Green Economies

Balancing National and Economic Security - An Assessment of European Union’s Risk Framework for Critical Technologies

TL;DR
Recent global events, such as the Russia-Ukraine conflict and the Covid-19 pandemic, have prompted a resurgence of export controls. In response to these geopolitical developments, the European Union (EU) came out with its risk-assessment framework, targeting crucial technology sectors like advanced semiconductors, artificial intelligence, quantum technologies, and biotechnologies. However, while emphasizing risk mitigation, the framework lacks adequate measures to actively promote the growth of critical technologies. The absence of supportive strategies for research and innovation could potentially hinder EU's competitiveness. Moreover, increased scrutiny through Foreign Direct Investment (FDI) screening and export controls could negatively impact businesses, causing disruptions in supply chains and global trade. The EU's approach serves as a case study for jurisdictions considering similar steps in the future, highlighting the importance of balanced interventions that safeguard national security while also promoting innovation and research of the targeted segments.

In recent decades, global cooperation and multilateral partnerships, such as regional trade groups, free trade agreements (FTAs), and regional trade agreements (RTAs), have gained momentum. These agreements serve as catalysts for economic development, helping countries integrate into global supply chains by reducing import barriers and enhancing domestic manufacturing capabilities through increased investment and technology transfer.[1] At the same time, there has been a resurgence of export controls in response to recent geopolitical events, notably the Russia-Ukraine conflict and the Covid-19 pandemic.[2] While frameworks like the World Trade Organization's (WTO) General Agreement on Tariffs and Trade (GATT) aim to limit countries' use of export controls, the International Monetary Fund (IMF) suggests that exceptions for "essential products" and national security render the agreement somewhat weak. According to the IMF, while export restrictions are not new, their scope and severity have broadened. Instead, the IMF recommends targeted and temporary measures if utilised.[3]   

Countries like the United States, Japan[4] and Australia[5] have used measures such as export controls and customs licences to address national security concerns in the past. The European Commission’s European Economic Security Strategy (EESS) and associated the risk-assessment framework[6] introduced on Oct 3, 2023 is the latest addition to this list. 

The EU Economic security framework targets crucial technology sectors, and evaluates four broad aspects that pose national security risks to the EU. These include (A) resilience of its supply chains, including energy security; (B) physical and cyber-security of critical infrastructure; (C) technology security and leakage; (D) weaponization of economic dependencies and economic coercion. These risks were identified as a result of geopolitical events such as the ongoing Russia-Ukraine war and the Covid-19 pandemic, which exposed EU’s vulnerabilities in terms of energy security, pandemic preparedness, resilience of supply chains and economies, as well as key technologies. They are critical as they can occur along the entire value chain, from the knowledge creation steps to commercialisation and manufacturing at scale, according to the Commission. Based on this, four critical technology areas pose the most imminent and sensitive threat to the EU's national security. These include (1) Advanced Semiconductors, (2) Artificial Intelligence (AI), (3) Quantum Technologies and (4) Biotechnologies. All four have important applications in several domains, particularly military and defence. Semiconductors for instance are key components of wireless sensors and navigation systems,[7] while biotechnology has application in genetic engineering, and is critical for the development of new medications. Quantum technologies and AI, while still relatively new, have found application in nuclear power plants[8] and image processing for surveillance[9] respectively. Thus, these technologies are described by the Commission as having a potential risk of civil and military application i.e., they will be used widely for these activities, as well as having the potential for being misused for human rights violation. 

Although the specific recommendations are yet to be finalised amongst member states, the broad scope of the EU risk mitigation framework mirrors strategies adopted by like-minded nations, particularly the United States.[10] In the past few years, the US specifically targeted export, re-export or transfer of critical technology items to impede China’s military and technological advancement. In response, China recently came out with its own set of export controls on critical materials used for manufacturing semiconductors and chips. Due to their high electrical conductivity and crystallisation properties, Germanium and Gallium are key components used in the manufacturing of semiconductors and chips. On July 3 2023, China’s Ministry of Commerce announced export licensing requirements for Germanium and Gallium.[11] This is a critical development since China produces 98 percent of the world’s Gallium, and holds control over 68 percent of global refined germanium production in other countries, mainly in Southeast Asia.[12] 

Such tit-for-tat moves can have severe implications on trade. With the EU formalising its measures in the coming months, it becomes important to analyse how their economic security framework may impact innovation, businesses, and international trade. 

Balancing protection and promotion of critical technologies - One of the key concerns of the EU's economic security framework is the heavy emphasis on de-risking using foreign subsidies, foreign direct investment (FDI) screening and export controls. These are strategic policy instruments that can be enforced immediately and at scale across the EU. However, corresponding steps to promote critical technologies through industrial and competition policy are absent. For instance, Japan’s economic security policy included promotion of critical technologies through subsidies.[13] Similarly in the US, the Defense Production Act (DPA) is an investment policy specifically targeted towards advanced microelectronics and production of state-of-the-art integrated circuits in the US.[14] In contrast, steps to promote research and innovation of critical technologies in the EU security framework are vague. For example, the strategy talks about deepening the EU ‘Single Market’, ‘investing in the economy of the future through sound macroeconomic and cohesion policies’ and upskilling the European workforce. These interventions can take years to formulate, implement and to create impact. The EU Chips Act introduced in 2023 is a step in the right direction, as it aims to promote domestic manufacturing of semiconductors and chips.[15] However, similar frameworks for the remaining three critical technologies are absent. Hence, lack of the requisite tools to promote growth of future critical technologies could potentially result in the EU losing out its competitiveness over the coming years. 

Impact on businesses and global supply chains - Businesses in the EU fear that increased scrutiny in the form of FDI screening and export controls, combined with a lack of promotive tools for improving in-house capabilities could negatively impact their operations.[16] It could harm their ability to act as an original or intermediate supplier, or as the final recipient of supplied goods or technology.[17] The Semiconductor Industry Association argues that excessive and unilateral export restrictions can create an unlevel playing field for businesses, who will have to compete with foreign competitors that do not bear the same export-related administrative and bureaucratic burdens.[18] Delays and backlogs, of even a few days, can force buyers to look for alternative options and ultimately cause long-term harm to their operations and the workers they employ. 

In conclusion, the EU's economic security framework reflects a notable imbalance between protecting critical technologies and actively promoting their growth. It can serve as an important case study for other jurisdictions who may wish to take similar steps in the future. While countries have the right to safeguard their national interests and economic security, restrictions on technology exports must not be unilateral in approach, and focus on targeted, narrow interventions instead. The EU framework aims to proportionally address technology-related risks while mitigating negative spillover effects on the European and global economy. However, whether the EU can effectively fulfil these promises, without first addressing imbalances and gaps in its economic security framework to sustain its technological competitiveness remains to be seen.

[1] Sabala (2023) Free Trade Agreements Mean Export Growth for Some Countries, Reallocation of Trade for Others. U.S. Department of Agriculture. Economic Research Service.

[2] Bown (2023). The Challenge of Export Controls. International Monetary Fund.

[3] Ibid. Bown (2023).

[4] The National Security Strategy adopted by the Japanese government in December 2013 used export control measures to monitor export of specific goods to a foreign country or transfer of specific technologies to a foreign person or a foreign country.

[5] Australia has several legislative acts such as  the Defence Trade Controls Act (2012) and the Customs (Prohibited Exports) Regulation 1958 - Regulation 13E to control export of goods and technologies used in defence and military systems. 

[6] On June 23 2023, the European Commission adopted a Joint Communication on European Economic Security Strategy (EESS) aimed at minimising risks arising from certain critical technology areas. Subsequently, on October 3 2023, the European Commission released a risk-assessment framework for the EESS with recommendations on addressing “Critical technology areas for the EU's economic security” with Member States.

[7] Arjun Gargeyas (2022). The Role of Semiconductors in Military and Defence Technology. Defence and Diplomacy Journal Vol. 11 No. 2,

[8] Medium (2022).

[9] PBS News (2023).

[10] Vela (2023). The Four Technologies EU wants to keep safe from China. Politico.  

[11] The US had first introduced its policy on export controls in 1976 called the Arms Export Control Act (AECA), followed by the International Emergency Economic Powers Act (IEEPA) in 1977, and the Export Controls Act of 2018 (ECA). All three were largely aimed at controlling export of defence articles, ‘dual-use’ goods, that is, items that have both commercial and military applications, and nuclear materials and technology; and any other items that would assist in the advancement of such technologies. MIT Technology Review (July, 2023).  China just fought back in the semiconductor exports war.

[12] Ibid. MIT Tech Review (2023).

[13] Adler (2023). What the EU doesn’t get about Economic Security. Foreign Policy.

[14] U.S. Department of Defense (2023). Defense Production Act Title III Presidential Determination for Printed Circuit Boards and Advanced Packaging Production Capability.

[15] European Chips Act (2023). European Commission.

[16] Gehrke (2023). De-risking in action: How the EU can build on its critical technology list. European Council on Foreign Relations (ECFR).

[17] Brackett (2023). Impacts of Sanctions and Export Controls on Supply Chains. Global Investigations Review.

[18] Semiconductors Industry Association (n.d.). Reduce Burdens on the Export of Commercial Semiconductors.