Summary
- Technology is increasingly a battleground in the strategic competition between the US and China.
- Western technology contributes to China’s military modernisation as well as the development of Russian weapon systems.
- The US is restricting trade in key technologies with China and pushing EU member states to follow its lead.
- To better defend its interests, the EU needs to develop clearer policies on China and security, including pursuing the ‘de-risking’ of its relations with Beijing.
- The EU must develop a new strategic technology doctrine and upgrade its export control policy.
- This more coherent stance will enable the EU both to act where necessary but also to defend itself and its member states from future pressure from China – and the US.
In January 2023, the United States and two of its closest allies, the Netherlands and Japan, concluded a ground-breaking agreement – but took pains not to draw attention to it, or even to call it an agreement. They held no press conference and released no joint statement. Yet the subject of their deal goes to the heart of the growing strategic competition between the US and China. And it encapsulates some of the critical challenges facing the European Union at the intersection of international security, the world economy, the technological revolution, and strategic competition.
The agreed non-agreement between the three states pertains to some of the most complex machinery and most miniscule components humankind has ever produced. With their accord, the countries effectively restricted the export to China of the most advanced microchips and the tools to produce them. These items have become a focal point in international power politics because of their use in developing artificial intelligence and their centrality to many of the 21st century’s most important technologies.
As news on the matter emerged, the Dutch prime minister confined his remarks to saying: “Those talks have been going on for a long time and we’re not saying anything about it.” The reason for reticence was clear; in response to their decision, China threatened retaliation against the Netherlands and Japan.
The move followed on from measures unilaterally implemented by the US in October 2022 to restrict the trade of advanced semiconductor technologies with China for reasons of international security. And it now appears that the Dutch national measures could soon be followed by a decision by the German government to restrict the export to China of chemicals needed for chip production.
As these sorts of incidents mount amid the escalating US-China strategic technology competition, the EU and its member states will find themselves increasingly caught in the crossfire. Washington will maintain pressure on its allies to align with its China policy. China’s military build-up will continue to change the balance of power. And Beijing’s willingness and ability to weaponise trade will likely continue to grow – it will no longer be possible for the EU to keep its pursuit of free trade separate from these powerful currents. If a rules-based order is to remain, the rules will need to change to take account of the ways in which economic security forms part of this wider competition.
To steer a course according to its own interests in this new era of strategic trade controls, the EU must urgently develop its own strategy and upgrade its tools to deliver on it. If it is to promote and defend its own sovereignty, it must start to draw its own red lines in technology engagement with China and upgrade its export control policy.
Strategic technology controls: A new era
Despite its threats of retaliation, Beijing’s response to the Netherlands’ export controls on advanced chip manufacturing equipment has so far been largely cautious. This is in contrast to the Chinese reaction to the United States’ October 2022 decision to begin restricting trade in advanced semiconductor technologies with China. In response, China brought a case against the US at the WTO; it also targeted a number of American companies, sought to divide the US from allies, and pressured its own companies to eliminate foreign suppliers.
Advanced semiconductors are primarily needed for commercial applications, including supercomputers, to develop artificial intelligence for climate modelling, medical research, advanced manufacturing, and self-driving cars. Preventing China from importing and developing advanced semiconductors will likely slow the country’s economic and technological development across a variety of commercial sectors dependent on supercomputers and artificial intelligence.
But semiconductors are inherently dual-use, meaning they are not only needed for many commercial applications but are also integral to modern weapon systems, as Russia’s war of aggression against Ukraine is showing. Russian weapons, such as Kh-101 cruise missiles, are heavily reliant on Western semiconductors.
There is no doubt that advanced semiconductors from Western companies have been contributing to China’s military build-up. Given Beijing’s increasing political and military assertiveness, especially with regard to Taiwan, the US deemed restricting the flow of these technologies to China a legitimate security measure. Nevertheless, with this move, the economic realm is now firmly in scope for the wider US-China strategic competition.
EU member states are able to adopt measures similar to those of the US under the EU dual-use export control regulation. The bloc updated and upgraded this regulation in 2021 after five years of difficult negotiations. Nevertheless, the EU framework is much more confined and less coherent than that of the US. Crucially, the EU lacks a firm policy underpinning on China and on economic security to inform the use of export controls.
Yet, as the US-led move to restrict China’s access to advanced semiconductors shows, this is likely to be the first among many such examples, as China and the US each enhances its approach to technology on the broader strategic battlefield. The EU is likely soon to need new policy options to be able to act in this new era.
The United States’ approach to strategic export controls
The United States’ October 2022 restrictions signify a strategic change in its post-cold war use of export control policy. For many decades, the use of export controls across the globe was largely confined to military and dual-use goods. Under the Trump administration, the US – somewhat erratically – introduced technology blockages against individual Chinese tech giants. The Biden administration has now begun to leverage export controls as a strategic tool to “maintain as large as a lead as possible” in key technologies over China.
Indeed, the US National Security Strategy, adopted in 2022, clearly states that keeping ahead of China in technology is a central pillar of American national security. In a pivotal speech last September, national security adviser Jake Sullivan set out how this new doctrinal thinking is reshaping US domestic policy – by promoting American industry and technology – and foreign policy – by capping China’s access to critical US technologies, limiting US dependencies, and bringing allies along. This is grand strategy in the making.
To deliver this developing strategy, the US has been steadily expanding its toolbox to limit China’s access to, and arrest its advancement in, technology industries that Washington considers foundational to American military and economic power. Over the last half-decade, and through over half a dozen legislative acts, the US has: beefed up controls on Chinese investments in America; ringfenced its telecoms sector from Chinese involvement in building and maintaining infrastructure; tightened visa restrictions on students from China; barred Chinese imports; and is removing Chinese ICT providers from its supply chains. More such legislation is in the pipeline.
Alongside these steps, the Biden administration has also created ways to actively retain American positions of leadership in various technology sectors – or seek to win these positions back. Both the CHIPS and Science Act and the Inflation Reduction Act (IRA) aim to re-wire strategic technology supply chains for semiconductors, electric vehicles, batteries, and renewable energy components – thereby limiting China’s power of control over these technologies. The CHIPS Act, for example, makes subsidies for companies conditional on them limiting certain operations in China. Since the entry into force of the IRA and the CHIPS Act in August 2022, companies have committed over $200 billion in investment in these strategic sectors in America. This underlines Washington’s power to shape global industries through its national security policies.
In these ways, the recent Western measures on semiconductors are set to advance the United States’ objective of safeguarding its military and technology leadership. This act aims to freeze China’s own progress towards developing advanced semiconductors domestically. It is thus delivering on a central objective of Biden’s national security agenda.
The White House has stated that advanced semiconductor technologies not only have broad commercial applications but also act as “force multipliers” that contribute to military strength. It identifies a clear link between semiconductor technologies and China’s development of weapons of mass destruction (WMD). For this reason, it wants to control the trade in these primarily commercial technologies with China, despite the risk of significant collateral damage for the US, China, and the world economy and the risk of an escalating trade conflict. The US commerce department justified its semiconductor restrictions by drawing connections between advanced semiconductor technologies and WMD development, China’s military modernisation, and human rights abuses.
That being said, the restrictions on largely commoditised memory chips (where China had been gaining market share, but where no clear links between such chips and AI and modern weapon systems can be made) that were part of the October control package suggest that the measures are also intended to maintain or change market balances in favour of the US. Economic security considerations are also evidently at play.
Importantly, the October 2022 measures rested on a firm bipartisan consensus enshrined in the 2018 Export Control Reform Act (ECRA), which clearly defined the parameters of national security that allow for the broad use of export controls. Beyond long-established goals of preventing the proliferation of WMD and military and dual-use technologies, the ECRA established new powers to impose export controls with the explicit aims of preserving US military superiority, strengthening the US industrial base, maintaining US technological leadership, and advancing US foreign policy objectives, including the protection of human rights and the promotion of democracy.
The ECRA was written with China and its challenges to economic security in mind. With the adoption of the ECRA, the Commerce Department is now tasked, on an essentially permanent basis, with identifying which additional “emerging and foundational technologies [that are] essential to the national security of the United States” ought to be controlled – particularly vis-à-vis China.
Relations with the EU
Maintaining leadership over China by cordoning off access to, and hampering the development of, advanced technology is as profound a strategy as it is disruptive to the global economy – and the EU’s position therein. While national security is the leitmotif, it remains unclear where and on what basis Washington draws the red line for technology trade with China, as this area is constantly evolving. To what extent competing interests such as open trade, efficiency, and multilateralism can still play a role in this reassessment also remains unknown. While the Biden administration has invested significant diplomatic effort in explaining its security policy to European allies – and some European leaders have become more outspoken about their shared security concerns regarding China’s economic and technology policies – wariness and distrust of US motives and interests remain strong in some parts of Europe. A Republican White House may be more willing to force closer European alignment by leveraging its security dominance.
Still, Washington is aware that it cannot single-handedly address the security challenge that the economic, military, and technological rise of China poses. It knows that unilateral controls lose their effectiveness and negatively affect US economic competitiveness over time as the gaps left in the Chinese market by the withdrawal of US companies are successfully filled by non-US firms. This desire to bring allies along gives Europeans the ability to influence the direction of travel of US policy – if they manage to adopt a more united approach.
China’s approach to strategic technologies
Since the founding of the modern Chinese state, the party leadership has explored ways of integrating the military and civilian sectors. From Mao onward, technological “self-reliance” – the absence of foreign dependencies – has been a strategic priority for Chinese leaders, first with regard to the Soviet Union and later Western democracies in the face of technology embargoes such as CHINCOM (a US-led committee coordinating export controls on China during the cold war). These efforts rarely succeeded. But since Washington targeted Chinese national champions Huawei and ZTE in 2018, Chinese leader Xi Jinping reinvigorated this national security drive for technological self-reliance. “Only by grasping key core technologies in our own hands can we fundamentally guarantee national economic security, national defence security, and other securities” were his words as he explained this doctrine in 2021. Elsewhere, he directed his administration to “intensify the formation of unique advantages in some domains of strategic competition.”
Alongside these developments, the inclusion of military-civil fusion into China’s national strategy in 2014, the establishment of the Central Commission for Military-Civil Fusion Development in 2017, and a number of recent national security laws with vague and expansive knowledge-sharing obligations for companies have contributed to Western policymakers’ change in attitude.
Indeed, China now enjoys a growing dominance in emerging technologies that are vital to determining tomorrow’s economic and military balance. Artificial intelligence, which China’s leaders see as foundational to economic and military power, advances in domestic surveillance systems, and advanced data analytics could give China significant military advantages. In quantum technologies, China’s leading research positions in photonic sensors, quantum communications, and cryptography could also translate into significant warfare capabilities. And beyond such ‘hard security’ considerations, averting the risk of Chinese companies monopolising emerging dual-use industries should be a key concern for European governments as they consider how to address China’s techno-security state.
China’s toolbox for securing strategic technologies is large and growing. It includes its military-civil fusion framework, five-year plans, national and local sector-specific industrial plans, targets for localisation and market shares, research and development funding, the creation of national champions and innovation centres, selective foreign investment, joint ventures, espionage, and more.
China’s strategic export control toolbox
In 2020, China reformed its Export Control Law, introducing the capability to place restrictions on a wide range of items and end users, including applying and enforcing its controls even outside its own borders if needed. While China has so far been reluctant to pull the export control trigger, it has equipped itself with a large potential weapon – the threat of which may give it powerful leverage in any future negotiations with the EU. For example, an ongoing revision of the items on its export control list is likely to include a range of technologies in which China enjoys asymmetric leverage over Europe, including rare earth magnets, solar photovoltaic equipment, gene editing technology, computers, and automatic driving software. China’s policies to increase its influence over the manufacturing of ‘legacy’ semiconductors could equally become a powerful form of leverage: in the EU, the production of electric vehicles, industrial robotics, drones, and medical devices relies on legacy chips from Chinese factories.
With this toolbox to hand, China could dial up its own technology controls on other states or on the EU – indeed, some in China are already calling for this publicly. And China has already significantly increased its use of economic coercion in recent years. China’s advances in sensitive and emerging technologies could therefore not only amplify China’s military power but also its coercive leverage, making it a risk to both the national and economic security of the EU.
Currently, however, the European policy debate suffers from a lack of domestic intelligence on the mechanisms through which China is aiming to develop a dominant position in strategic technology supply chains – and how exactly sensitive technologies leak to China and into its military-industrial complex. The EU needs to do more to gain its own intelligence of these processes in order to inform its strategic technology policy without having to rely largely on US assessments.
Russia lessons
Lessons from Russia’s war in Ukraine demonstrate the importance of ensuring trade and technology policy work in support of security imperatives.
Within 24 hours of Russia’s all-out invasion of Ukraine, the EU and the US implemented unprecedented export restrictions on strategic technologies traded with Russia and Belarus. They were shortly after followed by other key Western allies including the United Kingdom, Australia, Japan, Canada, and South Korea.
These measures marked a significant change for EU and allied policy, by significantly broadening the traditional scope of export restrictions beyond military and dual-use goods to incorporate a host of advanced commercial technologies. These included electronics, computers, telecommunications, information security, sensors, lasers, and aviation and maritime technologies. Since the end of the cold war, export restrictions had not been used with this strategic ambition, in such breadth, with such coordination among allies, and against an economy the size of Russia’s.
For Washington, this allied strategic leap against Russia signified clear momentum to now also jointly target China through coordinated export controls.
However, the sort of broadened technology export restrictions applied against Russia are by no means an obvious next step for the EU to use with regard to China; nor for Japan, South Korea, or Taiwan. It is one thing for the EU to implement export restrictions as part of a sanctions regime against Russia. It is quite another to actively implement strategic export controls on largely commercial technologies against China – an economic giant, with which the EU is tightly economically entangled.
European interests in the crossfire
In this difficult context, the EU is at risk of being caught between the two superpowers. Without developing a robust common strategy on strategic technology policy, the EU will find itself drawn deep into the US-China struggle for technology supremacy and left unable to steer a course according to own interests. Crucially, Europeans will only be able to find their footing if they establish what their own security interests are. Otherwise, the US will continue to set the terms in bilateral deals such as the recent measures on semiconductors.
Technology risks
China’s dominance over clean technology value chains – from the mining and processing of critical minerals to the production of solar cells, modules, and batteries – has already generated concern that the foundations of the EU’s economic security are at risk. The spectre of strategic dependencies and economic coercion has led to calls to diversify imports.
In recent years the EU has significantly upgraded its economic security toolbox to tackle a range of different risks, including unfair trade competition, economic coercion, supply chain dependencies, and risks to critical infrastructure and strategic assets. To this end, the EU adopted an anti-coercion instrument (ACI) to combat economic coercion, introduced a foreign direct investment screening mechanism to protect strategic assets and infrastructure, and developed industrial policy tools to ensure the EU remains an innovation power.
But China’s techno-security state still poses many challenges. The EU remains vulnerable to sensitive technology leakage (the unwanted transfer of technology), especially to China, where the state mobilises its national economy – from labs, to universities, to private companies, to the military – to become a “global leader in innovation,” as Xi declared.
China actively works to facilitate the transfer of sensitive technologies from the EU and European companies. It does so in a variety of ways. It employs open-market mechanisms – such as free trade and direct investments – legal mechanisms – such as rules that make market access conditional on the transfer of technology – and coercive mechanisms – such as espionage and the use of research and academic networks. Although China has tweaked these technology transfer mechanisms in response to foreign pressure, nearly a third of EU companies reported in 2020 that they had been compelled to transfer technology to China. And China’s state-owned companies have consistently sought to replace foreign technology and push out foreign firms once they have secured the technology transfer. From wind turbines and solar energy to high-speed rail and telecommunications, technology transfers in these sectors have eroded EU leadership positions in technologies the Chinese state had designated as strategic. In April 2023, the Dutch intelligence service warned that China was targeting high-tech companies and institutions through “corporate takeovers, academic cooperation, as well as illegitimate (digital) espionage, insiders, covert investments and illegal exports.” Such networks conceal the involvement of the Chinese government or army and would pose the “greatest risk to Dutch economic security,” the agency warned.
Herein lies the rub: the EU’s technology restrictions distinguish between ‘purely’ commercial technologies and dual-use technologies. For China, however, strategic technologies are identified in countless industrial plans and are framed as vital to Chinese national and economic security in the struggle for technological leadership. A focus on strategic technologies – those required for fighting climate change, those in which strong dependencies exist, or those that support key advantages in supply chains – is more recent for the EU, such as technologies identified in industrial policy frameworks such as the Chips Act and the Net Zero Industry Act. China’s approach means that the EU cannot treat its strategic technology policy as something separate from agendas set in Beijing or elsewhere.
Finally, the advances in military-civil integration occurring in China – and other countries – and the increasingly central role commercial technologies play in military development mean the EU will need better intelligence on the links between civilian companies, universities, the military sector, and the role of commercial technologies in military end uses. Individual member states do not have the capacities to investigate these complex links alone.
The EU’s fragmented China policy
A serious public discussion is still to take shape in the EU about how China’s quest to become a technology superpower – and how the United States’ determination to prevent this from happening – will fundamentally challenge European security and economic and political engagement with both countries. The EU now faces integrated economic strategies from more than one source that will bend the global economy beyond recognition.
The EU’s challenge is this: with national security returning as a powerful variable of economic strategy in other powers’ capitals, the bloc’s ability to deploy its economic leverage is shrinking. This was evidenced most recently in its relations with the US. Because the IRA forms part of a wider national security-driven China strategy, Washington acted without seriously consulting European allies, offering only ex-post coordinationsome relief through “ex-post coordination.” It is apparent that the EU’s deep and growing security dependence on the US, as exposed with American leadership on the Ukraine war, and its fragmented security positions with respect to China, have hastened the erosion of its economic bargaining power.
While many EU member states share the United States’ concerns regarding the security threat posed by China, there is neither full alignment vis-à-vis China between the EU and the US nor between all EU member states. In fact, the EU has not formally adopted the maintenance of military superiority and technological leadership over China as objectives of its security or China policies. Indeed, the EU has no common security policy or China policy and, unlike the US, it has not clearly defined the role strategic commercial technologies and the trade thereof play in European security. As a result, the EU is yet to decide how European export control policy can contribute to advancing its security policy objectives in face of the rise of China, trade weaponisation, and new technologies.
In a seminal speech on EU-China relations, European Commission president Ursula von der Leyen this year identified these shortcomings when she urged a reassessment of European security interests for exports and investments in China “where dual-use purposes cannot be excluded.” She also correctly identified that the EU will need to consider additional instruments, such as powers to screen investments from the EU to China, and link them up coherently in an overarching economic security strategy. In June this year, the European Commission is expected to propose an economic security strategy that could set out how the EU might pursue this.
Implementing such a de-risking approach will throw up difficult trade-offs. The EU wants to limit the military build-up of rivals – but not limit their economic fortunes. It wants to limit strategic dependencies – but not friend-shore. The EU wants to retain its powerful economic voice – but not share its national security competencies. The bloc wants to secure its economy, but not violate existing international trade rules. Yet its de-risking agenda must tackle these trade-offs head-on. To address this, the EU will require a strategic technology policy in peacetime that not only limits its own vulnerabilities but also identifies and ringfences asymmetric advantages needed for deterrence or even economic warfare.
The economic-security world order under strain
Recent difficulties in the WTO expose the tightly interwoven relationship between the economic order and the security order. They should compel the EU to move quickly ahead with enhancing its own policy grounding in the critical area of strategic export controls.
There is no doubt that retaining the WTO as the most important international trade body is in the EU’s interest – to protect its place as a global economic power (not least since there are no better options currently available). But the WTO currently finds itself seriously struggling to handle the challenge presented by a securitised global economy in which the US has turned its back on much of the organisation. When the Trump administration’s argument that tariffs on steel and aluminium were a matter of national security came under formal challenge at the WTO, the organisation was obliged to make a judgment as per the rulebook. Unsurprisingly, the Biden administration snubbed the WTO’s recent ruling on the US measure. No American administration will allow a panel of three bureaucrats in Geneva to determine what is or is not in America’s national security interests.
There is therefore a mismatch between the way in which powerful states are using economic means to pursue geostrategic ends, and the institutions available to manage such competition safely.
Challenging obvious protectionism under the guise of national security is important if the global trade system is to survive. But the legalistic approach to addressing trade and security issues as enshrined in the WTO is also reaching its limits: the geopolitical foundations on which this approach was built are eroding. There can be no functioning open trading order without a corresponding security order underwriting it. The General Agreement on Tariffs and Trade, the cold war predecessor to the WTO, was unequivocally linked to US great power competition with the Soviet Union, and was part of a wider strategy to strengthen allies against the communist threat. The drive towards open markets among Western economies was possible not least because bolstering the Western economic bloc assisted Washington in its geostrategic competition with Moscow. After the end of the cold war too, the WTO was not operating in a geopolitical vacuum, as some now claim in hindsight. Despite the push in the 1990s from companies to expand free markets globally, the strategic arguments to allow China to accede to the WTO in 2001 were deeply geopolitical in nature, based on a gamble that economic and political change in China would support American geopolitical interests.
With this gamble not paying off and having lost all favour in Washington, the security foundations on which the WTO was built will need to be relaid. Europeans cannot therefore hope to save the open trade order if it continues to lack a security underpinning. They must honestly consider that in the absence of a national security valve that allows for US-China strategic competition, the WTO will be further relegated to the backbench of international organisations. “The commonest error in politics is sticking to the carcass of dead policies,” former British prime minister Lord Salisbury remarked in 1877. For the EU, this means it must table experimental models for managing trade in a geo-economic world, such as through a political body or a mediation process. The aim would be to ensure certain contested trade matters do not undermine the wider rules-based system of international trade.
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About the Author
Tobias Gehrke is a senior policy fellow at the European Council for Foreign Relations, based in the Berlin office. He leads ECFR’s Geoeconomics Initiative.
Julian Ringhof is a policy fellow with the European Power programme at the European Council on Foreign Relations.