EU’s New Industrial Strategy: Much To Like, but Some Concerns

March 11, 2020

(Ed. Note: The “Innovation Fact of the Week” appears as a regular feature in each edition of ITIF’s weekly email newsletter. Sign up today.)

There is much to like in the European Commission’s newly released Industrial Strategy for Europe, especially as it recognizes the need for more competitive advanced-technology industries and stronger efforts to push back against unfair foreign trade practices. The document gets many things right, recognizing, among other things:

  1. The need for smart intellectual property policies as “essential to help all companies to grow, create jobs and to protect and develop what makes them unique and competitive”;
  2. The fact that “the digital sector will also contribute to the European Green Deal, both as a source of clean technology solutions and by reducing its own carbon footprint”;
  3. The need to push back more strongly against foreign abusive trade practices, such as by exploring “how best to strengthen anti-subsidies mechanisms,” emphasizing the lack of reciprocity in procurement markets and EU funding, and the need for stronger foreign investment screening and advancing tools such as the International Procurement Instrument;
  4. That supporting industrial alliances and industry roadmaps will be important tools;
  5. That, “[if] Europe wants to lead the twin transitions, the Industrial Strategy has to be an industrial innovation strategy at heart";
  6. The focus on climate, particularly the support of clean energy innovation; and
  7. That scalability is key in a digitalized economy and thereby can strengthen the digital single market.

Overall, these are all forward-looking and important positions for the Commission to adopt. However, the document could be strengthened in a number of ways.

First, the Commission defines the challenge Europe faces too narrowly around “digital leadership.” Given the importance of a wide range of advanced technology industries to Europe, the focus instead should be on advanced industry leadership in many sectors and technologies, not just digital.

Second, the document focuses on EU sovereignty rather “allied nation” sovereignty. It states that “Europe’s strategic autonomy is about reducing dependence on others for things we need the most: critical materials and technologies, food, infrastructure, security and other strategic areas.” But this is contradicting the strategy’s language that asserts Europe’s commitment to free trade and global innovation. The report could square that circle if it called out the elephant in the room—China. It is China, with its vast array of destructive innovation mercantilist tools, that is the major threat to EU sovereignty, prosperity, and security. As such, Europe’s focus should be on “allied sovereignty,” not its own interests in isolation from others’. For example, the United States is not seeking to create its own 5G equipment industry to counter China; rather, it is looking at how to boost European players. Europe should adopt the same approach for other industries, especially the Internet and software (including social media and cloud computing) where the United States is strong.

Neither Europe or the United States is big enough to be competitive against China in every technology and industry. We will need to work cooperatively for that to happen. However, while the Commission’s proposed industrial strategy focuses on areas where the EU can still lead, such as robotics and microelectronics, attempts to strive for “sovereignty” will backfire by leading to unsustainable business models, higher prices for ordinary citizens, and a more fragile economy in the long run. To gain comparative advantage, the EU is right to focus on where it has strong incumbent strengths, but it should trade with its allies in the many areas where that is mutually beneficial.

Third, while the report rightly talks about being tougher to confront unfair foreign trade practices, European policymakers should acknowledge that it is China that is the major threat, and absent a close alliance with the United States and Japan, the EU likely will not be able to generate the political will to challenge Chinese practices on its own. As it has in the past, China will retaliate against EU companies, and, as they have done in the past, member states will pressure the Commission to back down on taking strong actions such as bringing WTO cases, which will enable the continued erosion of Europe’s advanced-industry competitiveness.

Fourth, it is problematic to claim that European industry should not face unfair competition from countries that abide by different standards or principles. Clearly, the global trading system has been designed to recognize that developing nations do not, cannot, and should not have the same standards for environmental and labor protection, for example, as the most developed nations. To insist that the EU will only trade with countries that have the same standards and regulations it does is to turn its back on global trade and unfairly punish emerging markets.

Fifth, the strong focus on small businesses is misguided. Yes, Europe has a greater share of small businesses than China or the United States—but this is precisely why it is less competitive. Europe needs stronger medium-sized and large businesses, and fast-growing small businesses that grow up to become big ones. The strategy should be size-agnostic at minimum.

Sixth, the report punts on the key question of competition policy. As the Alstom-Siemens merger decision showed, Europe faces a key tension between consumer welfare from more competition and industrial competitiveness from increased scale of EU companies, particularly to be able to compete with state-backed Chinese behemoths. Currently, Brussels is facing a similar dilemma in having to decide on a deal between Fincantieri and Chantiers de l’Atlantique, two European shipbuilders. This is another test that will show whether the EU is taking China’s commercial threat seriously, or if it will jeopardize its global lead in cruise shipbuilding. The Commission should adapt EU competition rules sooner than by 2021—a timeline proposed by the Industrial Strategy—to revise the rule book for high-stake mergers and allow for the creation of larger European companies.

But the EU should not push for a more defensive industrial strategy either. A more protectionist model that prioritizes European firms over those of allied nations carries the risk of undermining competition internally at the expense of European consumers and skewing the game by picking winners instead of pushing all companies to innovate. As the strategy proposes to support “Important Projects of Common European Interest” through public funding to forge European champions, relaxing state aid rules should remain the exception, and if aid is expanded then firms from all allied nations should be eligible.

In addition, although the strategy recognizes the need for scale for its companies to compete in the digital economy, the Commission should extend that insight globally and recognize that all large non-EU internet companies also need scalability. Limiting cross-border data flows and favoring EU digital champions work against that.

Seventh, although the strategy’s call for increased EU participation in international standardization bodies is welcome, its intention to develop “new standards and technical regulations” is problematic. The EU should commit itself to supporting the existing voluntary, cooperative, and industry-led standards process, but it should recognize that China is manipulating that process today, and it should push back. Developing its own standards is not the right response.

Eighth, the EU’s call to “set global standards” that bear the hallmark of European values does not adequately respect differences between nations. Some nations do not share Europe’s values on particular issues, such as the “right to be forgotten,” and the EU should respect those differences rather than trying to impose its system on everyone else.

Finally, although the strategy rightly sets out to “shift the mind-set from risk averse to failure tolerant” and embeds innovation in its policy making, many recent EU proposals, such as the AI White Paper, do not currently reflect this, and rather continue to push for a precautionary, risk-based approach.

Overall, the industrial-competitiveness challenge facing advanced Western economies, including Europe is, significant, and the Commission should be commended for taking a bold, forward-looking approach. But with some adaptations, particularly recognizing the need for allied cooperation to push back on the China challenge, the strategy could be even stronger.