The risk of inaction: Economic threats against Europe

America and China now use grave economic threats against Germany and Europe. Here are three reasons why they feel they can do so – Europe’s incapacity to protect itself from the effects of sanctions on Iran, Turkey, and Nord Stream 2.

Last week, Germany’s defence minister confirmed that the White House threatened to impose car tariffs on European countries unless they triggered the Dispute Resolution Mechanism of the Iran nuclear agreement – an act that could lead to the demise of a deal Europeans want to uphold. The same week, the New York Times revealed that Beijing had figured out that it too could bully Europeans in this way, using the threat of such tariffs to force Germany to accept a bid by Huawei to build the country’s 5G infrastructure. Yet it is not like Europeans hadn’t been warned. In sanctions policy alone, there have been three major signs of this shift towards economic coercion in recent months.

The first warning shot was about Iran, of course. It is true that Europeans are now considering whether to reimpose their own sanctions on the country, in response to the latest round of escalation in the Middle East. But, until recently, it was their declared will to continue trading with the country despite harsh US sanctions. They even took active steps to help European companies circumvent the measures. Nonetheless, after trying to protect at least some of their sovereignty (and their nuclear non-proliferation policy), Europeans have woken up to the fact that a great power has almost completely cut off their trade with a third country against their will, despite their attempts to prevent this. Europe now finds it almost impossible to export even humanitarian goods to Iran. Observers in capitals around the world have doubtlessly noticed Europe’s difficulties and its lack of political will.

Although Iran has never been one of Europe’s major trade partners, the second warning shot demonstrated how potentially devastating US sanctions against European companies could arrive overnight, in a way that was totally unforeseen even among experts. Yet the incident did not get the attention it deserved. After Turkish President Recep Tayyip Erdogan deployed troops in northern Syria in October, US President Donald Trump faced scathing criticism at home for abandoning the Kurds. Within hours, he prepared an executive order that included drastic coercive measures against Turkey, declaring that he would “destroy” the country’s economy if Erdogan acted in a way he did not like. If implemented, these measures would have had a dramatic effect on German and European companies. As part of the order, Trump granted his treasury secretary extensive powers to impose penalties on all companies involved in yet-to-be-defined sectors of the Turkish economy. Countless European banks and other companies that do business in Turkey would have found themselves suddenly in violation of US law.

Economic coercion and sanctions are Trump’s foreign policy measure of first resort.

Undoubtedly, the US Treasury would have specified the sectors of the Turkish economy it would sanction. And there would have been an outcry from Washington’s allies, if it had actually implemented such dramatic measures on the economy of a NATO partner. European governments could have limited some of the effects of the measures, but it is unclear what tools they could have used to protect their companies and persuade Trump to change course if he had been determined to forge ahead. Luckily, Turkey changed course – by agreeing to a ceasefire with Russia – and Trump let the matter go.

The third warning shot relates to the Nord Stream 2 energy pipeline. The case illustrates how European trade with third countries is under threat from not just an unpredictable president who acts (and tweets) from the gut but also the US Congress, in which members of both US parties may have no scruples about interfering with Europe’s economy when American and European interests diverge. Although these congressional sanctions have only recently become law, they have already had a marked effect: Nord Stream 2’s completion, originally scheduled for late January 2020, has been postponed by at least a year. The US administration also reportedly used private threats to impose car tariffs in this case, making the German government think twice about whether it really wanted to find alternative ways to complete the pipeline.

Both Washington and Beijing have watched how Germany and the rest of Europe reacted to these three warning shots. They could see that, in short, Europeans struggled to respond at all. This may have set a dangerous precedent for both great powers: if they employ enough economic pressure on Europe, they can obtain the foreign policy or economic results they’d like.

Of course, all three cases are highly complex and pose real difficulties. The Iran issue is a difficult topic because the country systematically uses violence for geopolitical ends in the Middle East and poses a threat to Israel. Nord Stream 2 is a difficult topic because the project bypasses its eastern European partners and increases Germany’s dependency on Russia to a degree. And, even in the case of the executive order against Turkey, one could argue that the Trump administration probably would not have implemented the coercive measures as stringently as they were formulated.

Still, the cases should concern even Europeans who are critical of Iran or Nord Stream 2. Sanctions and other forms of economic coercion are Trump’s foreign policy measures of first resort. And China is now going down a similar route. Europeans’ hope that they could de-escalate the Iran crisis by bowing to one coercive measure – when it did not hurt them much economically – could backfire: Washington and Beijing seem to increasingly interpret European inaction as weakness and an invitation for greater coercion in pursuit of their economic and geopolitical interests. For instance, China is working on a new export control law that mirrors America’s and could, through its extraterritorial effects, significantly hamper Europe’s trade with third countries.

In light of these warnings, it is increasingly important for Germany and other European countries assemble their tools to respond to great powers’ use of economic coercion. In this, it is crucial for Europe to understand the asymmetrical dependencies that shape its relations with great powers and to build up a credible deterrent. Europe can act more forcefully without undermining its broader relationship with the United States (which would be a strategic mistake). Unless they put the option of reciprocal and well-calibrated countermeasures on the table, Europeans will invite Washington and Beijing to use their latest threats again and again.