Protectionism Will Hold Back Europe’s Innovation

Europe is walking a tightrope between two competing visions of the future. On one side is the urgent need for innovation-led productivity to fuel growth, competitiveness, and real-world progress for Europeans. On the other is the misguided push for technology sovereignty, which risks slipping into protectionism—a flawed belief that restricting foreign competition leads to economic security and global influence. But here’s the rub: These ambitions are fundamentally at odds. Chasing self-sufficiency means clinging to protectionist policies that delay the adoption of emerging technologies, stifle global collaboration, and hinder the very innovation Europe needs to thrive. If the European Commission truly wants innovation-led growth, it should abandon the idea that protection equals prosperity.

Last month, the European Commission unveiled its Competitiveness Compass—an economic framework outlining several policy and legislative actions to boost EU competitiveness. It focuses on three pillars: reviving growth through innovation-led productivity, advancing the 2050 climate neutrality commitment, and curbing excessive foreign dependencies while increasing security.

The last pillar is the “strategic autonomy” legacy left by previous European policymakers, who argued that sovereignty ensures Europe’s ability to defend its interests and values while achieving collective security. Indeed, the Draghi Report—which made several recommendations on how to boost competitiveness and on which the Competitiveness Compass builds—articulates the desire to use economic statecraft to retain European freedom through a coordinated EU strategy to bolster domestic production in strategic industries.

In response, the Commission’s new plan hints at protectionist ideas. For example, it advocates for a new EU Cloud and AI Development Act that would “set minimum criteria” for cloud services offered in Europe and complement support for European chip design and manufacturing. Such an act is likely to reinforce protectionist ideas, much like the draft European Cybersecurity Certificate Scheme for Cloud Services, which would make local firm ownership and control the defining factors for trusted cloud service providers in the EU.

The Commission, however, is not alone in its push for increasingly misplaced protectionist measures. Many governments, including those of Australia, India, and the UK, are prioritising the development of domestic capabilities over global partnerships. This shift is a likely symptom of growing political tensions with the United States, fears over a lack of supply-chain security that drive governments toward self-sufficiency, and the mistaken belief that countries need their own firms to be leading producers of emerging technologies to effectively govern their development.

Many policymakers fail to distinguish between the risk posed by China’s economic statecraft, which is significant from a global adversary, and the risk of supply chain dependency on the United States, which is non-existent given the strategic alignment and common interests of Western democracies. Such rhetoric needlessly legitimises protectionist manoeuvres—in 2024, the EU ran a trade surplus of almost $236 billion with the United States. The fact that the EU relies on the United States for digital services—one of the few areas in which the United States runs a surplus— is not a precursor to digital insecurity. Rather, it is a practice of digital solidarity, a strategy that favours global partnerships to address shared problems and achieve shared goals.

While there is a place for building domestic digital capacity, the pursuit of protectionist policies to achieve economic resiliency is fundamentally flawed because it requires the artificial creation of competition. This leads to less domestic innovation and increased reliance on government support, which stifles the innovation efforts that naturally arise from supportive, nationality-neutral innovation policies. One study analysing 2005 data from nearly 5,000 firms across 13 Latin American countries found anti-innovation effects when protectionist policies were in place for infant domestic industries like communications equipment, motor vehicles, and furniture. The results showed that reducing import competition does not necessarily strengthen or make domestic industries more profitable.

Indeed, protectionism stifles a key driver of innovation: free markets. Faced with increased import competition from China, European firms actually saw an increase in the absolute volume of innovation, including faster technological change, increased patenting, and, as a result, more innovation-led productivity within the EU. Consider the United States, where at least half of America’s economic growth can be attributed to scientific and technological innovation—the result of free markets supported by smart government investments in R&D and collaborative public partnerships.

Instead of doubling down on protectionist measures under the guise of strategic autonomy, Europe should refocus on sustainable, innovation-led growth. This means nurturing the key ingredients that foster innovation and curating an environment that rewards it. As one study rightly identifies, getting the basics right where the government can set policy is crucial: talent availability, a thriving knowledge economy, open and functioning value chains such as trade agreements, modern infrastructure, and supportive regulation.

To achieve this, the EU should start by identifying which of its regulations actively hinder innovation, which include the General Data Protection Regulation, the AI Act, and the Digital Markets Act. The Commission has already begun this simplification effort by withdrawing what would have been yet another regulatory hurdle to innovation—the AI Liability Directive—which would have imposed ex-post liability on AI model development companies. The Commission should now go further, drastically reassessing how it uses the policy tools at its disposal to foster innovation. Moreover, it needs to be clear-eyed about its priorities, the actions required, and the consequences that come with them.

If innovation-led growth is the goal, there can be no room for protectionism. Prioritising productivity means letting innovation flow from anywhere, not just from within.

Image Credits: Flickr/European Parliament