How To Devise a Coherent and Cohesive National Economic Security Strategy (2023)

> Identify and quantify critical cross-border economic vulnerabilities.

> Pursue reforms to mitigate the most critical economic vulnerabilities. Risk mitigation policies should focus on reducing both economic vulnerability and concomitant political coercibility, while taking into account the relevant tradeoffs in terms of cost-effectiveness.

> Devise a credible and effective deterrence policy to manage the economic security dilemma, consisting of vulnerability mitigation policies to facilitate ‘deterrence by denial’ as well as credible and effective retaliatory policy to facilitate ‘deterrence by punishment.’ Deterrence policies should (1) be well-calibrated in terms of the potential aggressor’s politically most salient economic vulnerabilities, (2) be sustainable in domestic economic and political terms (endurance), (3) be sufficiently robust in the face of possible escalation (retaliation and counter-retaliation), (4) be designed as a ‘threat that leaves something to chance’ (incl. automaticity and severity of response), and (5) be very explicit what type of unfriendly actions are considered potential escalation thresholds that substantially increase the risk of retaliation. Taken together, this should help make deterrence credible and effective, while avoiding an ‘escalating commitment trap.’ (If deterrence is not viable, then strategy should focus on mitigation policies.)

> Create a system of collective economic security, consisting of military allies (and allies of allies?), whereby economic aggression against one is considered an attack against all, committing members to coordinated retaliation and/ or mutual assistance.

> Integrate economic security policies with the soon-to-be-released national security strategy, ensuring that they are credible, effective, strategically coherent (not haphazard), integrated (across trade and finance) and appropriately calibrated (in terms of costs and benefits) in each case/ country/ scenario. A coherent economic security policy needs to reduce vulnerabilities (defensive/ securitization) and strengthen the credibility and effectiveness of deterrence and retaliation policies (offensive/ retaliatory/ weaponization).

GEO-EOCNOMIC VULNERABILITIES	MITIGATION POLICIES	DETERRENCE & RETALIATION POLICIES	BENEFITS & DRAWBACKS OF MITIGATION POLICIES	POLICY INSTRUMENTS
				- National Level	- Intra-EU	- Transatlantic/ International
Exports =>  vulnerable to import restrictions   -Reduces exports and economic growth	Identify export dependence in terms of value-added   Support export diversificationthrough (1) FTAs, (2) ‘targeted,’ export promotion, (3) ‘guided’ investment guarantees   (Create sufficient fiscal space to mitigate short-term impact of trade restrictions)	Leverage size of EU market   Threaten quasi-automatic (proportional or disproportional) retaliatory import restrictions, (if balance of power allows (targeting politically sensitive sectors in aggressor country)	Benefits: Limits export dependence (relative to baseline)   Drawbacks: FTAs may be trade-diverting   Even large number of free-trade agreements  will fail to offset significantly reduced market access in case of very large countries (e.g. China)	Delegate deterrence and retaliation policies to EU Commission (subject to clearly defined, pre-determined parameters)	Further develop ‘trade defence’ policies (incl. anti-coercion tool)   Develop policy instruments allowing for horizontal escalation (or non-trade retaliatory measures)   Set up intra-EU compensation mechanism to limit members’ incentives to ‘entrap’ EU in ‘unprovoked’ trade conflict	Create defensive, collective economic security alliance, committing individual members to coordinated deterrence and retaliation policies (and avoid ‘third-party spoiling’ behavior)   Adopt a policy of ‘extended  economic deterrence’
Imports => vulnerable to export restrictions   - Limits access to critical goods, disrupting vital supply chains	Identify critical import dependencies    Reduce critical import dependence through (1) import diversification (incl. FTAs), (2) domestic production, (3) creation of emergency stockpiles	Leverage ability to withhold critical exports   Threaten automatic (proportional or disproportional) retaliation, (if balance of power allows (targeting politically and / or economically sensitive sectors)   Evaluate the viability of secondary sanctions to deter third-party spoilers	Calibrated  policy should combine various mitigation options, depending on desired economic cost/ risk reduction tradeoff/ risk tolerance   Benefits:  Reduces dependence on ‘critical’ supplier   Drawbacks: Parallel, alternative supply chains raise costs; onshoring is generally even more costly	Review export control policies  in context of national security strategy   Coordinate/ integrate export control policy with inward/ outward foreign direct investment screening	Enhance intra-EU coordination/ integration of export control policies to make threat of retaliatory export restrictions more credible and effective    Create EU buyers’ cartel and set up a common EU fund to finance emergency stockpiles of critical goods, providing quota-based access to in case of emergency	Create collective economic security alliance, committing members to coordinate deterrence and retaliation policies    Set up intra-alliance ‘insurance scheme’ to provide mutual assistance in terms of critical goods in case of severe supply disruptions
Inward foreign direct investment => technological leakage   -  Gives acquirer ability ‘lock up’ or transfer cutting-edge technology, undermining national technological leadership and future innovation potential   - Puts at risk national security (incl. foreign ownership of critical infrastructure; other critical, especially defense-related economic sectors)	Identify ‘critical and foundational technologies’ relevant to future economic competitiveness and other national-security-related vulnerabilities   Screen inward foreign direct investment (and other investment allowing for technology leakage, like JVs)   Focus screening countries deemed to be (1) ‘non-market’ economies and (2) non-allies	Leverage position as provider of advanced technology   Threaten to restrict ability to invest/ acquire assets in specific sectors   Demand reciprocity or equivalent access to sender country’s respective high tech sectors to create a level playing field	Benefits:  Mitigates (‘non-market-driven,’ politically driven)  technological leakage and safeguards protects national security   Drawbacks: Economic losses due to (1) reduced levels of investment, (2) reduced strategic partnerships (esp. high tech)	Review existing legislation in light of new national security strategy and appropriate definition of critical (future) technologies   Optimize policies to achieve desired risk reduction/ economic costs tradeoff   Explore if domestic legislation regulating foreign investor behavior can function as a substitute for outright investment restrictions (esp. critical infrastructure)	Enhance intra-EU coordination/ integration of inward FDI screening mechanism to make threat of restrictions more credible and effective (and prevent third-party spoilers)   Create EU-level equivalent of America’s CFIUS to monitor uniform implementation of converging rules   Strengthen EU Foreign Subsidy Regulation in terms of economic cost/ security benefits (including in JV and PE space)	Coordinate inward screening policies in order to facilitate transatlantic/ intra-alliance investment, technology sharing, diffusion and development
Outward foreign direct investment => vulnerable to ‘forced’ technological transfer   - Risk of technological leakage (e.g. forced transfers, IPR theft and  espionage)   - Risk of discriminatory, treatment  (e.g. regulatory, counter-sanction measures, expropriation)	Identify ‘critical and foundational technologies’ and national-security-related vulnerabilities   Establish outward FDI screening  mechanism with a special focus on (1) countries lacking sufficient legal safeguards, ( (2) non-allies (“countries of concern”)   Support FDI diversification through (1) investment guarantees/ subsidies, (2) BITs   (Put in place effective safeguards (more applicable in case of critical infrastructure than technology))	Leverage position of provider of technology goods    Threaten to restrict further outbound investment and/ or force divestment	Benefits:  Reduces risk of forced’ technology transfer and time-inconsistent behavior of companies   Drawbacks: Economic losses due to  more limited access to overseas markets in terms of asset-, market- and efficiency-seeking investment   Does not really address espionage & IPR theft	Create (narrowly focused) outward investment screening mechanism   Make use of investment guarantees to ‘guide’ and diversify outward FDI	Establish intra-EU coordination and streamlining (esp. with respect to critical technologies)	Coordinate outward screening policies to ensure continued, relatively unfettered mutual, intra-alliance market access in terms of advanced technology
Outward non-FDI investment => vulnerable to financial sanctions   - Risk of asset freezes, expropriation   -Prohibition to buy/ sell designated financial assets (incl. access to currency)	Make mandatory disclosure of country risk related economic and financial exposure for relevant companies to encourage market monitoring	Threaten (proportional or disproportional) financial retaliation (sanctions), such as (1) limiting/ prohibiting access to EU financial markets (incl. euro), (2) freeze existing assets, (3) assess cost/ benefits/ viability of secondary sanctions	Benefits:  Creates incentives to manage country risk more actively, potentially reducing risk of excessive political-risk-driven financial losses   Drawbacks: Foregone investment opportunities and financial profits   Measures may be insufficient to alter firm behavior (esp. in case of large markets like China)	Put in place coherent financial counter-sanction policies	Delegate more authority to EU Commission (incl. Anti-Coercion Tool)   Establish fully-fledged EU sanctions agency to monitor effective enforcement   Lower EU majority requirements and establish intra-EU compensation mechanism to distribute costs of sanction measures more equally    Structurally, strengthen euro architecture, including capital market integration	Collective economic security to strengthen credibility and effectiveness of deterrence and retaliation (and avoid ‘third-party spoiling’ behavior)