A U.S. Grand Strategy for the Global Digital Economy
For America to remain the global leader in IT, the U.S. government must formulate a grand strategy grounded in a new doctrine of “digital realpolitik.” The first priority should be advancing U.S. interests by spreading the U.S. digital innovation policy system and constraining digital adversaries, especially China. This will entail working with allies when possible—and pressuring them when necessary.
For the past quarter-millennium, each emerging wave of general-purpose technologies has widened the scope of global economic integration, raising new questions about international governance and national economic competition. The rise of the digital economy over the last two decades has further deepened and widened global integration as the Internet and related technologies have allowed firms to more easily attain global reach, while at the same time linking the world more closely in a web of information. But there is also a large countervailing force: an autocratic, non-democratic country—China—that is threatening to wrest global leadership in these technologies, with attendant social, political, economic, and security implications.
Against this backdrop, the key question today is how a world, extremely diverse in income levels, cultures, and types of government, will deal with global technologies and global firms. This is a particularly important question now. For unlike the prior period of globalization—which reached its pinnacle in the summer of 2001 (after China joined the World Trade Organization (WTO) and before 9/11 and the start of the failed WTO Doha round), a time when there was a wishful consensus that most nations would embrace globalization, rules-based open markets, democracy, and cooperation—today’s era is one of nationalization, mercantilism, increased authoritarianism, and tension.
The digital economy entails a degree of overlap—and tension—between economic, social, and political control that is different from traditional 20th century trade in physical goods. The digital world thus is rife with strife: There is conflict over cyberattacks, Internet blocking, and cross-border data flows; over attitudes and policies toward leading information technology and Internet firms; and over technology leadership and competitiveness. Indeed, for many countries and regions, advancement of their own IT and digital firms, sometimes involving active steps to hobble foreign competitors, especially American firms, has become a centerpiece of economic policy. (The Information Technology and Innovation Foundation (ITIF) defines digital economy industries as more than just Internet companies; they include firms involved in the entire “stack” of information technology (IT), including chip design, semiconductors, hardware, software, e-commerce, and Internet services.)
In this world, the United States as the global IT and digital leader has struggled to articulate and advocate for a coherent and strategic response. All too often, U.S. thinking about privacy, tech platforms, national security, and Internet and artificial intelligence (AI) governance is siloed and bifurcated. During the Clinton and second Bush administrations, U.S. policymakers believed that the rest of the world would emulate what was obviously the superior U.S. digital policy system, and they worked toward that end. But China’s unprecedented success in IT and digital industries, coupled with a questioning of the desirability of a U.S.-style light-touch digital regulation and the rise of U.S. “big tech” companies, has meant that the United States can no longer rely principally on persuasion to convince others of the economic and innovation advantages of its approach.
When that reality started to crystalize, the Obama administration made advancing the global “open Internet” one of its top global digital policy goals. Unfortunately, many countries have grown distrustful of the U.S. government, especially after the Snowden revelations showed the degree to which U.S. intelligence agencies were leveraging digital technologies for surveillance. Despite some reforms and engagement by the Obama administration, the last decade has seen retrenchment rather than advancement of the open Internet globally, open governments, and an open, rules-based global digital economy.
The Trump administration’s response to this rising digital competition was grounded in realpolitik and determination to put U.S. interests first, coupled with a reduced presence and advocacy of U.S. interests in international forums. But while the former part of this shift was needed, the reality of the global digital economy is that it is difficult to effectively advance U.S. national interests unilaterally.
This brings us to the present moment. The United States needs to move away from an idealist view of digital international relations to a new doctrine of “digital realpolitik”—focusing more on protecting key U.S. interests rather than acting as a global ambassador of Internet openness. The new doctrine needs to move away from the idealist’s dream of a harmonized, values-based global Internet, as this is clearly not going to happen. It also needs to move away from principally unilateral action.
The U.S. government needs to formulate a grand strategy grounded in a doctrine of digital realpolitik that advances U.S. interests first and foremost, recognizing that it should work with allies when it makes sense, and constrain digital adversaries, especially China and Russia.
A realist strategy needs to be based on the central recognition that America must enlist, in a variety of ways, like-minded nations to support U.S. interests, and at the same time not be reluctant to exert pressure to have other nations come along. And given China’s directly conflicting approach to the Internet, this needs to include cooperation on the overarching goal of limiting China’s global dominance and manipulation of competitive markets in the IT and digital space.
Fears of the Internet fracturing at the root system level into a so-called “splinternet” are overblown. But it is true that global digital politics are likely to be highly contentious for the foreseeable future. Permanent alliances may be difficult to sustain, even against China. More likely, alliances will shift, depending on the issue.
This means that shaping the global IT and digital economy in ways that are in U.S. interests is one of the most important challenges facing U.S. foreign and economic policy going forward. Getting it wrong could lead to a many-against-one environment wherein U.S. IT and digital firms—and by extension, the United States overall—face a challenging environment with consequences for many aspects of American life.
It is long past due to leave behind the hopeful, but naïve, view that most countries will see the digital economy the way the United States has historically seen it: as a force for progress, innovation, and free speech, wherein market outcomes should generally be allowed to prevail, with a light touch of government only in the few places needed. In the future, needed change will come more from appealing to foreign interests, rather than values and ideas.
The U.S. government needs to formulate a grand strategy grounded in a doctrine of digital realpolitik that advances U.S. interests first and foremost, recognizing that it should work with allies when it makes sense, and constrain digital adversaries, especially China and Russia.
This report first discusses why leadership in IT and digital technology is important. It then discusses where major nations or groups of nations stand vis-à-vis IT and digital technology and their strategies and successes. These include the United States, China, the EU, Japan, the Four Asian Tigers (South Korea, Taiwan, Singapore, and Hong Kong), developing nations generally, and disruptive nations such as Russia. The report then enumerates seven undesirable scenarios and how they may develop:
Scenario 1: EU “regulatory imperialism” succeeds, and America is isolated.
Scenario 2: Anti-tech forces turn America into the EU and China prevails.
Scenario 3: The EU won’t budge.
Scenario 4: Nations craft a “digital WTO.”
Scenario 5: China wins the minds (if not the Hearts) of UNCTAD nations.
Scenario 6: The splinternet emerges.
Scenario 7: The United States spends much of its political capital on promoting the open global Internet.
It then lists four desirable scenarios the achievement of which U.S. policy should seek:
Scenario 8: U.S., EU, and non-aligned nations isolate, punish, and defend against IT and digital “scofflaws,” such as Russia.
Scenario 9: The U.S. forms an Anglo-American (and friends) alliance to push back against Chinese innovation mercantilism.
Scenario 10: The United States, the EU, and non-aligned nations cooperate against China.
Scenario 11: The U.S. approach prevails in developing markets.
Finally, the report lists 11 key principles that should guide U.S. IT and digital policy internationally:
Principle 1: Unabashedly support IT and digital innovation, rejecting the techlash narrative and policies.
Principle 2: Embrace IT and digital “national developmentalism” (smart, active policies to support IT innovation and adoption) and bring more nations into that orbit.
Principle 3: Work to limit China’s IT and digital progress, especially when it based on innovation mercantilism.
Principle 4: Actively fight foreign IT and digital protectionism.
Principle 5: Advance IT and digital free trade, especially with like-minded nations.
Principle 6: Resist authoritarian influences in the IT and digital economy but remain focused on key U.S. interests.
Principle 7: Defend the private sector’s core role in IT and digital governance.
Principle 8: Defend the principle that big is not bad, and often is superior.
Principle 9: Defend light-touch regulation.
Principle 10: Defend the mostly open Internet.
Principle 11: Support and advance a robust domestic IT and digital policy that ensures U.S. global leadership.
Since the rise of the first industrial revolution in Britain, most nations seeking wealth and power have focused on attaining leadership, or least competencies, in technologies that are emerging, foundational, and propulsive. These technologies change over time as emerging technologies become mature and nations master them. But initially, these technologies are emerging, and most nations seek capabilities. They are foundational in that they apply to many different parts of an economy and society, including to military capabilities. And they are propulsive, in that their growth spurs widespread investment and growth in the overall economy.
For example, when the British led in the development of the railroad, nations around the world sought to also adopt the technology. While the first modern steam locomotive railroad was built in 1830 between Liverpool and Manchester England, it took decades for other nations to attain it. For example, in the United States, rail miles grew from about 32,000 in 1860 to about 180,000 in the mid-1890s. And it was not until 1872 that the first railroad was built in Japan, which the modernizing Meiji government saw as critical to launching Japan into the modern age. Likewise, governments have sought to ensure technology capability in every key technology since, including steel, electricity, telephony, aviation, oil, mass production systems, computing, and now digital technologies.
Propulsive industries are almost always characterized by scale and the growth of extremely large firms, in part because only very large firms can assemble the resources to master the complexity of the task at hand.
Technologies such as the railroad and IT and digital today enable “propulsive” industries that generate an economic boom, both through the investment wave generated and the economic benefits they bring. In the late 1860s, about 10 percent of America’s non-farm paid labor and 50 percent of the production of its capital goods industries were involved in railroad construction. During the next major economic transformation in the late 1890s, the steel industry played a similar role. Again, in the early 1950s, the technology systems of chemical processing, electronics, and mass production powered an economic boom, with mass production goods industries such as automobiles and appliances propelling the U.S. economy to new heights.
During their emergent periods, these technologies and industries seem larger than life, capturing the excitement of the entire society. In the boom period of the railroad, it was at the center of the national imagination just as the Internet was from the mid-1990s to the mid-2010s. As one economic historian described it, “Stories about railroad projects, railroad accidents, and railroad speed filled the press, the fascinating subject was taken up in songs, political speeches, and magazine articles.” In 1880, sociologist Charles Fraser stated that “an agent is at hand to bring everything into harmonious cooperation, triumphing over space and time, to subdue prejudice and unite every part of our land in rapid and friendly communication ... and that great motive agent is steam.” The rhetoric surrounding IT and digital technology was not all that different, at least until recently. But eventually the excitement dies, and in some cases turns to scorn, as we see with the current “Techlash,” wherein big tech firms and emerging tech generally are accused by many as the source of much that has supposedly gone wrong.
Propulsive industries are almost always characterized by scale and the growth of extremely large firms, in part because only very large firms can assemble the resources to master the complexity of the task at hand. The United States saw this with the railroad industry, which generated America’s first large corporations, an industry many later industrial leaders, such as Andrew Carnegie, got their start in. Similarly, propulsive industries such as oil, aviation, autos, computing, and software were also characterized by the emergence of very large firms, just as we see with today’s large Internet firms. And from their early beginnings, these firms became global. And like now, populist reactions against these large firms emerged. Despite what the populists might say, scale and global reach is a feature, not a bug.
Once most nations have built out or developed a new foundational technology, it and the industry developing it cease to become central, and are usually relegated to routinized policy interest, just as industries such as rail, steel, oil, and mass production manufacturing are today in most developed nations. The excitement and policy focus shifts to the next emerging technology system.
But while the current IT and digital technology system is similar to prior emerging technologies in multiple ways—it is global, propulsive, foundational, and characterized by very large, global firms—it is different in three key ways:
- The system is more of a production and consumer technology system than prior periods (e.g., mainframe computers were used by organizations, not consumers; search engines are used by everyone).
- They are also a communication technology, which means that they impact what people see and hear, and who with and how they communicate, and thus have a broad political and social impact.
- They have a potentially broader impact on jobs than most prior technology systems.
It is these aspects that add complexity to the global digital system, as it means that the technology systems links nations, firms, and people more closely together, often in ways that conflict with individual country norms and rules.
Since the development of computing in the 1930s, the United States has led the world in IT, with a succession of leading companies.
The particular nature of the IT innovation system played to U.S. strengths. Unlike some sectors and technologies wherein innovation could be pursued more incrementally by incumbent firms, the history of the IT industry is one in which older firms committed to older technologies were regularly replaced with new ones embracing fundamentally different technologies. This relentless Darwinian winnowing and survival of the fittest played to America’s entrepreneurial strengths. Americans were willing to take risks and start new enterprises, often with the support of robust venture capital pools. Indeed, with the establishment of the American Research and Development Corporation in 1946, the United States pioneered the venture capital industry.
As such, one key to U.S. success was the continuing entry of new IT companies, displacing others as leaders. Once-dominant companies such as Cisco, General Electric, Hewlett Packard, and IBM are now smaller than they were at their peak. And once strong companies such as AOL, DEC, EDS, Lucent, Motorola, Myspace, Netscape, Sperry Rand, Sun Microsystems, Yahoo, and Wang are either out of business or were purchased by other firms. And the top digital companies in the United States—Amazon, Apple, Facebook, Google, and Microsoft—are on average just 31 years old. Some of this evolutionary change came about as technology opened up new opportunities (e.g., the shift from mainframes and mini-computers to personal computers, the rise of the Internet, etc.) wherein incumbents could not adapt effectively, and new entrants emerged and thrived.
This disruptive dynamic played out in the emergence of semiconductors. When Bell Labs pioneered the development of the transistor, it would seem logical for General Electric, America’s sixth largest company, to lead in this technology. But it did not. Other new firms such as Texas Instruments did. And after presiding over the development of the transistor at ATT’s Bell Labs, William Shockley founded his own semiconductor company in Mountain View, California, in 1957, called Shockley Semiconductor Laboratories. Rebelling against his authoritarian style, eight of the young technicians he had recruited—the “traitorous eight”—quit and formed their own company: Fairchild Semiconductor. When two of the eight, Robert Noyce and Gordon Moore, got frustrated working at Fairchild, they left to start their own firm: Intel. Another of the eight, Eugene Kleiner, cofounded the Silicon Valley venture capital firm Kleiner Perkins Caulfield & Byers, which made early investments in companies including Google, Amazon, AOL, Netscape, and Sun Microsystems.
The United States had another key advantage, one which China enjoys today, and that is scale. As noted business historian Alfred Chandler has written, the large American market enabled U.S. firms to successfully enter new mass production industries, such as chemicals, steel, and meat processing, and later autos, aviation, and electronics.4 Because scale mattered so much to innovation and firm competitiveness, U.S. firms such as DuPont, Ford, GE, GM, Kodak, Swift, Standard Oil, and others became global leaders.
Scale mattered even more to IT firms, for which fixed costs were high (writing the code, designing the chip, etc.) and marginal costs significantly lower. This meant that having access to a larger market gave firms key advantages that allowed them to drive down costs and reinvest the profits into the next generation of technology. As David Moschella argued in Seeing Digital, in most businesses, as sales grow, “there are initially important economies of scale due to learning and experience, but these eventually flatten out. In economic terms, the marginal cost comes to equal the average cost of adding more human capacity.” Software and network markets are different: “Here, the marginal cost of adding a new user to, say, Google or Facebook is close to zero. This means that average costs keep falling with volume, generating increasing returns to scale, and a tendency to create highly profitable, winner take-all (or near all) industry structure.”
And because digital industries, especially information (including search engines and social networking) and e-commerce, are characterized by scale and network effects, U.S. firms were able to capitalize on early leads to be the most competitive in the global market.
That contributed to another key success factor: The United States became a talent magnet, particularly for electrical engineering and computer science talent. Andy Grove, Andy Bechtolsheim, Vinod Khosla, Sergei Brin, Elon Musk, and Peter Theil are just a few of the top immigrant entrepreneurs who helped fuel U.S. IT leadership.
Another key advantage was U.S. government policy. With World War II and the subsequent emergence of the Soviet threat, the federal government constructed the world’s greatest innovation system. The massive expenditures on weaponry and research and development (R&D) in WWII positioned the United States as the leader in a host of advanced industries, including electronics. The response to the Soviet threat—exemplified by the satellite Sputnik—helped cement America’s technology leadership. By the early 1960s, the federal government invested more in R&D than every other foreign government and business combined. And that support for research, as well as contracts to provide needed government services and products, provided critical, although usually overlooked, inputs to America’s key technology hubs, including Boston’s Route 128 and Silicon Valley. Indeed, as late as 1990, Silicon Valley’s Santa Clara County received more Department of Defense (DOD) prime contract award dollars per capita than any other county.
Absent major policy changes, it is likely that in the next decade America sees continued relative decline, and with it, increased dependency on other nations’ IT and digital products, including from non-allies.
As IT entered into a new phase in the 1980s and 1990s, with more powerful microprocessors, the emergence of personal, networked computers and easy-to-use software, it became clear to many policymakers that IT was now a key driver of growth and competitiveness, and that effective economic policy mean getting it policy right.
Successive administrations, supported by bipartisan agreement in Congress, took a number of steps to spur IT and digital innovation, including deregulating broadband telecommunications (as most American homes had access to at least two broadband “pipes”— cable and DSL), freeing up radio spectrum for wireless communications, and taking a light touch with respect to regulating online privacy, establishing Section 230 of the Communications Decency Act to protect Internet intermediaries from liability for content on their systems, opening up the GPS satellite system for commercial use, and using IT to transform government itself. Finally, at least until recently, the prevailing attitude toward IT and digital’s impact on jobs and the economy was positive, with few policymakers wanting to slow down transformation, even if it led to productivity growth and some employment disruption.
While the United States still leads in many areas of IT, its lead is shrinking and, in some cases, such as in telecom equipment to China, has been lost. And absent major policy changes, it is likely that in the next decade America sees continued relative decline, and with it, increased dependency on other nations’ IT and digital products, including from non-allies.
China Responds, Mostly Succeeds, and Is Poised for Further Success
In the early 1980s, when China sought to gain advantage in the IT industry, it was significantly behind Europe and the Four Asian Tigers. But it has arguably made the most progress, and succeeded in creating many viable competitors for leading American IT and digital companies, and in the case of telecom equipment, destroying the competition.
As a result, China’s IT economy is massive. Around 30 percent of Chinese exports are in the IT sector. However, much of this output and exports is by foreign multinationals that produce in China. But China has developed some leading multinationals of its own, including Huawei, Lenovo, and ZTE. In addition, its BAT companies (Baidu, Alibaba, and Tencent) have used their protected home market to grow and become dominant in China, before using it as a base to expand into foreign markets around the world.
China has adopted some technologies at a rapid pace. For example, in 2019, there were an estimated $1.5 trillion of online retail transactions, 25 percent of the nation’s total retail transactions—more than twice both the volume and proportion of e-commerce in the United States. This is even more impressive given China’s Internet penetration rate remains low at only 60 percent, and 99 percent of its Internet users have mobile Internet (with 70 percent using mobile payments).
As in virtually all technology sectors, China’s game plan is the same: first copy foreign technology (often through forced joint ventures, intellectual property (IP) theft, or reverse engineering); then limit access to the Chinese market of foreign firms while supporting domestic firms with a panoply of support, including grants, low-cost and preferential financial loans, tax breaks, discriminatory government procurement and other tools; and finally, supporting “going out” to gain market share outside of China.
China made arguably the most important digital strategy decision in the history of the IT industry. It decided it would not let the giant U.S. dot-coms—especially Google, Facebook, and Amazon—just set up shop and dominate the Chinese market.
China’s first step was to attract foreign investment. In the early 1980s, when Deng Xiaoping opened up the Chinese economy to foreign investment, its main economic development strategy sought principally to induce foreign multinationals to shift relatively low- and moderate-value production to China.
China’s second step was to attempt to learn from foreign companies, in part by having them train Chinese executives, scientists, and engineers, and also by forcing them to transfer technology as a condition of market entry. Since roughly 2000, when China joined the WTO, it has deployed an array of unfair and often WTO-illegal tactics, including currency manipulation, massive subsidies, and limits on imports in order to both attract foreign establishments and support domestic manufacturers, especially in the IT sector.
The third step was to support Chinese companies in their efforts to copy and incorporate foreign technology while building up domestic capabilities. One important marker for the transition from stage two to stage three was the publication in 2006 of “National Medium- and Long-Term Program for Science and Technology Development (2006–2020),” which calls on China to master 402 core technologies—including a host of IT sectors such as integrated circuits and high-performance computers. China moved to a “China Inc.” development model of indigenous innovation, which focused on helping Chinese firms, especially those in IT and digital industries.
This is how China’s digital economy became dominated by domestic firms. The Chinese government banned international competitors, such as Facebook and Twitter, in 2009, and Dropbox and Google in 2010. Indeed, China made arguably the most important digital strategy decision in the history of the IT industry when it decided it would not let the giant U.S. dot-coms—especially Google, Facebook, and Amazon—just set up shop and dominate the Chinese market the way they were doing in so many other nations. Instead, it significantly limited the role of or banned U.S. firms, creating time for its own firms—especially Baidu, Alibaba, and Tencent—to build similar services, or at least initially copies of U.S. services. This means that a generation of Chinese consumers has grown up without knowing that their Internet and consumer experience is completely different than what is available in most other countries. And this happened during a critical, formative period of digital growth in China. While it is not possible to calculate an exact figure, ITIF has conservatively estimated (based on market-share comparisons) that Google, which withdrew from the Chinese market in 2010, subsequently lost $32.5 billion in search revenue from 2013 to 2019, while Amazon and Microsoft’s cloud services (IaaS, which is restricted in China) lost a combined $1.6 billion over the two-year period from 2017 to 2018.
While this type of protectionism was unfair and even illegal under WTO rules, there is no doubt this “China First” strategy was wildly successful and led directly to China’s now highly diverse and dynamic mobile and Internet services industries. Its apparent success is what attracts many other large developing countries, such as India and Indonesia, in trying to replicate China’s success in developing an advanced IT and digital sector.
The fourth and final step was to enable Chinese firms to be independent innovators—as Japan, Singapore, South Korea, and Taiwan have all become. China is attempting to do this through an array of plans and policies: “13th Five-Year Plan for Science and Technology,” “13th Five-Year Plan for National Informatization,” “The National Cybersecurity Strategy,” and, of course, “Made in China 2025 Strategy.” For instance, with regard to information and communications technology (ICT)-enabled manufacturing, the strategy calls for 80 percent domestic market share of high-end computer numeric-controlled machines by 2025; 70 percent for robots and robot core components; 60 percent for big data; 60 percent for IT for smart manufacturing; and 50 percent for industrial software. Transitioning from “fast follower” to “global leader” in innovation is extremely difficult. And while China is among the leaders in some areas such as telecommunications equipment, it is farther away in others such as semiconductors—but is closing the gap. (See figure 1.)
Figure 1: National IT and digital strengths
This is important because too many experts, pundits, and policymakers in the United States persist in believing that China can never catch up technologically and as such never be a technological threat to the United States. They believe that because they hold that there is only one “recipe” for innovation success, and that this is the Washington Consensus model of free markets, IP rights, and limited government. This is why Zachary Karabell wrote in The Washington Post, “Chinese firms excel at copying but not yet at creating. As a result, smart foreign companies realize that the lasting solution is innovation, not courts and lawyers.” Kerry Brown, a professor at Kings College London, wrote,
The Chinese government under Xi can pour all the money they want into vast research and development parks, churning out any number of world class engineers and computer programmers. Even with all of this effort, however, China is likely to produce few world class innovative companies. The fundamental structural problem is that the role of the state and government in China is still very strong … The system that China currently has still rewards conformity.
Self-congratulatory assumptions on the part of U.S. commentators about China’s inability to innovate are not only wrong, but dangerous.
Officials and experts in China love to send this message to Americans. They pretend to bemoan the fact that that government is bad at “picking winners” and that China would be better off without such policies, but alas, the government hasn’t yet seen the light. The not-so-subtle subtext is don’t worry about us, we can’t challenge you technologically.
Such self-congratulatory assumptions on the part of U.S. commentators about China’s inability to innovate are not only wrong, but dangerous. As Gregory C. Allen, a fellow at the Center for a New American Security, wrote, China’s dominance in AI technology and its military applications are not only credible, but likely, in the absence of a massive shift in U.S. policy. The reality is that China can innovate, even if it is not always “first to the world,” and that has, does, and will challenge U.S. IT and digital leadership. It will also innovate in very different areas, prioritizing those valued by the state, such as facial recognition, social credit, traceable financial transactions, and the like. Overall, China is the most serious competition America has ever faced.
Europe Responds, But Largely Fails
Europe has responded to America’s digital leadership with concern, even alarm. Many EU policymakers regularly call out U.S. technology “colonization” and call for “digital sovereignty” against (U.S.) “dominant platforms.” The French Minister for Economic Affairs went so far as to call U.S. “big tech” companies an “adversary of the state”
These reactions are not new. Since the 1960s, Europe has viewed U.S. IT leadership with alarm. As French economic journalist Jean Jacques Servan-Schreiber wrote in his 1968 bestseller, The American Challenge, “One by one, U.S. corporations capture those sectors of the economy most technologically advanced, most adaptable to change, and with the highest growth rates.” Like today, Europeans characterized the challenge in dire terms: “a seizure of power,” “invasion,” “domination,” “counterattack,” and “industrial helotry.”
Also like today, it was not just European politicians sounding the alarm, it was European business. The major business trade association of Europe (UNICE) complained that U.S. firms actually had the audacity to cut prices, writing in a report to government:
A joint study of production costs has allowed us to set rules which, while safeguarding competition, prove beneficial to all. We must not allow the American firms from lack of knowledge of our methods, to provoke a price war that would cause serious difficulties in the market.
In other words, American firms refused to participate in price cartels and instead focused on providing EU consumers with lower prices, and this should be stopped.
Servan-Schreiber called for Europe to get its house in order: Build a single market, fund advanced technology R&D, and expand university enrollment, particularly in STEM (science, technology, engineering, and math). He eschewed any talk of punishing or rejecting U.S. investment. In fact, he wrote, “Nothing would be more absurd than to treat the American investor as ‘guilty’ and to respond by some form of repression.”
As both a cause and effect, in response to the current “invasion” by U.S. digital firms, Europe has embraced the kind of “repression” Servan-Schreiber counseled against.
Despite fretting about the U.S. “invasion” for over half a century, and the success of such firms as Arm, SAP, Skype, and Spotify, Europe largely failed to generate global-leading IT and digital firms. In fact, Europe has lost global market share, especially to China. As figure 1 shows, compared with nations such as South Korea and Taiwan—and especially the United States—the EU has broader technology capabilities across value chains, but has much shallower capabilities in each area.
As both a cause and effect, in response to the current “invasion” by U.S. digital firms, Europe has embraced the kind of “repression” Servan-Schreiber counseled against. The EU has deployed a wide array of mercantilist tools to protect itself in the hope of hobbling, Gulliver-like, the American giants so that that the EU “Lilliputians” can grow. This takes the form of aggressive antitrust enforcement; limitations on the export of data; taxes on U.S. digital companies’ sales (digital services taxes); geo-blocking prohibitions; regulating video platforms as traditional audiovisual providers; government funding of technology alternatives (e.g., the Quaero search engine, the GAIA-X cloud project); establishing EU-approved “data intermediaries” as an alternative to U.S. tech firms; mandates for paying newspapers to list their articles in search results; limits on price discounts by e-commerce retailers; requirements to take down information from the web (“right to be forgotten”); charging foreign firms more for access to EU government data; massive fines for privacy, content, and other digital violations; onerous regulatory restrictions on the use of data; and many others.
There are multiple reasons for Europe lagging behind in IT and digital, especially in developing EU-headquartered firms (most U.S. tech firms actually invest significantly in EU operations, including R&D). One is its approach to antitrust. With the Sherman Act, the United States banned trusts and cartels, which led American firms to merge and get big, significantly boosting their global competitiveness. In contrast, Europe was more permissive toward cartels and other cooperative arrangements (as noted by the previously mentioned UNICE statement), which meant that on average EU firms remained smaller. For example, in 1966, the United States had 134 corporations with annual revenues of more than $500 million, while Europe had just 41. In the IT sector, wherein scale is everything, this was a serious drawback. Europe’s continued veneration of small businesses continues to hold back its digital leadership, as it leads to a reinforcing cycle of attacking large U.S. IT firms while at the same time continuing to provide small EU firms with a host of preferences, which are tied to them being small and just ensure they remain small.
Europe also has a long history of throwing money at second-rate “national champions,” usually in an attempt to win “the last war.” For every Airbus or Ariane, there are many more failures. Europe did that with mainframe computing in a quixotic campaign to challenge IBM, funding companies such as Bull and Olivetti, before the weakened firms were bought up by General Electric—which in turn also failed at computing. And Europe failed in the Eureka project to create a digital television industry. It failed to build the next so-called “Google killer” with Quaero, and the next cloud giant with Cloudwatt or Numergy. And now the French government wants to inject public money into creating the next Airbnb. In this case, they fail to effectively predict the future, as noted by a 2006 European Commission report on national champions, which does not even mention the Internet.
EU policymakers never understood, and still largely don’t, that the way to compete with American tech giants is not to take them on directly, but to rely on Schumpeterian competition. As Joseph Schumpeter wrote:
[C]ompetition from the new commodity, the new technology, the new source of supply, the new organization … competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.
Europe consistently strikes at the margins—by taxing, regulating, and fining American tech giants—when it should strike at foundations, by supporting disruptive technologies in which U.S. (or Chinese) firms are not yet established. They continue to fight the last war, with their focus on cloud computing, search, and social networks; all relatively mature technologies wherein new entrants will have a difficult time penetrating because current offerings are so good and because scale economies and network advantages make entry difficult. The United Kingdom has performed a bit better, with a rich history of at least inventing, if not exploiting, IT (for example, Deep Mind).
Structurally, the EU continues to suffer from a number of challenges, including limited venture capital funding, a relatively weak higher education system for computer science, and too many small firms that do not scale. In addition, even though the EU has made considerable progress since 1992 in establishing a single market, and more recently, a “digital single market,” it still has not completed the task. And even with that, language differences make it harder for firms to scale quickly across Europe, leading them to lag behind Chinese and U.S. competitors.
Because of a lack of synchronized layers of laws and regulations (in other words, regulatory fragmentation) across member states, and a digital single market that remains more theory than reality, the EU has been unable to nurture data-driven business models through a large domestic market. There are still divergences in IP rules, licensing arrangements, and regulatory enforcement, as well as obstacles to the efficient delivery of online goods. Fragmentation prevents scale for companies—in a digital economy in which successful players are those that can harness network effects.
Europe also lagged because its firms did not embrace the IT “ecosystem-based” business models. For example, in 2006, Nokia was the leading cell phone maker in the world. Within just a few years, Apple was dominant and Nokia’s cell phone business was dead. This was in large part because Apple was able to leverage technology to create a unique customer experience through a product-service, ecosystem-based business model. In addition, the EU generally put an emphasis on mechanical engineering at the expense of software capabilities, even as Marc Andreesen famously stated that “software is eating the world.”
In addition, Europe has not been able to generate an environment in which enough new firms emerge and then reach global scale. In 2000, for example, there were 30 major IT companies started since 1950 and still strong in the United States, compared with just 3 in Europe.
Europe has even convinced itself that its array of heavy-handed, precautionary-based digital economy regulations, rather than being a drag on innovation, are actually a spur to it.
The kinds of disruptive change needed to succeed in the digital economy goes against the nature of Europe. America was settled principally by Europeans who wanted out from under the yoke of feudal hierarchy and limitations. The ones that remained were less entrepreneurial and more committed to the status quo. As Servan-Schreiber wrote, “Behind the success of American industry lies the talent for accepting and mastering change.” It appears no different today, with 41 percent of Americans strongly agreeing that in general they are willing to take risks, compared with 8 percent in Spain and 10 percent in Germany.
As Servan-Schreiber alluded, behind the success of the American tech economy lies the embrace of change and innovation. In contrast, the EU has embraced the “precautionary principle” wherein virtually every new innovation is approached from a “glass half empty” view, with the urgent need to form a commission of experts—largely academics and “civil society” representatives with little connection to actual commerce—to study the innovation and identify the sundry and various ways it could go bad, especially in the hands of the profit-hungry, U.S.-cowboy capitalists.
Europe has even convinced itself that its array of heavy-handed, precautionary-based digital economy regulations, rather than being a drag on innovation, are actually a spur to it. The dominant narrative in Brussels and most EU states is that the strict regulation of privacy, AI, and other emerging technologies is required in order to boost consumer trust, which in turn will give EU firms a leg up because, unlike the United States, EU consumers will more readily adopt these technologies. However, the fact is they do not. The scholarly evidence is quite clear that these kinds of restrictive regulations (as opposed to balanced regulations) not only deter innovation but fail to spur more digital adoption. Moreover, they believe that since EU firms will already be in compliance with what will soon become global regulatory standards, they will gain competitive advantage.
At times, it’s even worse, with European elites being actively hostile to technology and capitalism. Simone de Beauvoir, a leading French intellectual, wrote in 1966:
In every country of the world, socialist or capitalist, man is crushed by technology, alienated from his work, enslaved and brutalized. This has happened because man has multiplied his needs rather than constraining them…. When did this downfall begin? The day we began to prefer science to wisdom and utility to beauty.
In other words, the peasants should be happy with immiseration, looking at the beautiful sunsets after a long day of backbreaking labor with scythes and rakes. Similar statements today about emerging technologies such as AI abound. For example, , a member of the European Commission’s Artificial Intelligence High Level Experts Group, embraces resistance to AI, writing, “I find that this resistance has great potential. We must embrace it as a wake-up call; treating it not as a direct cause of alarm, but as a valuable societal warning sign.”
Strict and stifling digital regulations don’t just come from a deep-seated commitment to the precautionary principle; they come from the fact that Europe remains a social-democratic society wherein markets, businesses (especially large and U.S. businesses), and technologies are suspect, government is privileged, and so-called “civil society” groups are presumed to represent the public interest. Moreover, these regulations come from a long-standing concern in Europe over employment, where job loss is something to be avoided, and policymakers have struggled to bring unemployment rates down to U.S. levels, in large part because unemployment benefits and other income support systems are so generous that many people choose to stay out of the labor market longer than they otherwise would and many firms are virtually prohibited from dismissing workers.
None of this, of course, is to say that the correct alternative is libertarianism, despite the fact that some EU officials believe this is the overriding U.S. governing philosophy. It is to say that the only way a nation or region has any chance of succeeded globally in the digital economy is to adopt a balanced approach to regulation that privileges both innovation and social protection. This means recognizing that no one right or interest (such as privacy) should define a government’s approach to innovation, but that like any public policy issue, there are going to be multiple rights and interests to balance.
Japan and the Four Asian Tigers Respond, and Partially Succeed
Japan and the Four Asian Tigers were the miracle economies of the 1970s and 1980s. The Japan challenge to U.S. technology leadership in the 1980s was particularly significant, with a host of books being written about it.
To be sure, all five countries or territories have made significant progress in technology, most of it fueled by a burning desire to develop and catch up, especially in technology industries. All five relied on explicit government industrial policies, with their strategies following particular phases. As Linsu Kim wrote in his definitive history of Korean-innovation upgrading, Imitation to Innovation: The Dynamics of Korea’s Technological Learning, there are several distinct stages these nations took to try catching up to the leaders in innovation. The first stage involved the transfer of foreign technology to that nation—sometimes by foreign direct investment, sometimes by licensing, and to some extent, although vastly less than with China, by theft. This was supplemented by intensive education in technical fields; supported by rigorous screening, testing, and promotion (something few other developing nations did).
This painstaking process of doing the work hard on the low end of commodity IT markets first, and then working their way up was based on humility, patience and hunger (something Europe lacks).
The second stage involved “the effective diffusion of imported technology within an industry and across industries.” The third stage:
involved local efforts to assimilate, adapt, and improve imported technology and eventually to develop one’s own technology. These efforts are crucial to augmenting technology transfer and expediting the acquisition of technological capability. Technology may be transferred to a firm from abroad or through local diffusion, but the ability to use it effectively cannot. This ability can only be acquired through indigenous technological effort.
This painstaking process of doing the work hard on the low end of commodity IT markets first, and then working their way up, was based on humility, patience, and hunger (something Europe lacks today).
The final stage is to become global innovation leaders, with all four (leaving aside Hong Kong) regions working to achieve. As Lim wrote:
Firms in catching-up countries that have successfully acquired, assimilated, and sometimes improved mature foreign technologies may aim to repeat the process with higher-level technologies in the transition stage in advanced countries. Many industries in the first tier of catching-up countries (e.g., Taiwan and Korea) have arrived at this stage. If successful, they may eventually accumulate indigenous technological capability to generate emerging technologies in the fluid stage and challenge firms in the advanced countries.
These places, especially Singapore, Taiwan, Japan, and South Korea, focused on IT hardware, including semiconductors, computers, consumer electronics (e.g., TVs), and more recently smartphones. For example, computers, telecommunications equipment, and the manufacture of electronic components/circuit boards account for close to 90 percent of the value added by Japan’s ICT sector.
As figure 1 shows, these Asian nations have specialized and competed mostly in hardware and components. Taiwan is home to a world-leading semiconductor foundry, TSMC, as well as a host of component and hardware makers. South Korea is home to two world-leading semiconductor producers, Samsung and SK Hynix, and electronics firms such as LG. In Japan, long-standing electronics firms such as Hitachi, NEC, and Mitsubishi Electric have all moved into ICT production, and Softbank is a word-leading holding company for advanced IT and software firms.
These nations took a different approach from Europe. First, they initially relied on low wages to gain market share at the lower end of the value chain in many IT segments. And they were willing to accept lower margins, something most U.S. technology companies were not, and often were supported financially by the state. As a result, many U.S. technology companies ceded the low end of many markets to these regions, hoping to retain the more profitable, higher ends. However, these nations were not content with staying at the lower end, and used that entry to gain knowhow and experience, and then reinvest into the next generation of technology, gradually working their way up the value chain, often taking U.S. market share.
At the same time, each country provided valuable government support in the form of industrial and technology policy. In Taiwan for example, the public-private Industrial Technology Research Institute (an entity established in part by the U.S. government in the 1960s), played a key role in helping Taiwanese technology firms. Singapore invested significantly in government R&D targeted to the technology industry, supported universities to do research and train engineers and computer scientists, and actively recruited leading IT firms from around the world.
Despite these policies, and their success, for the most part these nations did not fully capitalize on the Internet and digital era, especially in Internet services. In Japan’s case, one reason was it initially did not embrace the Internet-era global, interoperable standards, preferring to develop its own standards. In what has been termed the “Galapagos Island Syndrome,” Japanese enterprises developed quite advanced IT products that were nevertheless isolated from global markets. Japan’s development and adoption of unique standards for second- and third-generation (2G and 3G) mobile networks contributed to Japan’s leading mobile-phone manufacturers, including NEC, Panasonic, and Sharp, dominating domestic markets with innovative mobile technologies and products. Indeed, in the early 2000s, many American commentators visiting Japan praised Japanese cell phone makers for being more innovative than American ones. But because they adopted Japan-only standards, these Japanese technology firms had difficulty exporting to foreign markets and gaining needed scale. And these early leaders were soon left behind firms that chose to use global standards.
And like Europe, by the time many firms in these countries got around to focusing on key Internet technologies, such as search and social media, U.S. firms had already made considerable progress, and because of network effects, essentially locked in the market. In addition, some of these nations, particularly Japan and Korea, had a much less well-developed entrepreneurial ecosystem, with many workers preferring to work for large, well-established companies. On top of that, there was more resistance to disruptive innovation, with entrenched interest groups fighting new entrants. Finally, it is hard to overstate how much of a factor the English language was in limiting global Internet opportunities for these nations.
However, the governments of Japan, Singapore, South Korea, and Taiwan have succeeded in newly emerging digital technologies, such as the Internet of things, AI, and robotics—a key focus of their technology policies. Singapore has well-developed AI policies. South Korea has formed a presidential commission on the Fourth Industrial Revolution. And Japan has developed a national AI initiative.
Even if their products are sometimes virtual, IT and digital firms have physical presences in actual countries, and their products and services are sold to actual people and organizations. Countries seek advantage in these industries, and many do so by designing policies that hurt foreign competitors. For this reason alone, the concept of the nation state and national interests continues to matter.
However, the rise of the Internet has led some to argue that it leads to new and unprecedented global structures and functions, and that concepts such as national power are now anachronistic. In his classic 1996 Internet manifesto, cyber guru John Perry Barlow waxed poetically about some special place called cyberspace:
The Internet has no elected government, nor is it likely to have one, but this does not mean it is not governed. The Internet is ruled, as are all technologies, not only by the norms and beliefs of its users, but also by the laws and values of the societies in which they live,… We do not want an Internet controlled by the nations of the world, but neither do we want an Internet divorced from government. We seek a balance that recognizes both the rights of the individual and the benefits to the community of well-ordered systems…. We reject your declaration of independence and take up a new call for interdependence among sovereign nations and peoples. We will work together in common cause so that no one can arrest our progress.
People could be excused for falling for this kind of philosophizing in 1996 when few even used the Internet. But there is no reason why anyone should today. Yet many still do. The Economist recently wrote:
To make sense of all of this, it helps to see the political world as one in which technology is beginning to look every more like geography … where a state’s territory stood in respect to such geographical facts of lie told it what is should fear and what it might aspire to, whose interests conflicted with its own and whose might align with them. In other words, geography was destiny. The units of analysis for today’s nascent technopolitics are platforms.”
Former State Department official Anne-Marie Slaughter, agrees, writing in Foreign Affairs:
Think of a standard map of the world, showing the borders and capitals of the world’s 190-odd countries. That is the chessboard view. Now think of a map of the world at night, with the lit-up bursts of cities and the dark swaths of wilderness. Those corridors of light mark roads, cars, houses, and offices; they mark the networks of human relationships, where families and workers and travelers come together. That is the web view. It is a map not of separation, marking off boundaries of sovereign power, but of connection.
As does NYU’s Jeff Jarvis:
We also see globalization not only in commerce—affecting jobs and economies—but also in social interaction. Thus, borders are challenged and so are nations. Is this challenge a reason why we see the rise of nationalism? We see now that wars can be fought with data and without national armies or weapons. We see that virtual currencies can challenge the monetary power of nations. Will the nation-state as we know it survive intact?
In this notion, competing nation states are not the problem and in fact are structurally weakened in the digital age. Rather, the challenge is from amorphous networked systems. This is fanciful to say the least. The telegraph and telephone no more did away with the need for a Westphalian view than the Internet does now. Notwithstanding some individuals who commit cybercrime, it is still governments that take or support actions that most directly impact U.S. national interests, and it will continue to be. When a nation state truly wants to affect change on the Internet, it can do so. The question at the heart of this report is how nation states such as the United States go about articulating and advocating for their preferred approach to Internet governance—not whether they should be trying at all.
The telegraph and telephone no more did away with the need for a Westphalian view than the Internet does now.
An associated branch of this Internet exceptionalist view is that the United States and other democracies should be focused on challenging the so-called authoritarian Internet: the use of digital technologies to limit freedom. For example, Cohen and Fontaine warned, “In Zimbabwe, for instance, the Chinese AI company CloudWalk is helping develop a , giving the local government a powerful new tool for political control.”
But the Internet and associated technologies such as AI and facial recognition are no more authoritarian than technologies such as the guns and mainframe computers the Nazis used. Facial recognition systems, for example, can be bought in every nation, and most governments will eventually install them widely because of their significant benefits. The issue is not that some technologies are authoritarian. The issue is the rules under which they are used. Authoritarian nations will use technology for authoritarian purposes. Democratic nations will use them for legitimate and civil-liberty-protecting purposes. Moreover, history has shown that short of overthrowing these governments and installing democratic ones, the best that can be hoped for is diplomatic pressure to limit abuses. Telling an authoritarian dictator that Internet openness, as desirable as it is, is better for them is like telling a dictator that his nation is better off with democratic elections. And banning U.S. exports of technologies that might be misused does little or nothing to limit techno-authoritarianism, and hurts U.S. economic interests.
It has become common to argue that the Internet is splintering into multiple different Internets. One report stated that “several Internets are currently coexisting uneasily.” In fact, this is quite misleading. There is only one Internet. Siberia and South Carolina both use the same Internet, even if for the most part they don’t view the same Internet pages. While there is still one Internet (in terms of the technical architecture), there are multiple Internet policy regimes.
Idealistic notions of a unified global Internet community living in love and harmony, above craven and corrupt governments and bureaucrats, is now thankfully mostly assigned to the dust bin of history. But there is a risk that this simple-minded framework will be replaced by another one: that the overarching issue in digital governance is the fight between open democracies versus closed autocracies. wrote:
Almost in parallel, the United States and its allies have stepped away from their tradition of collaboration. Instead of working together on issues of common interest, they have been pulled apart by diverging national interests and have responded incoherently to autocratic states’ co-optation of new technologies. Although officials in most democratic capitals now acknowledge the profound ways in which new technologies are shaping the world, they remain strangely disconnected from one another when it comes to managing them.
While this is no doubt true and problematic, it assumes that there is just one major axis of conflict: between open democracies and closed authoritarian regimes.
Even if all countries had an open Internet, the United States would still face significant global digital policy challenges and conflicts.
But this is too simple. Even if all countries had an open Internet, the United States would still face significant global digital policy challenges and conflicts. To fully understand global digital policy conflicts, it is useful to formulate a framework comprising six major groups of nations. To be sure, any such typology risks oversimplification, in part because some nations can be aligned with more than one camp, depending on the issue. But this formulation hopefully provides a useful guide for how the U.S. government should constitute a grand digital strategy.
Tensions between these groups of nations play out over three main clusters of issues: 1) issues of criminal or other malign activity, such as Internet piracy and cyber-attacks; 2) social and economic regulation, including of AI and other emerging technologies, privacy, Internet, and telecom standards; and 3) issues related to national technology competitiveness and national security, including cross-border data flows, taxation, IT and digital competitiveness policies, encryption and law enforcement access to data, and export controls. Nations have different views on these issues for a variety of reasons.
The United States: The Major Advocate for and Driver of Global IT and Digital Innovation and Progress
The first group is the United States. Because the United States is home to global-leading IT firms, it seeks a deeply globally integrated market, including with data flows and Internet openness, so that its firms can fully benefit from expanded markets. But the motivation goes beyond commercial. The United States has also pushed for this, and the policies that go along with it, because most U.S. policymakers believe that technological innovation is critical to global gross domestic product (GDP) growth and societal progress, and democratic values, norms, and processes are critical to human fulfillment. And they rightly see U.S. policies, practices, and firms as maximizing these.
Because of this, U.S. policymakers push for limiting unfair and protectionist foreign IT policies, not only because they threaten U.S. interests, but because they harm global IT innovation. At the same time, the United States has pushed for a governance approach to the Internet and IT standards generally that is based on a voluntary, industry- and stakeholder-led, bottom-up standards process, rightly pushing back against some government efforts to dictate standards. It has also pushed for an open Internet wherein all or most legal content is available to citizens, because of the belief in the democratizing and empowering force of information. And from the Clinton administration, Internet governance principles crafted by Ira Magaziner to efforts by the Trump White House supporting a light-touch approach to AI regulation, the United States has generally avoided innovation-harming regulatory regimes and sought to convince other nations of the wisdom of this approach.
More recently, the United States has tried, albeit haphazardly, to lead a global coalition to push back against Chinese IT and digital dominance, including in the telecom equipment and AI spaces. There are three main motivations for such actions: 1) concerns about cybersecurity and Chinese government access to foreign networks; 2) concerns about Chinese Internet values, including censorship and government surveillance, spreading globally; and 3) concerns about the damaging effects of Chinese predatory “innovation mercantilism” practices on U.S. competitiveness and global innovation.
China: Seeking Global Hegemony Through Technology
China is not a “normal” country when it comes to trade and globalization, especially in the IT and digital field. Even Asia Tigers who sought to build up their key industries through heavy-handed industrial policy never embraced autarky in all key sectors. China does. There is no IT sector, perhaps with the exception of IT consulting, in which China does not seek global leadership, if not dominance. That alone makes China the most important threat in the IT and digital space to virtually every country hoping to grow or maintain its IT and digital industry.
China has worked tirelessly to increase its influence on important international bodies related to IT and digital technologies, such as the ITU, in order to shield it from global scrutiny and help ensure its approach to IT and digital policy is widely adopted.
It would be one thing if China were simply a supercharged Taiwan or South Korea. The threat would be only loss of key industries and the jobs associated with them. But China is not just another Asian Tiger; it is a Leninist dictatorship that rejects Western values of free speech, an open press, democratic elections, and the rule of law. Indeed, under Xi Jinping, all party apparatuses are to “guide the broad masses of teachers and students to be strong believers” in Marxist theories and socialist core values. Indeed, the famous Document 9, an internal communique from the party in 2013, warned all cadres to stop universities and media from discussing seven topics: “Western constitutional democracy, universal values, civil society, neoliberalism, the Western concept of press freedom, historical nihilism, and questioning whether China’s system is truly socialist.”
It is one thing for another country with different cultural values than those of the United States to seek to preserve those values. It is quite another for a country such as China to reject core values grounded in respect for human rights and freedom.
Finally, as an aspiring global hegemon, China uses a combination of carrots and sticks to bribe and bully other nations into submission, including its “digital silk road.” Moreover, it has worked tirelessly to increase its influence on important international bodies related to IT and digital technologies, such as the ITU, in order to shield it from global scrutiny and help ensure its approach to IT and digital policy is widely adopted.
Europe: Precaution and Protection
As noted, the European Union is characterized by two key foci, both of which put it at odds with the United States.
The first is a desire to impose a precautionary-principle-based regulatory framework on the digital ecosystem, not only in Europe but in virtually every nation in the world, outside of nations such as China and North Korea. Achieving this framework globally would not only be detrimental to global innovation, it would harm U.S. technology interests. One reason is EU techno pessimism—AI and robots kill jobs, AI is biased, virtual reality is addicting, e-commerce hurts small firms, big tech breeds inequality, big firms should be chopped down to size, Internet companies practice “surveillance capitalism,” and on and on—not only dampen excitement for and interest in digital technology innovation, they generate anti-innovation policies.
Europe is talking out of both sides of its mouth, promoting free trade so it can get access to foreign markets for its goods, while also protecting its markets when it comes to some sectors and technologies in which it is weaker.
The second is the growing and increasingly naked EU protectionism, which takes the form of an array of attacks on U.S. technology companies, limits to EU markets, and policies to unfairly prop up EU competitors. Until recently, much of the EU’s focus was on spurring its own domestic innovation, including by trying to establish a digital single market. But under the new commission, that has changed. Now, with stronger Franco-German leadership, its focus is much more about protectionism.
EU officials now frame much of this agenda around the importance of small businesses, which, in their narrative, are victimized by big tech and need an array of special privileges and government handouts in order to thrive. They argue, without evidence, that small business is the driver of innovation and all good things, and that digital policy must be not only biased toward “little tech” but biased against “big tech,” especially U.S. big tech. This is the only way to give “little tech” a fair and fighting chance.
Without a Gulliver-like tying down of U.S. big tech, including through antitrust, onerous privacy rules, mandated data sharing, algorithmic audits, and public data banks (where small companies get free access), discriminatory taxation targeting U.S. tech companies, asymmetric rules regarding platforms, and other measures, coupled with subsidies and other favors for EU “little tech,” the latter supposedly will have no chance. For example, the proposed EU Digital Services Act is quite clear of the intent: “Asymmetric rules will ensure that smaller emerging competitors are boosted, helping competitiveness, innovation and investment in digital services, while targeting specific harms emerging from large platforms.” The proposed Digital Markets Act just by happenstance appears to include only foreign (mostly U.S. companies). Rather than focusing on boosting their own framework conditions, and celebrating their overwhelming export success with the United States, they focus instead on raising U.S. tech firms’ costs. Finally, Europe’s forthcoming rules on foreign subsidies could give it the power to unilaterally shut out U.S. products from the EU marketplace, without having to go through the WTO.
Leaving aside the clear violations of the spirit, if not the letter, of the WTO—which EU officials proudly tout their allegiance to—such policies will do little to help grow the EU digital economy—but they will harm the U.S. tech economy.
Figure 2: EU Lilliputians “tying down” the U.S. tech Gulliver