The end of innocence in European trade

The idea that trade produces peace between nations has an old history in Europe.

“Peace is the natural effect of trade,” the French Enlightenment thinker Montesquieu wrote in his 1748 work, The Spirit of Law. “Two nations who traffic with each other become reciprocally dependent.”

In modern times this concept has been most closely associated with Germany, as a core principle of its foreign policy. The idea is known as “Wandel durch Handel”, or change through trade – the idea that increasing economic ties with authoritarian regimes will induce political change within them.

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This was the mood of the era when Germany was extending its economic ties east before the fall of the Berlin Wall. But the policy endured long afterwards, a convenient belief for commercial interests that allowed companies to brush off the moral compromises of co-operating with repressive regimes.

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The shock of Russia’s invasion of Ukraine upended this idea that had come to be considered an article of common sense.

Suddenly Germany was held hostage to its dependence on Russia for gas, and Moscow used that leverage to try to control what actions Berlin could take.

It caused a deep rethink in Germany. Following the invasion of Ukraine, “it won’t be Wandel durch Handel – change through trade – any more”, the ruling SDP party’s leader in the Bundestag, Rolf Mützenich, said in the wake of the invasion.

“It will probably be Stabilität durch Handel – stability through trade – instead.”

France had already favoured a more interventionist approach to trade, and the shift in Berlin created a new consensus at the heart of the European Union.

The policy implications were laid out in a European Commission paper setting out a “European economic security strategy” this summer.

It argued that supply chains should be made more resilient, critical infrastructure must be protected from physical and cyber attacks, crucial technology should not be leaked to rivals and the EU must have the power to retaliate if it is subject to the “weaponisation of economic dependencies or economic coercion”.

This platform made big strides this week with a vote in the European Parliament in favour of a new tool that would allow the EU to retaliate with trade restrictions in cases of economic blackmail. This was in part inspired by China’s decision to temporarily delist Lithuania from its customs system, in effect blocking its imports, after the Baltic State allowed the opening of a de facto Taiwanese embassy.

The European Commission also launched a risk assessment of key technologies including microchips and artificial intelligence technology to see if they need to be subject to special protections to avoid the know-how being poached by hostile powers abroad.

“We want to protect ourselves against potential risks,” internal market commissioner Thierry Breton, a French man sometimes talked about as eyeing Ursula von der Leyen’s job, said as the risk assessments were launched on Tuesday.

“We’ve also learned from previous crises that we’ve been through during recent years,” he continued. “Europe stays open for business. But we’re being a bit less naive here.”

It is too late to learn lessons about the risks of economic dependency on Russia. Few say it aloud for fear of antagonising Beijing, but these policies are in large measure now directed towards the EU’s other great geopolitical exposure, China.

The EU fears being caught out once again if there is a big geopolitical upheaval in relations with China, for example if Beijing were to invade Taiwan.

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What does this shift to become “less naive” in trade mean for Ireland?

Ireland was a big beneficiary of the EU’s free trade era, which created the environment in which the country was able to attract so many multinationals to choose the island as their base in Europe.

There is potential for Ireland to benefit from EU efforts to favour domestic production of strategically crucial tech like microchips, through measures like the so-called European Chips Act.

But fights may also lie ahead.

It’s no secret that some countries would like export restrictions on some crucial technologies, and for overseas investment plans to be screened for risk that technology might be stolen through manufacturing abroad.

Ireland sits in the so-called “free trade” camp, together with like-minded countries such as Sweden.

Their argument is that the solution to concerns about risk in supply chains is more free markets: the more options for suppliers that exist, the argument goes, the more resilient supply chains will be.

If Ireland greets interventionist trade ideas with a sceptical eye, it will not be alone.