Can Biden Restore Strong Transatlantic Partnership Given Europe’s “GAFA” Animus?

Robert D. Atkinson October 14, 2021
October 14, 2021

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When U.S. and EU policymakers met recently in Pittsburgh for the first summit meeting of the U.S.-EU Technology and Trade Council, one of the issues on the table was Europe’s treatment of U.S. firms, especially tech firms. This is a key issue because Europe has responded to America’s digital leadership with concern, even alarm. Many EU policymakers now 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. tech companies “adversaries of states.”

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 then in dire terms: “a seizure of power,” “invasion,” “domination,” “counterattack,” and “industrial helotry.”

But unlike today, Servan-Schreiber didn’t call for an attack on U.S. firms; he called for Europe to get its house in order: Build a single market, fund advanced technology R&D, and expand university enrollment, particularly in 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.”

Despite fretting about the U.S. “invasion” for over half a century, and notwithstanding the success of such European 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 in the technology sector, with China largely taking its share.

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 the American giants, Gulliver-like, so the EU “Lilliputians” can grow. This takes the form of aggressive and discriminatory antitrust enforcement as reflected in part by the Digital Markets Act; limitations on the export of data; taxes on U.S. digital companies’ sales; regulations on 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 alternatives to U.S. tech firms; mandates to pay newspapers for listing 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 AI, and many others.

There are multiple reasons Europe lags behind in IT and digital products and services, especially in developing EU-headquartered firms (most U.S. tech firms actually invest significantly in EU operations, including R&D). One is Europe’s continued veneration of small businesses, which leads to a reinforcing cycle of attacking large U.S. firms while at the same time continuing to provide small EU firms with a host of preferences and exemptions, which are tied to starting small and staying that way.

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. 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. Europe consistently fails to effectively predict the future and “skate to where the puck is going,” as noted by a 2006 European Commission report on national champions, which does not even mention the Internet.

Most EU policymakers did not understand, 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. 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. European policymakers continue to fight the last war, focusing on technologies like cloud computing, search, and social networks—all relatively mature markets that EU entrants will have a difficult time penetrating because current offerings are so good and because scale economies and network advantages make entry difficult.

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.

Because a digital single market remains more theory than reality, the EU has been unable to nurture data-driven business models through a large continental market. There are still divergences in IP rules, licensing arrangements, and regulatory enforcement, as well as obstacles to the efficient delivery of online goods.

The EU also puts 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 in the United States that started after 1950 and were still going strong, compared with just 3 in Europe.

The kinds of disruptive change needed to succeed in the digital economy goes against Europe’s nature. America was settled principally by Europeans who wanted out from under the yoke of feudal hierarchy and limitations. Those who remained were less entrepreneurial. 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 U.S. 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, triggering an urgent need to form commissions of experts—largely academics and “civil society” representatives with little connection to actual commerce—to study the innovation and identify the various and sundry 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 spur innovation, rather than placing a drag on it. The dominant narrative in the EU is that strict regulation of privacy, AI, and other emerging technologies is necessary to boost consumer trust, which in turn will give EU firms a leg up because European consumers will more readily adopt these technologies. However, 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, European policymakers believe that since EU firms will already be in compliance with what they believe will soon become global regulatory standards, they will gain competitive advantage.

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 businesses (especially large and U.S. businesses) are suspect, government is privileged, and so-called “civil society” groups are presumed to represent the public interest (rather than special interests).

None of this 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 any 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.

There is a saying that it takes two to tango. Hopefully, the EU and the United States will continue the tango they started in Pittsburgh, especially as China has become a prima ballerina of innovation. But whether or not the EU wants to dance with the United States is mostly up to Europe, and whether it wants to maintain its position of needing digital sovereignty.