In 2021, the EU adopted An Open, Sustainable and Assertive Trade Policy, which is designed to operationalize Open Strategic Autonomy (OSA). The concept has become increasingly important in an era shaped by economic security concerns and geopolitical competition. In 2023, the EU developed its European Economic Security Strategy through cooperation between the European Commission and the High Representative for Foreign Affairs and Security Policy. As a result, the EU has explicitly integrated economy and security under the Directorate-General for Trade and Economic Security (DG-TRADE), reflecting a reorientation of EU trade and investment policy, including advancing trade diversification and the investment screening mechanism (ISM) in response to geoeconomic upheaval.
Reorienting EU Trade and Investment Policy in the Age of Economic Security
The EU’s economic security strategy identifies three areas of action: promote, protect and partner. Together, these pillars provide a framework for responding to geoeconomic competition. The promote pillar focuses on strengthening the EU’s competitiveness and innovation capacity, including through the development of industrial policy and strategically important technologies with both civilian and military applications. Furthermore, the protect pillar can be construed as protecting against economic risks and threats.
The final pillar is the partner pillar, which focuses on international cooperation and engagement with allied countries and other partners. The EU continues to support a rules-based international order, a commitment reflected in its participation in multilateral trade arrangements and its network of trade agreements. This stance carries on to anchor EU trade policy, because Free Trade Agreements (FTAs) and World Trade Organization (WTO) rules remain important foundations of EU trade policy. From a geoeconomic perspective, this commitment can also serve strategic purposes, as it helps maintain EU market access, facilitates the diversification of trade flows, and reduces dependence on individual suppliers or markets.
In short, the EU’s approach to trade and investment governance operates on two levels. It relies on multilateral rules to support a predictable international trading system while also pursuing bilateral agreements and strategic partnerships with selected countries. 
Tax, Trade, and Investment: An Interconnected Regulatory Landscape
In 2019, the UN Committee of Experts on International Cooperation in Tax Matters highlighted the challenges arising from interactions between tax rules and bilateral, regional or multilateral trade and investment agreements. One concern was that trade and investment negotiators have overlooked potential overlaps with existing tax treaties. In subsequent work on this issue, including a paper published in 2021, the Committee examined the unintended effects and legal fragmentation that can arise when non-tax agreements, such as bilateral investment treaties (BITs) and WTO agreements, interact with domestic tax measures and bilateral tax conventions.
EU’s Dynamics of Tax Governance: National Tax Sovereignty, Revenue Protection, and Investment Neutrality
In a post-Base Erosion and Profit Shifting (BEPS) era, the EU’s tax governance faces an emerging trilemma, which describes tax sovereignty, revenue protection, and investment neutrality; no configuration secures all three at once. The argument is that no policy configuration can fully secure all three at once. The OECD-led international tax reform process, including the BEPS initiative and its subsequent developments, has significantly influenced corporate taxation in the EU and shaped the constraints within which EU institutions and member states operate. In the context of tax harmonisation, the Global Minimum Tax (GMT), implemented through the OECD/G20 Pillar Two framework, establishes a minimum effective tax rate for large multinational enterprise groups within its scope. In the EU, the framework is implemented through the Minimum Tax Directive (Council Directive (EU) 2022/2523), which is binding on member states. At the minimum, this favours an approach that targets large firms first: the segment of the economy most exposed to profit shifting.
This framework exposes a fundamental trade-off: while it enhances revenue protection and curtails tax-driven market distortions, it inherently constrains national autonomy by restricting member states’ ability to utilize tailored tax incentives for attracting foreign investment.
Greater tax harmonisation can reduce tax-related distortions within the single market, but it can also limit national fiscal autonomy and member states’ ability to tailor tax policy to domestic priorities. From a political perspective, common tax rules may be viewed by some member states as a twofold constraint: they limit national discretion over taxation and may expose domestic measures to greater scrutiny under EU law, including review by the Court of Justice of the European Union (CJEU).
Maintaining national tax sovereignty, the ability of member states to set rates, define tax bases and use taxation as a policy instrument, preserves differences between national tax systems. Those differences can influence multinational investment decisions and create incentives for cross-border profit shifting. At the same time, strong revenue-protection measures can limit opportunities for profit‑shifting, yet simultaneously diminish the mechanism through which multinationals reduce their effective tax burden on investments in higher‑tax EU countries, thereby increasing the tax sensitivity of investment.
The central question, therefore, is which objectives the EU should prioritise. Pursuing both revenue protection and economic efficiency (investment neutrality) requires trading off tax sovereignty; member states would need to converge rates and bases to prevent investment distortions. Conversely, preserving national discretion while strengthening revenue protection may leave some tax-related investment distortions in place. The trilemma cannot necessarily be resolved in full; it must instead be managed by making the trade-offs explicit and setting clear priorities.
EU’s Tax-Trade-Investment Nexus Regulation for Economic Security and Geoeconomics
The EU’s geoeconomic reorientation has highlighted a growing asymmetry in its economic governance. Trade and investment policy are increasingly treated as strategic instruments, with a stronger focus on long-term competitiveness and economic security. Tax governance, by contrast, continues to be shaped primarily by concerns about tax avoidance, revenue protection and the functioning of the single market. While tax governance has a potential position to incorporate into strategic considerations, it does not necessarily coordinate them with the EU’s wider economic-security agenda in a consistent way.
The purpose of tax governance in this new configuration is therefore not merely technical; it is also fundamentally political, particularly in an era of economic insecurity and geopolitical competition. Within the tax-trade-investment nexus, tax governance serves at least three distinct, sometimes conflicting functions. First, as a revenue instrument, it is tasked with ensuring that economic activity, including the cross-border activity that trade and investment liberalisation generates, is adequately captured within national and EU fiscal systems. Second, as a regulatory instrument, it shapes the conditions under which investment flows, determining where multinationals book profits, where they locate activities, and how they structure cross-border transactions. Third, tax rules can also serve as geopolitical instruments when they are incorporated into broader strategic frameworks. Examples include tax incentives designed to support industrial policy and priority investments, measures to address foreign subsidies, and tax-transparency requirements that may contribute to economic statecraft.
As trade and investment governance increasingly serves strategic objectives, tax policy faces growing pressure to support industrial competitiveness, respond to tax incentives offered by third countries, notably those introduced under the US Inflation Reduction Act, and protect the tax base from erosion. Thus, this creates a potential tension: the EU may seek to attract investment through its strategic economic policies while also ensuring that the resulting economic activity generates an appropriate tax contribution.
Ultimately, governance at the intersection of tax, trade and investment remains fragmented, with coordination managed on a case-by-case basis rather than through an integrated strategy. The EU needs a tax-governance framework that is as attentive to geoeconomic considerations as its trade and investment policy has become. Such a framework would make the trade-offs explicit, establish clear priorities, and recognise taxation as an integral part of strategic economic governance rather than treating it as a technical afterthought.
