June 08, 2021

The New Geo-Economic Environment and the EU’s Capacity to Act

The European Union must position itself in a new geo-economic environment in which the United States and China are increasingly using their economies to shape international relations, as well as regional and global regulatory structures. Although the EU has a good grasp of the challenges that this new environment poses, it does have vulnerabilities in its bilateral and multilateral channels that require attention.

Abstract image illustrating the topic of geo-economics
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Below you will find the executive summary of this report and the description of the “Ideenwerkstatt Deutsche Außenpolitik,” the project through which it is published. To read the paper in its entirety – including all info graphics, footnotes, and citations – please download the PDF here.

Executive Summary

The United States and China are increasingly using their economies to shape international relations, as well as regional and global regulatory structures. Currently, the EU is in the process of developing sufficient measures and policies to react to – as well as influence – these strategies, thus addressing increasing concerns about being taken advantage of by China (and possibly the United States). The EU needs to use its trade policy actively to achieve strategic goals and to defend its interests and values, which are under pressure. In order to achieve the best-case scenario, which focuses on effective multilateral cooperation within the framework of the WTO, the EU needs the support of the United States and China in the long run, and this means finding ways to influence and team up with them, despite the present competitive international environment.

There has been a realization by the EU that it needs to reinforce its own trade toolbox to restore an economic level playing field with China and to address Beijing’s trade-distorting measures. The EU has thus acknowledged that an overhaul of its trade measures is necessary to adapt to a newly geo-economic trading environment. The arrival of the Biden administration also shows the need to think about how to re-engage with old partners, and to work more closely together with the United States to induce reforms in China; but the EU also needs to diversify and look for additional strategic partners.

Trade has become one of the most important and stable pillars of the strategic relationship between the EU and third countries. Due to the well-established structure of EU trade policy, the EU is a very active agenda-setter regarding the activities of its member states across a growing range of related policy fields. Due to the exclusive EU competence over trade, the European Commission has also been able to quickly react to crises. Nevertheless, European unity will remain key if the EU wants to continue its successful and strategic trade policy in the future.

On a bilateral level, the EU is increasing its resilience with regard to the great power competition and exporting its norms and values through the successful negotiation of various bilateral and regional trade agreements. The EU has an almost global net of different kinds of trade agreements in place. In the future, the EU also wants to strengthen the connection and enforcement between trade and climate issues. On a multilateral level, the EU is highly dependent on the transparent and rules-based trading system of the WTO. But the organization itself is experiencing its deepest crisis since its creation in 1995 with all four pillars of the WTO deadlocked to a greater or lesser degree.

The relevant challenges and opportunities in trade policy are certainly on Berlin’s radar. Germany has realized that Europe needs to adapt to the changes in the new geo-economic trading environment because great power competition has negative consequences for EU/German open trade and investment. Germany has a strong influence on European trade policy and generally a positive impact on the EU’s capacity to act strategically in trade. However, the strong push for and implementation of German interests might increase EU divisiveness and hamper EU unity in the long run.

In general, European trade policy is thus capable to at least act in all scenarios and on all levels. But continuous reform efforts are necessary to keep this status. It is critical to unblock the WTO, and here, EU and US leadership is necessary. As such, the EU is using its capacity to act in trade in a constructive way, to make Europe more resilient internally against geo-economic pressure.

Ideenwerkstatt Deutsche Außenpolitik

This monitoring study was written within the framework of the project “Ideenwerkstatt Deutsche Außenpolitik,” a process of reflection on the capacity to act in German and European foreign policy, the underlying conditions for which are undergoing a fundamental transformation. In addition to the much-discussed changes to the international system and increasing great power competition between the United States and China, technological developments, new security threats, the consequences of climate change, and socioeconomic upheavals are just some of the developments that will determine the future tasks and international impact of German foreign policy. Furthermore, the COVID-19 pandemic poses numerous political, economic, and societal risks and accelerates many existing trends in the multilateral system with immediate consequences for Germany and the EU. In light of these challenges, the project “Ideenwerkstatt Deutsche Außenpolitik” aims to put German foreign policy to the test – through evidence-based analyses and interdisciplinary strategy discussions – and contribute to strengthening Germany’s and the EU’s capacity to act in foreign policy.

The project focuses on four thematic areas that are highly relevant for the future ability of German and European foreign policy to act: geo-economics, migration, security and defense, and technology. As part of the project’s overall strategic and analytical effort, DGAP will produce a monitoring study on each of these areas – four in total, including this one. All four studies analyze Europe’s capacity to act and provide recommendations to EU and German policy-makers on how to strengthen this capacity. In order to provide a nuanced and yet comprehensive picture, they take the different stages of the policy cycle into account: (1) problem definition, (2) agenda-setting, (3) policy formulation, (4) implementation, and (5) impact assessment. In gauging Europe’s capacity to act, the studies refer back to a series of scenario workshops on the four thematic areas that were held in late 2020 and in which DGAP and external experts created status quo, best-case, and worst-case scenarios for how the future might look in 2030. Taking the respective scenarios into account, the monitoring studies analyze to what extent the EU and Germany are prepared for the worst case, are aware of the implications of the status quo, and move toward achieving the best case. The report that distills the results of the scenario workshops and all four monitoring studies can be found here as soon as they are published:

This project is funded by Stiftung Mercator.

Bibliographic data

DGAP Report No. 11, June 8, 2021, 27 pp.