The Mobilisation of EU Market Power: Drivers, Limits and Future Prospects
by Johannes Jarlebring
The EU is currently mobilising its market power through a range of new policy tools. Examples include the Climate Border Adjustment Mechanisms (CBAM), the International Procurement Instrument and the Anti-Coercion Instrument. The general aim, as explained in the EU’s trade policy review and the recent industrial strategy, is to make the EU stronger, more assertive and more geopolitically relevant.
However, the actual implications of this mobilisation are largely unknown. Can the latent powers vested in the internal market really be transformed into effective, market-powered external action? There is an urgent need to understand how the EU machinery actually works when it comes to the use of market power. Which factors drive, constrain and condition the EU’s actions, thereby determining how, why and when the EU actively projects its market powers externally?
My recent article in the Journal of Common Market Studies addresses these questions by studying the EU’s use of blacklisting. Blacklisting is a coercive technique by which the EU threatens to restrict access to the internal market by assessing third countries’ regulatory regimes in specific sectors.
Three blacklisting schemes are currently in operation making it a relatively rare practice. However, blacklisting belongs to the broader family of trade-based sanctions – a prominent foreign policy tool. Moreover, it is an example of a coercive variant of so-called regime vetting, a technique frequently used by the EU to influence regulatory regimes in third countries.
Based on an examination of blacklisting in two policy areas, fisheries and taxation, the article finds that two main factors can explain why and when the EU uses blacklisting. When combined, these factors generate external action that is strikingly inconsistent.
Why and when blacklist?
EU elite actors act to promote the rule of law internationally, which explains why blacklisting schemes emerge. In both fisheries and taxation, EU external action was initiated by EU elite actors who undertook to develop international law with the purpose to define criteria for regulatory good governance. In fisheries, the responsible DG of the European Commission took action internationally to shape the first legally binding international convention on Illegal, Unregulated and Unreported (IUU) fisheries. In taxation, senior European officials engaged in the OECD to anchor EU criteria regarding ‘unfair’ corporate taxation. When blacklisting schemes were eventually introduced in EU law, they were explicitly linked to the same international law that EU elites had contributed to developing.
Domestic stakeholder interests also heavily condition and constrain the EU’s use of blacklisting, which largely explains when this technique is used. To begin with, the EU set up blacklisting schemes only when domestic stakeholders had clear commercial motives to support these schemes. In both fisheries and taxation, blacklisting was introduced as part of regulatory packages that included stringent internal market rules. These rules threatened to have a negative impact on EU producers as third countries could engage in regulatory arbitrage or rule deviation. Secondly, when it comes to the actual exercise of the blacklisting schemes to third countries, the EU almost exclusively blacklists very small third countries, while avoiding blacklisting large countries that blatantly violate EU criteria.
The EU as an inconsistent power
The general lesson from these finding is that the EU is institutionally predisposed to actively promote norms internationally and to break the norms it sets out to defend.
EU integration has generated dense networks of EU elites, often centred around the European Commission. These networks are central to the policy-entrepreneurship that drive EU external action in various sectors, be it climate change, labour rights or – as in the case of blacklisting – fisheries and taxation. A key insight is that their aims are not shaped by aggregated domestic interests or EU level capabilities, but rather follow from the interests and ideas represented by the networks. As their main tools and opportunity structure is constituted by supranational law, the networks of policy entrepreneurs will act to promote the development of such law.
EU integration has also generated an effective machinery for national control, mainly centred on the EU Council. When it comes to economic and regulatory issues, this machinery is activated when initiatives risk generating cost, in particular asymmetric costs. Only when the benefits, in terms of reduced negative externalities from abroad, outweigh the costs, does the national control machinery allow the EU to act.
This shapes not only the EU’s use of blacklisting, but its use of market power more generally, for instance when it comes to sanctioning violations of human rights or sustainable development clauses in its trade agreements. In cases like these, EU sanctions norm infringements almost exclusively in relation to very small countries and avoid moving against large countries.
This means that the EU is neither a ‘normative power’ promoting international law, nor a ‘superpower’ pursuing domestic interests, nor a ‘regulatory power’ engaged in functionalist extension of internal policies. Rather, the EU can be considered a ‘liberal power’, whose external action is driven and constrained by factors that are tightly associated with its identity as a union of liberal states.
Ill-suited to play geopolitics?
The findings indicate that the EU is not institutionally wired to use its market powers to play advanced geopolitical games with other large powers, through so called economic statecraft or ‘weaponised’ interdependence. Not only is such cross-sectoral action beyond the perspective of the networks of policy-entrepreneurs generated by EU integration, but it is also costly and therefore difficult to push through the national control machinery.
This institutional wiring is further illustrated by the ongoing development of the new wave of market-powered instruments. In fact, few of them concern outright foreign policy, geopolitics or geoeconomics, and most are tightly associated with specific aspects of the EU’s growth agenda; this is currently centred on the twin transition to climate neutral and digital societies. Rather than demonstrating a shift towards a ‘realist stance’, there is evidence of a liberal Europe assertively externalising its regulatory policies and progressively learning to calibrate power projection in ways that fit its complex, composite nature.
For instance, the recently agreed Deforestation Regulation illustrates how the EU fine-tunes its regime vetting schemes to avoid overly impacting (legitimate) trade. The new regulation sets tough requirements on timber exporting third countries, but rather than blacklisting poor performers, the Commission is empowered to flexibly impose gradually strengthened due diligence requirements on firms that import from countries with poor regulatory regimes.
Other examples illustrate how learning can allow the EU to play a geopolitical role. For instance, the Commission struggled to declare the U.S.’s data rules adequate under the GDPR, as its decisions were invalidated by the European Court of Justice. Staying clear of such troubles, the EU’s new Artificial Intelligence Act includes no adequacy clause but lays the basis for mutually recognizing third country regimes. This has allowed the EU to engage in intense and highly geopolitical discussions with the US on a global AI regime. The CBAM may offer similar opportunities, potentially allowing the EU to engage with third countries to set criteria for the governance of climate intensive industries.
Provided that this type of calibration can reduce costs sufficiently to avoid triggering national control mechanisms, the EU may be set to significantly strengthen its role as a global regulator, including in sectors of major geopolitical interest.
Author:
Johannes Jarlebring is a PhD candidate at Uppsala University. He has previously served many years as a civil servant and consultant specializing in EU matters. Twitter handle: @jjarlebring
