Policy (CFSP), which sits under the purview of the EU Council. Like the SMEI, the ACI establishes the commission and the council as parties in a complex process that involves the selective triggering of different phases. While giving the commission extensive authority, the ACI entails multiple interactions between the EU institutions, whereas decisions made under the CFSP exclude the commission and may be faster in critical circumstances.

The second dimension of the EU’s panoply of OSA-related instruments is their impact on the EU’s choice of negotiation forums and, in particular, their compatibility with multilateral trade rules. There are inherent tensions between the initiatives motivated by the EU’s willingness to enhance OSA, on the one hand, and the multilateral order, which the EU has traditionally championed, on the other.

Various actors, such as India’s Minister of Finance Nirmala Sitharaman, have criticized CBAM for being a green protectionist policy disguised as climate action. In response, the EU argues that the mechanism is not a protectionist measure because its pricing will be the same as that imposed by the EU on domestic industries, so local and foreign products will be treated equally. According to the WTO’s most-favored-nation principle, an importer should apply equal treatment to any given imported product, regardless of its origin. But CBAM applies different treatment based on each import’s carbon content. In addition, inconsistencies between CBAM and the distribution of emissions allowances under the EU’s Emissions Trading System could create concerns about the mechanism’s compliance with WTO rules.

CBAM could also have negative economic and developmental impacts on third countries. This risk is particularly acute for developing and least developed countries whose exports to the EU either play a significant role in their economies or are major sources of income in sectors covered by the mechanism. In addition, developing and least developed countries tend to have more carbon-intensive economies than developed nations and often lack advanced, low-carbon production methods; as a result, they may lose their competitive advantages over their developed counterparts.

What is more, CBAM places an obligation on exporting companies to report the amount of emissions generated during the production processes of affected exports. This requirement has the potential to put additional burdens on the private sectors of certain developing or least developed countries, as their administrative and statistical capacities are more limited than those of developed nations. CBAM’s disproportionately negative impacts on certain developing and least developed countries are also contrary to the principle of common but differentiated responsibilities, which asserts that the burden of climate change mitigation should be distributed equitably, taking into account nations’ levels of development.

The CRMA provides financial support and incentives to EU-based companies—an arrangement that could be seen as discriminating against foreign firms. The WTO’s SCM Agreement prohibits subsidies that are contingent on the use of domestic over imported goods or are limited to certain enterprises or industries. The CRMA’s support for EU-based companies may be seen as a violation of these rules.

There are also several concerns and criticisms about the CRMA’s environmental and social justice implications. One of these concerns stems from the act’s lack of a global justice approach to international partnerships. The CRMA’s focus on supply security could jeopardize sustainability standards in international investments, the participation of civil society, and the protection of human rights, especially for local populations. To prevent these potential risks, the act should be accompanied by monitoring mechanisms and regulations that ensure civil society participation and transparency. Additionally, the act’s streamlined procedures for greenlighting critical raw materials projects in the EU could increase environmental and health risks and decrease public participation by shortening the time frames of important procedures, such as environmental evaluations.

It could be argued that the European Chips Act violates several key WTO principles and, as such, may be incompatible with multilateral trade rules. Four aspects stand out.

First, the act provides financial support and incentives for companies that produce microchips in the EU. This could be seen as a form of local content requirement, which is prohibited under WTO rules. The organization’s Agreement on Trade-Related Investment Measures (TRIMs) forbids provisions that require the use of domestic content, the export of domestic goods, or the substitution of domestic goods for imported ones. More generally, the act’s support for EU-based companies could also be seen as discriminatory against foreign companies and therefore a violation of the WTO’s SCM Agreement.

Second, the act includes provisions that restrict the export of certain types of microchip, particularly those used in critical infrastructure, such as energy, transportation, and health care. These provisions could be interpreted as a breach of the Agreement Establishing the WTO and the General Agreement on Trade in Services (GATS), which prohibit restrictions on the export of goods and services, except in certain circumstances.

Third, the act’s provisions on intellectual property rights could be seen as a violation of the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which sets out the rules for the protection of patents, copyrights, and trademarks. The act could potentially violate the TRIPS Agreement by limiting the ability of foreign companies to protect their intellectual property rights in the EU.

Fourth, the act could be understood as a protectionist measure that carries the risk of a trade war, this time between allies. Europe, Japan, South Korea, Taiwan, and the United States may seek to outbid each other with ever-larger subsidy handouts to entice global companies to make new investments. The results would be the duplication of supply chains among allies, inefficiencies in global semiconductor production, a waste of taxpayers’ money, and a race to the bottom that would be incompatible with WTO guidelines. The paradox is that the success of the European Chips Act will be measured against the backdrop of a zero-sum mentality, including among Europe’s geopolitical allies. According to a 2022 report by the Brookings Institution, approximately $164 billion of semiconductor capital expenditure is required to achieve the EU’s ambition of a 20 percent share of the global market by 2030.

Like the CRMA and the European Chips Act, the NZIA provides financial support and incentives for EU-based companies, which could be seen as discriminating against foreign firms and a violation of the SCM Agreement. Critics see the NZIA’s target for the EU to become 40 percent self-sufficient in the manufacturing of strategic net-zero technologies by 2030 as a protectionist signal.

The act also requires that a certain percentage of the value of renewable energy equipment be produced in the EU. This could be seen as a local content requirement, which is prohibited under the TRIMs Agreement, which forbids measures that require the use of domestic content or limit the participation of foreign investors in a particular sector.

Further provisions in the NZIA restrict the export of certain renewable energy technologies, such as solar panels and wind turbines, to countries that do not have free-trade agreements with the EU. These provisions could violate article 11 of the General Agreement on Tariffs and Trade (GATT), which prohibits export restrictions that are not based on legitimate reasons, such as conservation or national security.

The NZIA also includes clauses that restrict the use of certain intellectual property rights, such as patents and trademarks, for renewable energy technologies. These provisions could be seen as a breach of the TRIPS Agreement.

Finally, there is a growing concern that the NZIA might trigger an intra-EU subsidies race because the act lacks provisions that encourage cooperation among member states. Similarly, there are fears that together, the NZIA and the U.S. Inflation Reduction Act could lead to a subsidies race between the EU and the United States. Therefore, instead of accelerating decarbonization, the transatlantic partners’ increased subsidies and protectionist policies risk slowing decarbonization efforts and raising the costs of necessary materials and components globally.

The FDI Screening Mechanism applies only to non-EU investors and, as such, could be seen as a violation of the GATS, which states that countries must not discriminate against foreign services or service providers, including investors.

The mechanism gives the EU the power to restrict or prohibit foreign investments in sensitive sectors, such as critical infrastructure and critical technologies. This power could be understood as a violation of the TRIMs Agreement, which prohibits restrictions on the movement of capital and investment, except in certain circumstances.

Although the mechanism applies to foreign investments in the EU, it could be seen as extending to investments outside the bloc. For example, it could be interpreted as applying to EU-based subsidiaries of non-EU companies, or to investments in non-EU countries that have a link to the EU. This arrangement could be seen as a breach of the TRIPS Agreement, which forbids extraterritorial application of intellectual property rights, again except in certain circumstances.

Historically, the United States and the EU have been the main proponents and guardians of a multilateral, rules-based order with the WTO as the main forum for resolving problems and disputes in international economic relations. However, both actors have consistently used trade and economic relations as an effective geopolitical tool in the form of unilateral and geostrategic sanctions. To be permitted under WTO rules, such measures need to be condoned as exceptions that are justified by national security concerns. WTO panels have so far had limited experience in interpreting the scope of these exceptions.

The new era of global geopolitical tension has rekindled interest in export controls. After a hiatus of almost twenty-five years, the WTO has handled four such cases since 2021, including when a WTO panel rejected the United States’ invocation of article 21 of the GATT in disputes brought by China, Norway, Switzerland, and Turkey. So far, the WTO approach has proved to be much more restrictive than the trend in both the United States and the EU toward expanding the scope of export controls. This situation raises the question of how compatible these measures are with WTO rules.

As export controls remain a gray area under WTO rules, increased reliance on these instruments will trigger criticism that the United States and the EU are becoming more inclined to impose unilateral measures based only on their own assessments and with too broad a definition of national security.

The WTO’s most-favored-nation principle requires that the organization’s members treat all other members equally and in the same way as they treat their closest trading partners. The EU’s use of the SMEI could be seen as a violation of this principle if the instrument is deemed to discriminate against certain countries or industries. If deployed in a protectionist or discriminatory way, the instrument could also be interpreted as a breach of article 21 of the GATT, which allows WTO members to take emergency measures to protect their domestic industries but only in limited circumstances.

The WTO’s Agreement on Import Licensing Procedures includes a requirement that such procedures be transparent, predictable, and fair. The SMEI could therefore be seen as a violation of this agreement if it is deemed to be opaque, unpredictable, or unfair.

Meanwhile, the WTO’s Agreement on Technical Barriers to Trade requires that technical regulations be based on relevant international standards and not create unnecessary obstacles to trade. The SMEI could thus be seen as a breach of article 3 of this agreement if the instrument is found to create unnecessary obstacles to trade or be based on noninternational standards.

At present, trade-distorting aspects of subsidies are covered by the WTO’s SCM Agreement. The scope of the FSR, however, goes beyond this agreement, and there are no binding multilateral rules on the nexus between subsidy regimes and domestic investments. In addition, while the WTO has specific rules on subsidies, these generally apply only to goods and do not cover services.

The essentially mercantilist nature of the ACI—a selectively restrictive economic tool in service of broader, political-economic goals—counters the free-trade philosophy that permeates all WTO regulations. The instrument has its origins in the current decade-long paralysis in the WTO Appellate Body. The ACI’s creation of a substitute mechanism for mediation between affected EU member states and alleged third-party infringers and a sanctions procedure may appear to signal an end to the multilateral apparatus built by WTO members.

In response to these criticisms of the ACI, the EU has argued that the instrument’s mechanisms deal specifically with cases of economic coercion not covered by WTO rules and agreements, and that the ACI is a different tool that addresses illegal economic coercion. However, the stage at which economic coercion becomes illegal is a highly controversial issue in international law. One of the main problems in this regard is the lack of a clear definition of what even constitutes economic coercion. As a result, concepts such as intervention, interference, and coercion are used in different and varied ways in international law.

In addition, international court rulings on this issue have held that certain actions that the EU defines as economic coercion do not violate the principle of nonintervention, which prohibits states from intervening in the affairs of others. In a case between Nicaragua and the United States, the International Court of Justice found that economic coercion by the United States, including trade embargoes and the suspension of aid, did not breach this principle. As a result, economic coercion by means of trade and investment restrictions does not necessarily constitute illegal intervention.

The EU’s pursuit of OSA is leading the union toward increased autonomy from the United States. Furthermore, OSA-related measures espouse a clear preference for unilateral, bilateral, or minilateral schemes over WTO-based multilateralism, resulting in lower levels of openness than in the past.

Through OSA, the EU has carved out a more autonomous role from the United States in green policies while embracing a more adaptive approach in traditional trade and industrial policies. Moving forward, increased EU autonomy—punctuated by occasional frictions but grounded in general agreement with the United States on broad objectives—appears the most likely scenario. The EU remains on a course of reluctant geopoliticization based on an ostensible preference for multilateralism but in reality pursued through unilateral, bilateral, or minilateral solutions.

Through CBAM, the EU’s shift from a reactive follower to a more proactive player shows that there is space for a more assertive EU role in global climate policies. The impact of the mechanism, however, depends on the union’s ability to widen its coalition options beyond the transatlantic partnership. To minimize CBAM’s incompatibility with core WTO norms, Brussels should ensure that the mechanism complies with the GATT provisions on special and differential treatment, which give developing countries special rights and allow other WTO members to treat them more favorably.

At the same time, the EU should introduce targeted carbon-financing schemes, including through the Global Gateway, to compensate developing exporters during CBAM’s transition phase. Such targeting would not only strengthen the EU’s image as a responsible climate leader but also enhance the union’s reach toward potential new partners and major exporters of carbon-intensive goods, including Egypt, India, Kazakhstan, Mozambique, and South Africa.

Financial support for decarbonization could mitigate criticisms of EU double standards when it comes to Ukraine, which is a major carbon-intensive exporter to the union but is currently exempt from CBAM, unlike the bloc’s developing partners. Overall, coupling CBAM with compensatory measures for developing exporters could advance the EU’s economic and strategic goals as well as its objective of a green and just transition. If China aligns with the EU by adopting its own domestic emissions-trading system, Brussels could fine-tune CBAM and become a global leader on decarbonization, exerting pressure on both Washington and Beijing.

However, if CBAM, the CRMA, the European Chips Act, and the NZIA are to jointly advance green transitions worldwide, the EU needs to make a bigger effort to realize its potential as a green and just coalition leader. This requires a twofold strategy of bargaining with the United States for a more ambitious approach to global equitable development, on the one hand, and prioritizing Global Gateway resources for green projects, on the other.

As in global development finance, excellent internal coordination will be needed if the EU is to lead multilevel, multiactor initiatives to promote clean transitions. Yet, this effort appears worth making: The combination of a solid EU-U.S. partnership and an EU-led green coalition that includes targeted developing partners may be crucial if the U.S.-China rivalry hardens further. The economic, environmental, and strategic implications of such a repositioning may prove vital for the future of Europe.

Similarly, the early impacts of the EU’s OSA-related trade and investment measures also indicate that Brussels may strengthen its role as a third pole beyond the U.S.-China duopoly in the global political economy. The ACI provides the union with unprecedented authority to deter third countries’ economic manipulation and retaliate against distortive practices, even before a case has been concluded at the WTO. The SMEI, meanwhile, should manage the domestic implications of disruptions in complex critical supply chains, empowering the EU Council and the commission to deal with sudden shortages through an EU mechanism.

The FDI Screening Mechanism, the EU’s export control regime, and the FSR are also expected to lead to enhanced EU capacity, but in the form of greater loyalty to the United States rather than more independence as a third pole. As mostly reactive moves to catch up with established U.S. practices, these instruments are likely to enable the EU’s alignment with the United States’ top foreign policy priority of outcompeting China in the global race for technological and, ultimately, security primacy.

Most of the EU trade and investment instruments discussed in this chapter are partly or even fully contrary to existing WTO rules. The EU’s green-tech tools, however, are similar to their U.S. counterparts and may provide a basis from which the EU and the United States can deepen their dialogue on revising current WTO regulations.

Some measures, such as the FDI Screening Mechanism and the export control regime, may reduce the EU’s internal cohesion and increase fragmentation—or even escalate state- or company-specific disagreements over their intended goals to the global level, with potentially destabilizing effects. Although unlikely at the moment, a scenario of outright fragmentation is a possible outcome of the competitive dynamics that have emerged among EU member states when it comes to green-tech initiatives. Under the NZIA, the European Chips Act, and the CRMA, the challenges of scarce funds, embryonic strategies, and the lack of an EU-wide procurement system, respectively, have raised major concerns within the EU.

Further worries stem from the commission’s lack of in-house expertise to implement crisis-management tools for complex supply chains, meet the private sector’s many demands, and ensure effective coordination with the EU Council. These challenges have exposed the risk that the SMEI, the FSR, and the ACI may harm the EU’s internal cohesion. While the aim of these instruments is to attract foreign partners and forge alliances between EU producers and non-EU suppliers, Brussels will have to carefully assess the risks that arise from the union’s internal differences.

A fragmented EU would weaken support for rules-based economic governance and mean greater global instability. In the short term, international economic regulations will become more heterogeneous and more complex. More global exchanges than ever before now involve countries that are aligned neither with the West nor with China, as evidenced by a 2024 International Monetary Fund (IMF) study, so any steps the West can take to increase the traction of transparent, rules-based governance are particularly important. For any meaningful economic activity, the worst possible outcome in a contested global context is regulatory uncertainty.

The EU is overhauling OSA-related policies across different domains, from trade to climate change, to better equip itself to respond to perceived geopolitical needs. As highlighted by Giovanni Grevi and Richard Youngs in this compilation, the EU has started to devise a different kind of economic statecraft in which geopolitical factors increasingly shape economic policies.

Except for specific initiatives, most notably CBAM in the broader context of the European Green Deal, OSA policies substantiate Brussels’s adaptive response to distortive practices, especially from China, and regulatory changes, particularly from the United States. Mostly defensive in nature, these policies embody a catch-up approach that in principle aligns the union with the United States, rather than widening the distance between Brussels and Washington.

The EU’s policy shift to a more assertive version of selective protectionism, while potentially incompatible with WTO regulations, is rules based and more transparent than most protectionist measures adopted by nonmarket economies. This not only makes the EU’s approach more actionable but also means it represents a sensible strategy for the EU amid the politicization of economic exchanges and the militarization of long-standing geostrategic cleavages.

Only by relying on solid instruments to protect its internal market and promote its competitiveness can the EU minimize its vulnerabilities to the further weaponization of interdependencies by China. Similarly, only by negotiating from a position of relative strength can Brussels exert influence on Washington to begin a review of the WTO system and engage developing partners in a shared effort to advance multilateral solutions fit for the twenty-first century.

At the same time, the shift in EU policies has taken place in an environment that has tended to downplay the external reactions to this transformation. In this respect, two issues are especially salient. The first relates to the EU’s traditional position as the champion of the multilateral trading system. Even more so than the United States, the EU has distinguished itself as the economic power intent on maintaining and consolidating this multilateralism. Thus, the EU’s possible departure from multilateral norms is an area of concern for many nations eager to protect these rules.

A second and related issue is the perception that the modernization of the EU’s legal and regulatory arsenal—allegedly to prepare the EU to better deal with a more challenging geopolitical order—in fact amounts to trade protectionism in disguise. For instance, many least developed countries have labeled the EU’s CBAM “green protectionism.” Going forward, the union should become more receptive to these concerns, especially in the context of its evolving relationships with the Global South. To address these issues, the EU should consider a holistic strategy that combines a political track and a policy track.

With respect to politics, the EU’s first objective should be to recast OSA as a beacon for like-minded countries. In doing so, the union’s aims should be to increase the reach of its coalitions and to maximize the benefits of selective partnerships. In addition to the United States, the UK, and other long-standing partners, such as Australia, Canada, and Japan, the list of like-minded nations includes Indo-Pacific states such as India, South Korea, and Vietnam.

This objective entails not only building wider coalitions but also paying particular attention to the multiple cleavages over OSA, both within the EU and when it comes to the concept’s external projection. EU policymakers will have to engage foreign interlocutors to weave shared strategies for mutually beneficial goals. This effort should involve political partners, particularly Australia, Japan, and the United States, especially in strategic sectors, such as dual-use technologies, semiconductors, and critical raw materials. Crucially, the success of the EU’s assertive projection of OSA also depends on the degree of convergence that will materialize with the policies of the post-2024 U.S. administration.

The second objective of the political track should be to engage in high-level political discussions, in a bilateral or plurilateral format, with leading members of the Global South. The aim would be to foster a mature deliberation of the ongoing transformation of the EU’s approach. The trap to avoid is Western-centrism: It would be a dangerous fallacy for the EU to assume that its political initiatives will be accepted by the rest of the world merely because they are justified by moral and ethical considerations, like fighting climate change or preventing social dumping.

This connection has been established among the European policy community and European public opinion; EU leaders now need to make the case convincingly to a global audience. This thought leadership should also aim to engage the U.S. policy community, given how potentially damaging certain U.S. initiatives—such as the U.S. CHIPS and Science Act, with its large reliance on domestic subsidies, or the increased use of Section 301 investigations—can be to the integrity of the multilateral regime.

The policy track, in turn, should involve a work agenda focused on identifying possible revisions to multilateral rules. Many nations are moving to enact domestic measures on the basis of geopolitical considerations that are not necessarily compatible with those nations’ commitments to multilateral norms. In many respects, the WTO rules that were adopted in the unipolar international system of the early 1990s now appear out of sync with today’s competitive, multipolar, and ideologically heterogeneous context.

At present, there is no real effort to foster a policy dialogue that will address this thorny question. The panoply of geopolitically motivated domestic measures seems to reflect strong political tendencies in the West and beyond. These measures are likely to remain in force even if they are largely incompatible with multilateral norms. Reforming these norms is therefore vital to protect the integrity of multilateralism.

This agenda should focus on four elements. The first is reform of domestic subsidy regulations to carve out space for so-called good subsidies. The idea of such subsidies is that provided they could be justified by an accepted set of shared objectives, such as climate change mitigation or other collective aims, they would be impossible to countervail, even if they created trade distortions.

Second, while proponents of the green transition should take the accusation of green protectionism seriously, the WTO will have to adapt to the greener trade and production needs of the twenty-first century. This could be done by providing for an exception under article 20 of the GATT to allow selective carbon tariffs and targeted domestic sourcing of clean tech–intensive goods.

The third element is a reinterpretation of core WTO norms, such as special and differential treatment, the dispute settlement framework, and the national security exemption. The WTO allows exceptions to its trade rules for national security emergencies, but such exceptions have been abused several times in the past, most recently in the U.S.-China trade war and by Trump’s aggressive mercantilist approach to U.S.-EU relations. Indeed, maintaining a multilateral rule on national security exceptions to free trade may prove unrealistic in the current context. Instead, the increased geopoliticization of economic exchanges and the intensification of conflicts on the EU’s borders and at strategic trade choke points push the union toward more limited goals. A bilateral EU-U.S. consensus and support from other transatlantic partners for a revision of WTO regulations would be steps in the right direction.

Finally, the EU should be more confident in pursuing openings toward new partners in emerging market economies. Now and in the future, the cooperation of such partners is vital to ensure continuous innovation, stable supply chains, and EU access to critical markets. In return, the EU will have to offer wider and fairer—although still selective—market access to Indo-Pacific partners while incorporating China in green efforts downstream. A group led by the EU and the United States could steer the course toward greener, more open technologies and catalyze a wider, gradually more inclusive group of green exporters in line with the United Nations Sustainable Development Goals. However, the EU should still carefully select its partners based on its political priorities, not only to balance China, but also to avoid economic emasculation by the United States and distance the union from coercive actors.

Eugenia Baroncelli is an associate professor of political science in the Department of Political and Social Sciences at the University of Bologna.

Sinan Ülgen is a senior fellow at Carnegie Europe.