How will future relations between the US and the EU look? In its new report, EIT Digital analyses the current geo-political and economic landscape to address this question and propose four possible scenarios, and their policy implications.
According to EIT Digital, the transatlantic partnership should move somewhere towards the middle of four scenarios that consider both the degree of regulatory alignment and the industry collaboration. To unlock the full potential of an economic and technological partnership, stronger regulatory alignment, more integrated R&D and Innovation systems, and more high-level trade agreements are needed. In addition, a collaboration between the EU and the US on technology should embrace a geopolitical perspective that includes the defence of market and democratic principles globally.
A changing global economic order
In the recent past, the EU and the US have released analyses of their strategic dependencies and proposals of action to mitigate them. Both identified semiconductors, pharmaceuticals, batteries and ‘rare earths’ as strategic sectors with vulnerable supply chains, due to their high reliance on a small number of suppliers. Factors such as the ever-changing global economic order, the COVID pandemic and Russia’s aggression in Ukraine have heightened the need for such action plans. In addition, China’s ambivalent position on the latter has brought new attention to its mercantilism and the dangers implicit in the rise of techno-nationalism and competitive autarchy. At its highest level the war has also brought home to Europe, the United States, and other democracies the issue of strategic dependencies.
The conflict, besides the issue of energy, has further affected global supply chains that had already been disrupted during the pandemic. These shocks have made it even more essential, for both American and European companies, to rethink their regional and global supply networks. Moreover, China’s critical role in global supply chains and its growing geostrategic objectives are also factors to be considered. The country’s focus on gaining either global leadership or market dominance in specific technology domains (including semiconductors, solar energy, rare earth magnets (REMs), electric vehicles, and artificial intelligence), when coupled with its aggressive geopolitical stance, pose an unavoidable challenge to market democracies.
Recent developments: the Trade and Technology Council
The Ukraine war and China’s rise have thus given new impetus to the imperative of resetting the transatlantic partnership and the broader liberal-democratic order it represents. They have re-enforced a process that was already underway since the end of 2020. As a result, in 2021 the US-EU Trade and Technology Council (TTC) was established. In its inaugural statement the TTC expressed support for ‘the continued growth of the EU-US technology, economic and trade relationship, and cooperation in addressing global challenges’.
Most recently, in May 2022, the TTC’s 50-page statement defined this new course of action. Points 14-17 of the statement explicitly outline an ambition for coordinated economic actions between “trustworthy and reliable partners” to parry attempts by “autocratic countries” to “undermine the security of other nations.” These recent statements and the establishment of the TTC represent an opening round and the intention for this vision to be made reality.
A series of actions related to the ongoing transatlantic reset and realignment have been taken (e.g., Boeing-Airbus dispute, US tariffs on European steel and aluminium and European tariffs on US goods). Divergences and irritants do however remain (e.g., US-EU Privacy Shield, Digital Markets Act, “Buy America” rules, Inflation Reduction Act (IRA) for electric vehicle tax credits).
In the meantime, trade and investment between the United States and Europe have grown significantly. In 2022 the US imported more from Europe than China, reversing the pattern of China being America’s dominant trade partner since 2010. In September 2022 Germany’s exports to the US surged 50% on a year-over-year basis. The U.S. has also become a major military and energy supplier, supporting the strengthening of European defences, and helping to replace Russia as a natural gas supplier. As some European companies have shifted investment from China to the US, Europe’s foreign direct investment in the U.S. grew 13.5% in 2021 to $3.2 trillion, as US DFI in Europe grew 10% to roughly $4 trillion, dwarfing investment flows between the US and China.
EIT Digital’s point of view
The new impetus to transatlantic unity with the TTC as its vehicle should help the US and EU move towards a more stable and collaborative relationship. Will this happen? How might transatlantic relations evolve?
This EIT Digital report addresses the above questions by developing future scenarios and assessing their implications. Chapter 2 provides an analysis of the state of digital regulation, a high-level picture of existing transatlantic economic ties, a characterisation of US and EU technology specialisation, and a review of collaborative activities. However, the approach is selective, as an exhaustive survey of the transatlantic economy is beyond this study’s scope. In chapter 3 the report highlights convergences and divergences, moving on to present four scenarios. Chapter 4 concludes with an assessment of the impact of the various scenarios and their policy implications.
Conclusions
Overall, there is not one ideal scenario when it comes to expected outcomes. Ideally, the transatlantic partnership should move somewhere towards the middle of the four scenarios. To achieve this objective, the report draws the following conclusions.
1) Stronger regulatory alignment is needed to unlock the full potential of the cross-Atlantic economic and technological collaboration. This requires stronger political will to find common ground on key issues such as:
– Privacy shield and data exchange
– Large platforms and competition
– Artificial Intelligence
– Cybersecurity
2) The EU and US should collaborate to build more integrated transatlantic R&D and Innovation systems.
NATO should be used to build cross-Atlantic military R&D collaboration, building on DARPA and emerging European defence research programmes.
The EU and US should work together to connect and leverage their innovation ecosystems, to enable start-ups on both sides to cooperate in key technological fields and scale in both markets.
Joint efforts should be made to strengthen in a balanced manner the two-way exchange of talent across the Atlantic.
3) Business collaboration and trade agreements should move to the top of the political agenda.
The TTC will be central to this process, but government-level trade agreements and bottom-up industry partnerships to accelerate industrial cooperation and complementarity in production and services are needed.
Stronger transatlantic alignment is needed on state support for industry, as seen in the Inflation Reduction Act and its EU equivalents, or on the issue of semiconductor subsidies.
4) Transatlantic collaboration on technology should embrace a geopolitical perspective that includes the defence of market and democratic principles globally. Joint principles should reflect the idea of technology for the good.
Source: EIT I News (https://shorturl.at/htPY9)