In the recent past, the EU and the U.S. have released analyses of their strategic dependencies and proposals of actions to mitigate them. Both identified semiconductors, pharmaceuticals, batteries and ‘rare earths’ as strategic sectors with vulnerable supply chains due to their highly concentrated reliance on a small number of suppliers. The need for such action plans is motivated by a changing world economic order and were accelerated through the COVID pandemic, as well as Russia’s aggression in Ukraine. In addition, China’s ambivalent position on the war in Ukraine has brought new light to its mercantilism and the dangers implicit in the rise of techno-nationalism and competitive autarchy, as the conflict has accentuated the autocracy-democracy divide. At its highest level the war has also brought home to Europe, the United States, and other democracies the issue of strategic dependencies.
The war, besides the issue of energy, has further affected global supply chains that had already been disrupted during the pandemic. These shocks have made it even more important than before for both US and the EU companies to rethink their regional and global supply networks. While war in Ukraine is the focus of short-term action, new thinking has also focused attention on China, given its critical role in global supply chains and growing concern with its geostrategic objectives. Its focus on a range of technology domains where it explicitly seeks either global leadership or market dominance (including semiconductors, solar energy, rare earth magnets (REMs), electric vehicles, and artificial intelligence), when coupled with its more aggressive geopolitical stance, pose a challenge to market democracies that can no longer be avoided.
The Ukraine war and China’s rise have thus given new impetus to the imperative of resetting and reinforcing the transatlantic partnership and the broader liberal-democratic order it represents. They have re-enforced a process that was already underway since the end of 2020. In 2021 the U.S.-EU Trade and Technology Council (TTC) was established. In its inaugural statement the TTC expressed support for ‘the continued growth of the EU-U.S. technology, economic and trade relationship, and cooperation in addressing global challenges’. Most recently, in May 2022 TTC’s 50-page statement that it produced the new course became clear. Points 14-17 of the statement explicitly outline an ambition for coordinated economic actions between “trustworthy and reliable partners” to parry attempts by “autocratic countries” to “undermine the security of other nations.” These recent statements and the establishment of the TTC represent an opening round, the vision, and the intention, that needs to be made reality. There are still tensions and issues to be resolved. A series of actions related to the ongoing transatlantic reset and realignment have been taken (e.g., Boeing-Airbus dispute, U.S. tariffs on European steel and aluminium and European tariffs on U.S. goods). Divergences and irritants do however remain (e.g., U.S.-EU Privacy Shield, Digital Markets Act, “Buy America” rules, Inflation Reduction Act (IRA) for electric vehicle tax credits).
This is happening as trade and investment between the United States and Europe have grown significantly. In 2022 the U.S. imported more from Europe than from China, reversing the pattern where since 2010 China has been America’s dominant trade partner. In September 2022 Germany’s exports to the US surged 50% on a year-over-year basis. The U.S. has also become a major military and energy supplier, supporting the strengthening of European defences, and helping to replace Russia as a natural gas supplier. As some European companies have shifted investment from China to the U.S., Europe’s foreign direct investment in the U.S. grew 13.5% in 2021 to $3.2 trillion, as U.S. DFI in Europe grew 10% to roughly $4 trillion, dwarfing investment flows between the U.S. and China.
