Issue NO. 303 March 2021 - Observer Research Foundation
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Occasional Paper
Issue NO. 303 March 2021
© 2021 Observer Research Foundation. All rights reserved. No part of this publication
may be reproduced, copied, archived, retained or transmitted through print, speech
or electronic media without prior written approval from ORF.Exploring Prospects for Digital Europe in the Age of the US-China Technology Race Sabrina Korreck Abstract In today’s digital economy, the United States (US) remains a market leader in many digital technologies; meanwhile, China is fast catching up. In Europe, foreign technology companies have a strong presence, often creating dependencies that can undermine digital sovereignty. Digitisation, therefore, is high on the European Union’s (EU) political agenda. This paper analyses recent key policy responses by the EU, and finds that the union can help shape digitisation by using its market power to regulate digital giants and set global standards. It also highlights the high ethical and data protection standards of the EU, which can give the private sector a competitive edge. Attribution: Sabrina Korreck, “Exploring Prospects for Digital Europe in the Age of the US-China Technology Race,” ORF Occasional Paper No. 303, March 2021, Observer Research Foundation.
I
nternational relations are increasingly being influenced by the
rivalry between the United States (US) and China. While the
competition first played out in the domain of trade, tensions
have emerged in other spheres, including technology. In
the struggle for power in the global digital order, the tech
companies of both states play key roles: While American technology
companies are still market leaders for many digital products, China
is fast catching up and aspires to become the new global leader. The
competition is not only about which side can innovate faster and achieve
economic success; equally important, technological superiority is seen as
translating into political power, and the ability to influence the discourse
and norms regarding emerging technologies. As both sides struggle for
technological leadership, they feel less committed to interdependence
and are increasingly prioritising their own interests. Today the world
is facing the possibility that the Internet could end up divided into US,
Chinese, and possibly further techno-spheres—or a “splinternet”.
This technology race between the US and China has implications on
Europe: US tech companies have a strong position in the European
Union’s (EU) Digital Single Market, and simultaneously, several Chinese
digital giants are seeking to expand their market reach in Europe.
Introduction
Partly, European users rely on one foreign technology provider, which
creates dependencies that can create opportunities for economic and
political interference from outside. As dependencies can be used to
coerce governments, companies and citizens to act in an involuntary
manner, the risk is that the EU’s digital sovereignty could be weakened,
and thereby, too—its ability to self-determine its “digital fate”.
The subject of digitisation has therefore moved to the top of the
European political agenda. The EU has launched several policy
initiatives and is currently implementing key regulatory reforms whose
aims are to promote fair competition and prevent the abuse of market
power, as well as to ensure safe infrastructure and handling of data and
online content. These efforts are complemented by investments in digital
3infrastructure, education, research and development, and support for
the startup ecosystem to promote innovation. By implementing this
approach, the EU empowers European tech companies to develop
technologies that are trustworthy and fulfill high ethical standards
and thereby have a good chance to compete against both Chinese and
American companies. Broadening the choice of suppliers can result in
the decline of dependencies on foreign tech companies. In this way, the
EU is able to strengthen its digital sovereignty, but—unlike other states—
without erecting barriers and falling back into protectionism. Instead,
the EU’s approach affords
an opportunity to engage in
regulatory cooperation with like- Tech dependencies
minded international partners
and in setting global standards can create
for the digital economy. opportunities for
interference from
Introduction
This paper explores the
implications of the US-China outside; digitisation
technology race on Europe,
and outlines the overall is thus a top priority
direction and main pillars of for the EU.
the EU’s policy responses. The
succeeding sections of this
paper provide an overview of the US-China rivalry and its economic,
political and normative dimensions; describe implications on Europe
and the extent to which dependencies on foreign tech providers exist
and which risks they pose; and analyse the EU’s recent significant policy
responses, which build on stricter regulation of the tech industry as well
as investments to promote innovation.
4The US-China Technology Race: Economic,
D
uring the first wave of digitisation in the 1990s, the United
States (US) was in the lead and secured a dominant
role in many core digital technologies.1 American tech
Political and Normative Dimensions
companies, many of them based in the so-called Silicon
Valley of Northern California, successfully entered
global markets. Over time, the companies – including the five biggest,
Google, Amazon, Facebook, Apple, and Microsoft (or GAFAM)—
built up immense market power and became influential in the global
digital economy. Many countries and businesses became dependent on
American products and services. In addition, tech giants got involved in
building digital infrastructure and invested substantial capital in their
own data lines and networks around the globe. For instance, Alphabet
(Google) is laying an undersea cable from New York to Europe, which
will be integrated with a line stretching along the African West Coast.
This data line will add to existing ones from the US through the Pacific
to Chile, and through the Atlantic to the French Coast.2
With the rise of China’s own tech
companies within the last two
decades, US firms face increasing China is aiming
competition as large populations
in many parts of the world are to become the
using more Chinese digital global tech leader
products and services. In some
areas, Chinese companies compete by 2025 in key
not by offering low prices, but
by developing technologically
future industries
advanced products that challenge including IT
the American edge in digital
innovation. In its “Made in China
and AI.
2025” strategy paper released
in 2015, the Chinese Communist Party (CCP) explicitly states the
aim for China to become the global tech leader by 2025 in key future
industries, including IT technologies and artificial intelligence (AI). To
reach this goal and nurture its own digital ecosystem, China has used
protectionist measures, subsidies, and transfer of foreign technology.
And while China limited access to its market and blocked services of
international tech companies, its homegrown companies including
Baidu, Alibaba, Tencent, and Xiaomi (or BATX) became tech giants
themselves. Indeed, it is an explicit aim of the “Digital Silk Road”—a key
element of the massive infrastructure project, Belt and Road Initiative
(BRI)—that Chinese companies become global champions. With their
growing international reach, Chinese tech companies can shape the
economic affairs of many states and businesses in a similar way as their
US counterparts have done.
5The US-China Technology Race: Economic,
By striving for independence from foreign, especially US technology,
Political and Normative Dimensions
and then disseminating its own technologies globally, China creates
a separate technopolitical sphere of influence as a counterweight to
America’s.3 This goal is supported through massive investments: Close to
US$ 1.4 trillion is provided to build new infrastructure through AI, data
centres, 5G, the Industrial Internet, and other new technologies; and
a US$ 29-billion seminconductor fund has been established to reduce
the country’s dependence on the US for semiconductors.4 Chinese tech
giants also play key roles to support these efforts: Alibaba established a
semiconductor division; Baidu released a smart chip; and Alibaba and
Tencent announced huge new investments in cloud services and data
centres.5
However, as Chinese companies capture more global markets and
simultaneously the Chinese government is tightening links with countries
that have signed on to BRI, the US is increasingly pushing back to curb
China’s influence and maintain its own. The administration of former
US President Donald Trump had taken action against Chinese tech
companies, including imposing a ban in 2019 on US companies against
doing business with 5G equipment provider Huawei, which allegedly
spies on American citizens and accesses sensitive security and trade
secrets, and the quarrel that revolved around the video platform TikTok
in 2020.6 Overall, US technology policy is focusing on controlling the
flow of technology, restructuring supply chains, and investing heavily in
innovative technologies.
As both countries battle for technological superiority and increasingly
decouple their technology sectors, the digital world is at risk of becoming
divided into rivalling techno-spheres. A vision of a so-called “splinternet”
could be as follows: “In half the world, driverless cars built by Baidu and
connected by Huawei’s 5G wireless networks carry passengers who shop
online with Alibaba and post selfies on WeChat. In the other half, those
activities are dominated by companies like Amazon, Google, Facebook,
Tesla and Ericsson.”7 If such a scenario becomes reality, the governance
of the digital space will be increasingly shaped by unilateral actions in
the name of tech-nationalism, which in turn can cause the escalation
of conflicts.8 Some analysts see the last few years as forewarning of
the intense technological competition yet to come,9 and suspect that
decoupling could lead to a new kind of Cold War. However, others see
these analogies with the East-West conflict of over 40 years before 1989
as misplaced: after all in this conflict, there is no unequivocal political
bloc confrontation, China’s state-capitalistic system is more integrated
6The US-China Technology Race: Economic,
into the world economy (unlike the Soviet closed-off system), and the
nature of new technologies is different and prevents countries from
controlling technologies the way they did in the early days.10
Political and Normative Dimensions
These developments have normative implications, as both states and
their tech companies play key roles in setting technological standards as
well as developing norms and shaping the discourse around the digital
economy and governance of emerging technologies. The rivalry takes
place within existing organisations such as the United Nations (UN),
where China has had increasing clout and is seeking to diminish the
institutional hegemony of the multi-stakeholder-approach championed
by the US and other countries through reform proposals.11 Furthermore,
China uses its own (co-)founded forums to discursively re-interpret the
Western image of the Internet as a global medium of free expression
and disseminate alternative norms.12 Beyond official representatives,
even Chinese tech firms, which are implicated in human rights abuses
in Xinjiang, play leading roles in setting global standards.13 In contrast,
Silicon Valley firms can no longer be neutral as they struggle to comply
with values that are fundamentally at odds.14 When active in China they
are faced with difficult questions, e.g. will they censor and delete online
content, or reveal user information when requested by authorities?
The governance of the digital space
could be increasingly shaped by
unilateral actions in the name of
tech-nationalism.
7T
o be sure, the US-Chinese technology race does not
only concern the two states, but has significant impact
on third countries. The presence of US and Chinese
tech companies is also noticeable in Europe, where they
influence how millions of Europeans do business, shop,
communicate, receive news, and consume entertainment. This section
explores the situation in the EU, which is shaped by a strong presence of
foreign tech giants in the European Digital Single Market, and analyses
the causes why Europe’s own tech companies find it difficult to scale
and successfully compete.
Non-European Players Have Strong Presence
in the Digital Single Market
Since the mid-1980s, there have been extensive EU-funded programs
as well as massive national and regional promotion of IT research and
development in many EU member states.15 Europe has universities and
institutes that are at the forefront of research in key technologies. And
with cities like Berlin, Paris and Stockholm, the EU has its own startup
hubs of global importance, and thereby, digital innovation.16
Implications for
Despite such favourable prerequisites and while Europe is a giant in
many traditional technology sectors (e.g. automotive and industrial
manufacturing industries), only a few local digital players have managed
to assert themselves in the global competition around technology.
Although Europe has system integrators, telecom providers and
network manufacturers that remain global leaders, none of the top 15
digital companies in 2019 was European.17 Therefore, not surprisingly,
Europe only accounts for less than 4 percent of the market capitalisation
of the world’s 70 largest digital platforms, while America boasts 73
percent and China, 18 percent.18
Europe
While Europe is a giant in many
traditional technology sectors,
only a few digital players have
managed to assert themselves in
the global arena.
8Due to the lack of indigenous alternatives for many technologies,
several American tech companies have nearly monopolistic positions in
the European Digital Single Market, while simultaneously, Chinese tech
giants are extending their presence in the market. For example, Alibaba
and Tencent are expanding aggressively in Europe and Bytedance’s
social media platform TikTok has become popular among young
people. This situation can lead to dependencies, whereby Europeans
have little choice and strongly rely on a single foreign provider of
technology. Already existing dependencies will only be amplified
as the global economy is becoming more reliant on digital activities;
the COVID-19 pandemic reinforced this trend. In addition, further
dependencies might arise. For instance, a heavily debated question in
Europe is whether the Chinese telecom equipment provider Huawei is
trustworthy enough to be involved in the buildup of 5G networks or if
the company has a hidden agenda that could bring European states to
a position of dependency.
In turn, technological dependencies can pave the way for heightened
foreign economic or political influence, and lead to a loss of digital
sovereignty, limiting the ability of states, companies or individuals to
self-determine their own digital fate. Risks emerge when a dominant
actor uses the power arising from dependencies to pursue its own
Implications for
parochial interests: this actor can obtain benefit by coercing a dependent
actor to act in an involuntary manner by threatening significant harm.
Possible scenarios are that dependencies are leveraged (1) to sabotage,
disrupt or even prevent data flows or the availability of digital services
in dependent states; (2) to manipulate technologies upon which other
states and businesses depend, and use them for cyberespionage and
surveillance; or (3) to permeate their political ideas, values and norms
through technologies.19 If the dependent actor strives for stronger self-
determination, it can lead to friction and be answered with sanctions
that cause further disadvantages.
If a dominant actor is setting norms and standards, while the dependent
Europe
actors do not have the means to participate, the latter might have no
other choice than to adapt. If no action is taken to address the current
situation, European states risk weakening their digital sovereignty.
Thereby, the next decisive technological stage could be shaped by non-
European actors, which do not share European core values, traditions
9and standards or even try to undermine them.20 In particular, the
concern is that the everyone-for-themselves ethos of the US or the
authoritarian centralisation of China will be imposed via the design and
accessibility of critical technologies and expanding automation.21 In that
way, dependencies can have far-reaching impacts on how European
societies function, as well as their prosperity and security.
Underlying Causes of the Status Quo
Due to the shortage of homegrown digital “champions”, non-European
tech companies – i.e., so far, mostly US and increasingly Chinese – grew
relatively unhindered. One factor which contributed to the status quo
is that digital technologies are often subject to network effects,a which
favour monopolisation and helped foreign tech companies acquire
strong positions in the market. Another crucial factor are the specific
characteristics of the Digital
Single Market, such as different
languages and a plethora of Existing
national rules in EU member
states. These make it difficult
dependencies will
for European digital small only be amplified
and medium-sized companies
Implications for
(SMEs) to scale. But apart from
as the global
technological and market- economy becomes
related causes, the conduct of
non-European tech companies more reliant on
plays a central role in explaining digital activities.
the status quo. Five key issues
can be identified:
First, their strong market position allows tech companies to capture
huge rents without offering much in return: They operate without
making significant investments locally, without creating many jobs, and
often without paying much in taxes.22 As this situation is advantageous
Europe
for incumbent companies, they seek to maintain the status quo. As
digital platforms are important channels for businesses to connect to
their customers, tech companies act as gatekeepers that can design
the terms of use and control access. This grants them enormous
a This essential principle means that the value of a technology increases with the
number of people using it.
10power, which can be used to undermine competition by threatening
disruption of services or making it difficult for competitors to reach
their customers. Examples of anti-competitive practices include giving
preferential treatment to own services, pre-installing own software, or
barring newcomers by establishing market entry barriers.23
Second, while European markets are relatively open to foreign
companies and investors, large parts of the Chinese economy are
not equally accessible for European digital and traditional firms.
Discriminatory practices, as well as insufficient transparency and
legal certainty make it difficult to do business in China. This prevents
European companies from competing on an equal footing with Chinese
firms, which again hinders their ability to scale globally. At the same
time, the Chinese government supports its national champions through
extensive subsidy programs and by “throwing state money” at them,
China has created hostility. In particular, German and French companies
feel that they are facing some highly unfair competition.24
Third, promising European startups often get into the focus of
foreign tech companies, which seek to invest in them or acquire them
altogether. For instance, over the period 2015-2017, Google, Amazon,
Facebook, Apple and Microsoft acquired 175 companies, out of which
Implications for
47 were located in the EU.25 The investments can help startups fund
their next stage of growth and investors can support their expansion
to global markets by providing technological or business knowledge or
connecting them with contacts in the market. However, investments
and acquisitions can also be used as a strategy to cut off potential rivals,
or lead to a sell-out of technology. Another risk is adverse influence
on startups as investors get involved in their corporate governance or
startups become more integrated into the ecosystems of foreign tech
giants.
Fourth, digital companies collect data, which is required to train
machine learning algorithms and develop AI applications. European
Europe
companies follow strict data protection rules in their home market,
while US tech companies face less regulatory restrictions and Chinese
companies draw on big data gathered through large-scale surveillance
of citizens. As a consequence, European companies have smaller
datasets than their US and Chinese rivals. This narrows their innovation
11capacity and gives foreign data-hoarding giants a competitive edge.
Further, a bulk of data of European users and companies is currently
stored in data centres of large US cloud providers, while Chinese
giants have also started to expand their cloud services in Europe. This
poses security risks, as US-developed encryption has been subject to
repeated indications of purposefully integrated loopholes,26 and foreign
jurisdiction could possibly force cloud providers to give access to data.
Moreover, Europeans can be vulnerable by relying too heavily on data
lines of foreign entities, or involving them closely in the building of its
own telecommunications networks.
Fifth, AI is a key disruptive and cross-sectional technology that promises
great potential, but can also pose substantial risks depending on how it
is deployed. AI, and particularly facial recognition, is increasingly used
for surveillance purposes and its unethical use challenges norms and
standards of democratic value systems. Further, intelligence gathered
through data collection can pave the way for targeted influence and
manipulation. Again, foreign companies act as gatekeepers as they
govern the flow of information and decide which content is published on
their platforms. They therefore exert tremendous influence on public
opinion, and current self-regulatory approaches to tackling harmful
Implications for
content have proven insufficient. As a result, the growing spread of
disinformation and hate speech on digital platforms has contributed
to the rise of right-wing populism in Europe, which undermines social
cohesion and heats up sentiments in favour of protectionism.
Europe
The conduct of foreign tech
companies plays a central
role in explaining the
shortage of European digital
‘champions’ .
12W
hile Europe has missed the first wave of digitisation,
it cannot afford to miss the second. Accordingly, the
topic has moved to the top of the political agenda
and the European Commission is determined to
make this Europe’s “Digital Decade”.27 This section
analyses the EU’s general positioning and its recent key policy responses,
which build on more stringent regulation of the tech industry as well as
active promotion of the European innovation ecosystem.
The EU’s Overall Positioning and Direction
s Priorities
The EU would like to avoid getting caught between the fronts of the
rivalry and be pulled into either a US or a Chinese techno-sphere. Rather,
Europeans are aiming to pursue their own approach to digitisation in
Shaping the Digital
line with their shared values. Such policy combines digital sovereignty
with strategic interdependence and can open the door to a third way in
cyber space, which lies between the American model of market freedom
and the Chinese one of authoritarian state capitalism.28
A unique European approach is also necessary in light of the union’s
changing relations with both the US and China. In recent years, the
EU has harboured a more critical perception of China: it is both as a
partner (in combating climate change, for example) and an economic
Future: EU’
competitor and systemic rival that is promoting different models of
governance.29 Simultaneously, transatlantic relations have undergone
change, and under former President Donald Trump the country’s
longstanding alliance with Europe was strained. With Joe Biden as the
new president, a rapprochement between the US and the EU is likely,
but differences in opinions and interests will remain. In particular,
Biden is expected to continue Trump’s hard stance vis-à-vis China,
while Europeans believe that there is no future without China and thus
do not intend to decouple. The connection to the US is still important,
but – as Chancellor Angela Merkel said at the beginning of Germany’s
term of the presidency of the European Council in July 2020—in a time
of global changes Europe now relies more on its own.30 Besides political
responses on the EU level, France and Germany have together pushed
forward to call on Europe to unite forces and develop a European
industrial policy, in which digital technology and especially AI play key
roles.31
13Against this background, the EU seeks to strengthen its digital
sovereignty, but – in contrast to other countries—without closing itself
off and turning protectionist. Indeed, a further fragmentation of the
Internet and creation of a European techno-sphere will not be in the
interest of the EU for two reasons. One, European companies benefit
from global supply chains and the EU has strong foreign trade ties with
the US and China, which are important export markets; and two, the EU
remains committed to the idea of a global and open Internet. It is aware
that a new “everyone against everyone” and potential confrontation is
not only risky and costly, but will also prevent cooperation in tackling
global challenges. Therefore, the aim of the EU is to keep its digital
market open and allow states do business with each other, for the benefit
s Priorities
of all.
Making the European Digital Single Market
More Competitive
Shaping the Digital
Instead of making the digital market European, the goal is to make the
Digital Single Market more competitive in the global digital economy.
There is broad consensus in Brussels on the need for stronger regulation
that promotes fair competition and ensures that new entrants can
access the market without barriers and have a chance to succeed against
incumbent companies. To that end, market domination by monopolistic
tech companies must be prevented more effectively and competition
distortions need to be addressed to enable a level playing field between
Future: EU’
European and non-European market participants. Moreover, despite
a commitment to remain an open economy, some appropriate defence
mechanisms must be in place to protect strategic interests.
To address the first challenge, the EU has developed two ambitious
regulatory packages: the Digital Services Act and the Digital Markets Act,
whose proposals were presented in December 2020. They represent the
EU’s first overhaul of Internet regulation in the last 20 years and include
A further fragmentation of
the Internet and creation of a
European techno-sphere will not be
in the interest of the EU.
14EU-wide harmonised rules to prevent loopholes through differences
in national laws. Particular focus is on anti-competitive behaviours of
gatekeepers and Commissioner for the Internal Market Thierry Breton
has declared that the larger companies are, the more they have to
comply with rules important to the EU.32 The EU Commission specified
a thresholdb and criteria that define which companies are gatekeepers
and developed a list of “do” and “don’t” obligations for them to follow.
The Commission will carry out market investigations to monitor
activities of gatekeepers and, if necessary, update obligations to ensure
that rules keep up with the digital sector’s fast pace. In case of non-
compliance, gatekeepers risk fines of up to 10 percent of the company’s
worldwide annual turnover, and in case of repeated infringements, the
s Priorities
EU can impose further remedies, which, as a last resort, can go as far as
a divestiture of (parts of) a business.33
Regarding the second challenge, the EU and China have concluded
negotiations for the Comprehensive Agreement on Investment (CAI) in
Shaping the Digital
December 2020. Its main aims are to improve market access conditions
for European companies, ensure that they compete on an equal footing
when operating in China, improve transparency, predictability and legal
certainty, and discipline the behaviour of state-owned enterprises.34 It is
not the deal the European side had hoped for when negotiations started
seven years ago, but some achievements have been made that improve
the status quo of European companies.35 However, the progress with
regard to market access and equality of European companies could in
Future: EU’
practice be thwarted; toothless enforcement mechanisms and China’s
track record concerning compliance with international commitments
raise doubts about the sustainability of the agreement.36 Overall, it
remains to be seen how China will behave in the coming years and in
case competition distortions are not removed, the EU may ultimately
turn to restricting the access of Chinese firms in the European market.
While the EU does not want to turn protectionist, its openness should
not be mistaken for naivety and some appropriate defense mechanisms
are required. One important measure is the EU’s framework for the
screening of foreign direct investments, which entered into force
in April 2019 and limits the ability of foreign investors to acquire or
invest in critical assets. The new framework encourages cooperation on
investment screening, enables information exchange, and allows the
Commission to issue opinions when an investment poses a threat.37
b This threshold is that companies that reach more than 10 percent of the EU’s
population are considered systemic in nature.
15Ensuring Safe Infrastructure and Handling of
Data and Online Content
The described competition and antitrust regulation reform goes hand-
in-hand with new rules on data governance as data is a central resource
in the digital economy and a crucial factor in determining whether
a company has acquired too much market power. The EU’s aim is
to strengthen its data economy and realise the potential of AI, while
implementing standards for its ethical use and preventing risks. More
s Priorities
security requirements are also needed to counter harmful content
online on digital platforms. Further, availability and security of data
transmission, processing and storage has to be ensured so that data is
trustworthy and free of bias.
Shaping the Digital
In February 2020, the European Commission released its new Digital
Strategy, which consists of a five-year policy roadmap, a Data Strategy,
and a White Paper on Artificial Intelligence. The new rules build on
previous legislation, namely the General Data Protection Regulation
(GDPR) released in 2016, its concomitant regulation on the free flow
of non-personal data (FFD)
passed in 2018, as well as the
Cybersecurity Act and Open
Competition and
Future: EU’
Data Directive, both published in
2019.38 One central idea in this antitrust regulation
new legislation is the creation of
a single market for data, which reforms go hand-in-
builds on strong data protection hand with new
that respects citizens‘ rights and
allows the use of personal data rules on data
only for narrow purposes, and
enables sharing of industrial
governance.
and commercial data. Further,
the plan is to create European
data spaces to pool data across several key sectors.c By making more
data available, European tech companies will be in a better position
to compete against foreign incumbents. With regard to AI, the EU
promotes a responsible, human-centric approach, which applies
particular scrutiny to sectors where essential human interests and rights
c These sectors are health, environment, energy, agriculture, mobility, finance,
manufacturing, public administration and skills.
16are at stake, such as recruitment, healthcare, transport, police and law
enforcement.39 In high-risk areas, AI systems must be independently
tested and certified before they can be used in the EU. Further, the
White Paper on AI proposes measures that will streamline research,
foster collaboration between member states, and increase investment
into AI development and deployment.40
The Digital Services Act includes a set of harmonised EU-wide
obligations that ensure that online platforms bear more responsibility
for the content which they host. Its cornerstones concern the faster
removal of illegal content, services and goods online; transparency rules
s Priorities
about their services (e.g. tech companies must disclose how targeted
advertising and recommendation algorithms work); and new powers to
scrutinise how platforms work, including access by researchers to key
platform data.41 Additional rules apply to very large platforms and relate
to risk management, external auditing, and public accountability. The
Shaping the Digital
EU member states, supported by a newly-established European Board
for Digital Services that has coordinators in each state, are in charge of
supervision and enforcement of rules. Fines for non-compliance are up
to 6 percent of annual revenue.
Moreover, Thierry Breton announced that it is time to offer a safe
harbour to European citizens and companies – meaning that data
accruing in Europe should be stored and processed in the region,
Future: EU’
according to local rules.42 Therefore, the new legislation promotes the
building of new data infrastructure, with the creation of a European
cloud federation as hardware foundation for the single data market
as a priority. In autumn 2019, the European project GAIA-X was
initiated as a platform to create cloud offerings, based on European
security standards, as alternative to those of foreign providers. Tech
giants such as Amazon, Google, Huawei and Alibaba participate in the
project and can strive for certification of their services. Some criticise
this involvement as a „Trojan horse“,43 while others believe an exclusion
would be a protectionist mistake.44 With regards to the building of
Europe’s 5G network, the European Commission is of the view that
banning certain suppliers is not the right approach and follows a multi-
vendor strategy. Instead, in January 2020 the European Commission
issued guidelines, which call on member states to assess the risks of
suppliers and restrict procurement from suppliers that are considered
to be high-risk.45
17Investing in Europe’s Innovation Ecosystem
In addition to the described regulation, what is equally important
is the active promotion of innovation. In her speech on the digital
strategy, European Commission President Ursula von der Leyen called
on Europeans to find European solutions in the digital age.46 Even if
Europe did not have the same amount of capital, or entrepreneurial
culture to mimic China’s industrial policy or create another Silicon
Valley, Europe can seize the opportunity of a diverse ecosystem, within
which new undertakings can grow and established industries can open
up to the existing European and even global ICT environment.47
s Priorities
To nurture its innovation ecosystem, the EU expands investments in
infrastructure, education, research and development, and support for
the startup ecosystem. Therefore, the EU aims to nurture global players,
although the case of the blocked Alstom-Siemens merger triggered a
debate on how big European champions should be allowed to grow
Shaping the Digital
without harming competition in the EU itself.48
In the context of the EU’s long-term budget (2021-2027), financial
resources are provided through the Digital Europe programme, which
is worth 8.2 billion Euro and will boost investments in supercomputing,
artificial intelligence, cybersecurity, and advanced digital skills.49 It is
complemented by further EU programmes, including the Horizon
Europe programme for research and innovation (worth 94.4 billion
Future: EU’
Euro), the Connecting Europe Facility-Digital that will support and
catalyse investments in digital connectivity infrastructure (1.8 billion
Euro) and InvestEU (31.6 billion Euro) that will provide crucial support
to companies in the recovery phase.50 Furthermore, at least 20 percent
of the expenditure of the Recovery and Resilience Facility (560 billion
Euro), which is the key instrument of NextGenerationEU to boost
recovery from the COVID-19 crisis, should relate to digital.51 To finance
expenditures, a fair tax system for digital companies would help, but
digital business activities are currently subject to relatively low taxes. The
EU is hoping that a global agreement on taxation of tech companies can
be found and currently awaiting agreement among the OECD to avoid
conflicts. However, Angela Merkel said at the beginning of the German
18presidency of the EU Council that if no arrangement is visible, the EU
has to seriously consider how a solution can be found for Europe, and
must if necessary introduce its own digital tax.52
Capacity-building efforts start with investments in education to equip
Europeans with adequate digital skills. The aim is to train digital talent
who are capable of confidently using digital media, building innovative
technology, and thinking critically about its use. It ranges from
s Priorities
promotion of digital literacy at early stages to advanced skills, especially
data science. Enhancing research and development is also necessary to
maintain technological advantage in core technologies.
This connects to the next focus, which is to accelerate the knowledge
Shaping the Digital
transfer between research and business and improve the access to
finance for promising startups. One instrument is an EU-wide network
of Digital Innovation Hubs, i.e. one-stop shops that support companies
through skills and training, provision of testing opportunities, and
connecting them with the ecosystem, especially investors.53 Further, the
European Innovation Council (EIC) offers new funding opportunities
for breakthrough innovations and has made its first equity investments
of 178 million Euro in January 2021.54 These investments are
supplemented by efforts of some EU member states to support their
Future: EU’
local startup ecosystems. In France, President Emmanuel Macron
announced in September 2019 a venture capital fund that will pump
5 billion Euro into the startup ecosystem,55 while Germany is in the
process of setting up a future funds for startups worth 10 billion Euro.56
19T
his paper provided an overview of the US-China
technological race, described the implications on Europe
and the extent to which the strong presence of foreign
tech giants poses risks to digital sovereignty, and analysed
the EU’s recent key policy responses. Together, these
measures create a market environment that remains open to foreign
tech companies, but ensures healthy competition and data protection.
Along with an investment offensive, the conditions will enable European
tech companies to develop alternatives for some – but not necessarily
all – key digital technologies. After all, sovereignty is not a binary choice
and the EU finds middle ground on a continuum instead of seeking
full sovereignty at all cost. As the choice of technology providers will
broaden, some dependencies will remain—though they can be offset
by Europe’s strengths in certain areas. Indeed, mutual dependencies
are crucial to avoid susceptibility to blackmail and US and Chinese
companies eventually rely on access to the European market, which no
tech firm with global aspirations can afford to ignore.
The EU’s approach offers
an opportunity to help shape
digitisation by using its market
power to regulate digital giants,
The EU’ s policy
and by setting global standards. responses aim to
While Europe’s present dearth
of tech firms helps it in taking
create a market
a more objective stance,57 the environment that is
Conclusion
EU seeks to impact how other
open to foreign tech
Sabrina Korreck is a Senior Fellow at ORF.
countries respond to the power
of global tech companies, companies, while
as it already did with past
regulations. For instance, the ensuring competition
EU set a benchmark with and data protection.
its General Data Protection
Regulation (GDPR) and most of
the 120 countries which have passed privacy laws, have principles that
resemble those of the GDPR.58 Simultaneously, most big tech companies
have adopted the rules as a global standard instead of tailoring their
offering to different regions. To promote its digital standards, the EU
also engages in regulatory cooperation with like-minded international
partners. Thus, a Digital Diplomacy Network and framework for action
20is currently created, and digitisation also plays a key role in the realm of
European development cooperation.59
Moreover, Europe and its tech companies can lead by example and
provide an alternative to the American and Chinese techno-spheres by
practically developing necessary technologies. As digital technologies
from Europe stand for high ethical and data protection standards, a
label “Digitised in the EU” signals trustworthiness and will therefore
give the private sector a competitive edge.60
The EU aims to shape interdependence in a way that lies in the
interests of all sides to avoid escalation. However, the implementation
of the approach does not come without challenges and headwind
must be anticipated. Many in Brussels expect a drawn-out fight, as the
US tech industry is spending more than ever on lobbying.61 Some of
the regulations are still at a proposal stage, which means they could
be diluted during negotiations and make the actual enforcement less
effective. The EU must remain steadfast, but this will be more difficult,
the more the EU is busy dealing with itself. The EU has experienced
several crises that challenge European cohesion, and the 27 EU
member states often have diverse views on issues. Of particular concern
is China’s engagement with 12 member and five EU candidate states
in Central and Eastern Europe in the context of the 17+1 grouping,
which other EU states perceive as an attempt to divide the EU. The
danger is that nationalist leanings of individual states gain the upper
Conclusion
hand and reinforce dividing tendencies. However, by pursuing
individual national agendas, they will not only weaken the EU on the
international stage, but ultimately themselves. Therefore, it is of utmost
importance for EU member states to stand together and act confidently
with a joint and coherent strategy.
(The author thanks ORF’s Manoj Joshi and Kartik Bommakanti, as well as
participants in ORF’s research colloquium in September 2020, as well as an
anonymous reviewer for valuable comments. Further, she is thankful to Vinia
Datinguinoo Mukherjee for her excellent editing.)
211 Matthias Schulze and Daniel Voelsen, “Digital spheres of influence,“ in: Barbara
Lippert and Volker Perthes (Eds.), “Strategic rivalry between United States and
China: Causes, trajectories, and implications for Europe,” SWP Research Paper
4, April 2020.
2 Frankfurter Allgemeine Zeitung, “Google verlegt ein neues Unterseekabel nach
Europa,“ July 28, 2020, https://www.faz.net/aktuell/wirtschaft/digitec/google-
verlegt-ein-neues-unterseekabel-nach-europa-16879658.html .
3 Matthias Schulze and Daniel Voelsen, “Digital spheres of influence,“ in: Barbara
Lippert and Volker Perthes (Eds.), “Strategic rivalry between United States and
China: Causes, trajectories, and implications for Europe,” SWP Research Paper
4, April 2020.
4 Adam Segal, “The coming tech cold war with China,” Foreign Policy, September
9, 2020.
5 Adam Segal, “The coming tech cold war with China,” Foreign Policy, September
9, 2020.
6 Cecilia Kang and David E. Sanger, “Huawei is a target as Trump moves to ban
foreign telecom gear,“ New York Times, May 15, 2019, https://www.nytimes.
com/2019/05/15/business/huawei-ban-trump.html? ; Deutsche Welle, „Trump
continues fight to get TikTok banned,“ December 2020, 28, https://www.dw.com/
en/trump-continues-fight-to-get-tiktok-banned/a-56078603 .
7 Marc Champion, “Digital cold war,” Bloomberg, December 12, 2019, https://
www.bloomberg.com/quicktake/how-u-s-china-tech-rivalry-looks-like-a-digital-
cold-war .
8 Julia Pohle and Julius Lang, “Digitale Souveränität als Frage der
Selbstbestimmung im digitalen Raum,“ Deutsche Gesellschaft für die Vereinten
Nationen e.V., July 2, 2019, https://dgvn.de/meldung/digitale-souveraenitaet-als-
frage-der-selbstbestimmung-im-digitalen-raum/ .
Endnotes
9 Adam Segal, “The coming tech cold war with China,” Foreign Policy, September
9, 2020.
10 Kaan Sahin, “The tech cold war illusion,” Berlin Policy Journal, January 6, 2020,
https://berlinpolicyjournal.com/the-tech-cold-war-illusion/ .
11 Julia Pohle and Julius Lang, “Digitale Souveränität als Frage der
Selbstbestimmung im digitalen Raum,“ Deutsche Gesellschaft für die Vereinten
Nationen e.V., July 2, 2019, https://dgvn.de/meldung/digitale-souveraenitaet-als-
frage-der-selbstbestimmung-im-digitalen-raum/ .
12 Julia Pohle and Julius Lang, “Digitale Souveränität als Frage der
Selbstbestimmung im digitalen Raum,“ Deutsche Gesellschaft für die Vereinten
Nationen e.V., July 2, 2019, https://dgvn.de/meldung/digitale-souveraenitaet-als-
frage-der-selbstbestimmung-im-digitalen-raum/ .
13 Rebecca Arcesati and Martijn Rasser, “Europe needs democratic alliances to
compete with China on technology,” Mercator Institute for China Studies, May
2229, 2020, https://merics.org/de/analyse/europe-needs-democratic-alliances-
compete-china-technology .
14 Jacob Helberg, “Silicon Valley can’t be neutral in the U.S.-China cold war,”
Foreign Policy, June 22, 2020.
15 Gabriele Goldacker, “Digitale Souveränität,” Kompetenzzentrum Öffentliche IT,
November 2017.
16 Berlin, Paris and Stockholm are considered “Elite Global Startup Hubs” (along
with Austin, Chicago, San Diego and Seattle in the US, Shanghai in China;
Bangalore, Delhi and Mumbai in India, Tel Aviv in Israel and Singapore); they
account for nearly a fifth (18 percent) of global venture capital investment.
See: Richard Florida and Ian Hathaway, “Rise of the global startup city: The
new map of entrepreneurship and venture capital,” Center for American
Entrepreneurship, 2018.
17 Axel Voss, “A manifesto for Europe’es digital sovereignty and geo-political
competitiveness,” January 2020, https://www.axel-voss-europa.de/wp-content/
uploads/2020/01/AVoss-Digital-Manifesto-2020-english-1.pdf .
18 Economist, „The EU wants to set the rules for the world of technology,“ February
2020, https://www.economist.com/business/2020/02/20/the-eu-wants-to-set-the-
rules-for-the-world-of-technology .
19 Matthias Schulze and Daniel Voelsen, “Digital spheres of influence,“ in: Barbara
Lippert and Volker Perthes (Eds.), “Strategic rivalry between United States and
China: Causes, trajectories, and implications for Europe,” SWP Research Paper
4, April 2020.
20 Axel Voss, “A manifesto for Europe’es digital sovereignty and geo-political
competitiveness,” January 2020, https://www.axel-voss-europa.de/wp-content/
uploads/2020/01/AVoss-Digital-Manifesto-2020-english-1.pdf .
21 Chris O’Brien, “France’s $5.5 billion startup fund is a bid for digital sovereignty,”
Endnotes
Venture Beat, September 23, 2019, https://venturebeat.com/2019/09/23/frances-
5-5-billion-startup-fund-is-a-bid-for-digital-sovereignty/ .
22 François Candelon, Hans-Paul Bürkner, Sylvai Duranton, Nikolaus Lang,
Rodolphe Charme di Carlo, and Midas de Bondt, “How digital giants and
Europe can cooperate to win in AI,“ BCG Henderson Institute, 2020.
23 For more details on anti-competitive practices see: Shirin Ghaffary and Jason
Del Rey, “The big tech antitrust report has one big conclusion: Amazon, Apple,
Facebook, and Google are anti-competitive,“ Vox, October 6, 2020, https://www.
vox.com/recode/2020/10/6/21505027/congress-big-tech-antitrust-report-facebook-
google-amazon-apple-mark-zuckerberg-jeff-bezos-tim-cook .
24 Keith Johnson, “How Europe fell out of love with China,” Foreign Policy,, June
25, 2020.
25 Axel Gautier and Joe Lamesch, “Mergers in the Digital Economy,“
CESifo Working Paper No. 8056, 2020, https://www.econstor.eu/
bitstream/10419/215058/1/cesifo1_wp8056.pdf .
2326 Gabriele Goldacker, “Digitale Souveränität,” Kompetenzzentrum Öffentliche IT,
November 2017.
27 European Commission, “A Europe fit for the digital age,“ https://ec.europa.eu/
info/strategy/priorities-2019-2024/europe-fit-digital-age_en ; Philip Oltermann,
“‘For Europe to survive, its economy needs to survive’: Angela Merkel interview
in full,” The Guardian, June 26, 2020, https://www.theguardian.com/world/2020/
jun/26/for-europe-survive-economy-needs-survive-angela-merkel-interview-in-
full .
28 Annegret Bendieck and Martin Schallbruch, “Europas dritter Weg im
Cyberraum,“ SWP-Aktuell No. 60, November 2019, https://www.swp-berlin.org/
fileadmin/contents/products/aktuell/2019A60_bdk_Schallbruch_WEB.pdf .
29 European Commission, “EU-China – A strategic outlook,” March 12, 2019,
https://ec.europa.eu/commission/sites/beta-political/files/communication-eu-china-
a-strategic-outlook.pdf .
30 Thomas Kirchner, “Ich glaube an Europa“ – Merkel zur Ratspräsidentschaft,“
Süddeutsche Zeitung, July 8, 2020, https://www.sueddeutsche.de/politik/eu-
parlament-merkel-1.4961080 .
31 Federal Ministry of Economic Affairs and Energy, “A Franco-German Manifesto
for a European industrial policy fit for the 21st century,“ https://www.bmwi.de/
Redaktion/DE/Downloads/F/franco-german-manifesto-for-a-european-industrial-
policy.pdf%3F__blob%3DpublicationFile%26v%3D2 .
32 Deutschlandfunk Kultur, “Wie die EU die Tech-Konzerne regulieren will,“
December 19, 2020, https://www.deutschlandfunkkultur.de/digital-services-act-
und-digital-markets-act-wie-die-eu-die.1264.de.html?dram:article_id=489546 .
33 European Commission, “The Digital Markets Act: ensuring fair and open digital
markets,“ https://ec.europa.eu/info/strategy/priorities-2019-2024/europe-fit-
digital-age/digital-markets-act-ensuring-fair-and-open-digital-markets_en .
Endnotes
34 European Commission, “EU-China Comprehensive Agreement on Investment,“
February 13, 2020, https://trade.ec.europa.eu/doclib/press/index.cfm?id=2115 .
35 Mikko Huotari, “Das EU-China-Abkommen birgt Chancen – aber auch drei
große Risiken,“ Handelsblatt, December 31, 2020, https://www.handelsblatt.
com/meinung/gastbeitraege/gastbeitrag-das-eu-china-abkommen-birgt-
chancen-aber-auch-drei-grosse-risiken/26760932.html?ticket=ST-4870598-
09obvQb9ckdIccFmvfn1-ap5 .
36 Mikko Huotari, “Das EU-China-Abkommen birgt Chancen – aber auch drei
große Risiken,“ Handelsblatt, December 31, 2020, https://www.handelsblatt.
com/meinung/gastbeitraege/gastbeitrag-das-eu-china-abkommen-birgt-
chancen-aber-auch-drei-grosse-risiken/26760932.html?ticket=ST-4870598-
09obvQb9ckdIccFmvfn1-ap5 .
37 European Commission, “EU foreign investment screening regulation enters
into force,“ press release, April 10, 2019, https://ec.europa.eu/commission/
presscorner/detail/en/IP_19_2088 .
2438 Adil Nussipov, “Data governance in the EU: Data sovereignty & cloud
federation,“ Medium, March 23, 2020, https://medium.com/center-for-media-
data-and-society/data-governance-in-the-eu-data-sovereignty-cloud-federation-
f26d44032d63 .
39 European Commission, “Press remarks by President von der Leyen on the
Commission’s new strategy: Shaping Europe’s digital future,“ Speech, February
19, 2020, https://ec.europa.eu/commission/presscorner/detail/en/speech_20_294 .
40 European Commission, “Artificial intelligence,“ December 23, 2020, https://
ec.europa.eu/digital-single-market/en/artificial-intelligence.
41 European Commission, “Europe fit for the digital age: Commission proposes
new rules for digital platforms,“ Press release, December 15, 2020, https://
ec.europa.eu/commission/presscorner/detail/en/ip_20_2347 .
42 Till Hoppe, “Neue Datenstrategie: EU will keine weitere Chance verpassen,“
Handelsblatt, January 17, 2020, https://www.handelsblatt.com/politik/
international/industriepolitik-neue-datenstrategie-eu-will-keine-weitere-chance-
verpassen/25439916.html .
43 Christian Sachsinger, “Gaia-X: Was bringt EU-Cloud, wenn Google und Amazon
mitmischen?,“ BR, December 7, 2020, https://www.br.de/nachrichten/netzwelt/
gaia-x-was-bringt-eu-cloud-wenn-google-und-amazon-mitmischen,SIUlLZW .
44 Bastian Benrath, “Europa setzt Standards,“ Frankfurter Allgemeine Zeitung,
November 20, 2020, https://www.faz.net/aktuell/wirtschaft/digitec/gaia-x-europa-
setzt-standards-17062690.html .
45 BBC, “5G: EU issues guidance on ‘high-risk‘ suppliers,“ 29 January 2020, https://
www.bbc.com/news/technology-51294691 .
46 European Commission, “Press remarks by President von der Leyen on the
Commission’s new strategy: Shaping Europe’s digital future,“ Speech, February
19, 2020, https://ec.europa.eu/commission/presscorner/detail/en/speech_20_294 .
Endnotes
47 Simon Rinas, “Digital sovereigty – a prospect,“ Alexander von Humboldt Institut
für Internet und Gesellschaft Blog, February 5, 2016, https://www.hiig.de/digital-
sovereignty-a-prospect/ .
48 Konstantinos Efstathiou, “The Alsom-Siemens merger and the need for
European champions,“ Bruegel Blog, March 11, 2019, https://www.bruegel.
org/2019/03/the-alstom-siemens-merger-and-the-need-for-european-champions/ .
49 European Commission, “The 2021-2027 Multiannual Financial Framework:
Digital shines through in the EU’s long-term budget,“ January 20, 2021,
https://ec.europa.eu/digital-single-market/en/2021-2027-multiannual-financial-
framework-digital-shines-through-eus-long-term-budget .
50 European Commission, “The 2021-2027 Multiannual Financial Framework:
Digital shines through in the EU’s long-term budget,“ January 20, 2021,
https://ec.europa.eu/digital-single-market/en/2021-2027-multiannual-financial-
framework-digital-shines-through-eus-long-term-budget .
2551 European Commission, “The 2021-2027 Multiannual Financial Framework:
Digital shines through in the EU’s long-term budget,“ January 20, 2021,
https://ec.europa.eu/digital-single-market/en/2021-2027-multiannual-financial-
framework-digital-shines-through-eus-long-term-budget .
52 Thomas Kirchner, “Ich glaube an Europa“ – Merkel zur Ratspräsidentschaft,“
Süddeutsche Zeitung, July 8, 2020, https://www.sueddeutsche.de/politik/eu-
parlament-merkel-1.4961080 .
53 European Commission, “Digital Innovation Hubs (DIHs) in Europe,“ July 10,
2020, https://ec.europa.eu/digital-single-market/en/digital-innovation-hubs .
54 European Commission, “European Innovation Council Fund: first equity
investments of €178 million in breakthrough innovations,“ press release, January
6, 2021, https://ec.europa.eu/commission/presscorner/detail/en/ip_20_2530 .
55 Romain Dillet, “Macron announces €5 billion late-stage investment pledge from
institutional investors,“ TechCrunch, September 17, 2019, https://techcrunch.
com/2019/09/17/macron-announces-e5-billion-late-stage-investment-pledge-from-
institutional-investors/ .
56 Till Hoppe and Christoph Kapalschinski, “Bundestag bringt Zehn-Milliarden-
Programm für Start-ups auf den Weg,“ Handelsblatt, November 27, 2020,
https://www.handelsblatt.com/politik/deutschland/zukunftsfonds-bundestag-
bringt-zehn-milliarden-programm-fuer-start-ups-auf-den-weg/26665398.
html?ticket=ST-13018979-mcfEj5GwYAKH2WfkuO2j-ap6 .
57 Economist, “Why big tech should fear Europe,“ March 23, 2019, https://www.
economist.com/leaders/2019/03/23/why-big-tech-should-fear-europe .
58 Economist, “The EU wants to set the rules for the world of technology,“ February
2020, https://www.economist.com/business/2020/02/20/the-eu-wants-to-set-the-
rules-for-the-world-of-technology .
59 eu2020.de, “Strengthening Europe’s digital and technological sovereignty,”
Endnotes
https://www.eu2020.de/eu2020-en/eu-digitalisation-technology-
sovereignty/2352828 .
60 Axel Voss, “A manifesto for Europe’es digital sovereignty and geo-political
competitiveness,” January 2020, https://www.axel-voss-europa.de/wp-content/
uploads/2020/01/AVoss-Digital-Manifesto-2020-english-1.pdf .
61 Adam Satariano, “Big fines and strict rules unveiled against ‚big tech‘ in Europe,“
New York Times, December 15, 2020, https://www.nytimes.com/2020/12/15/
technology/big-tech-regulation-europe.html .
Images used in this paper are from Getty Images/Busà Photography (cover and page 2) and
Getty Images/Otto Stadler (back page).
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