Markets (Page 137)

Europe invests a lot in research, and publishes and patents many ideas. But it fails to compete with the US and China when it comes to translating its innovation effort into large, global technology firms. The seven largest US tech companies, Alphabet (Google), Amazon, Apple, Meta, Microsoft, Nvidia and Tesla, are 20 times bigger than the EU’s seven largest, and generate more than ten times more revenue.

That isn’t to say Europe has no tech success stories. The world leader in music streaming is Spotify, a Swedish company. Dutch company ASML produces the world’s most advanced computer chips, and Danish drugmaker Novo Nordisk is leading the extremely profitable market for weight-loss drugs.

European start-ups are also actually a better deal for venture capitalists on average than US ones. But they rarely develop into major global players. The main reason for this is that Europe regulates more.

Research has found that Europeans are less optimistic than Americans about social mobility, want to redistribute income more than they do in the US, and have a more cautious relationship to owning risky assets.

This leads to some very predictable outcomes. Environmental, inequality and life expectancy metrics perform better in Europe, while the US does better on purely economic indicators.

This is not necessarily bad news. In the competition to define the rules of the technological game, combining the huge US tech ecosystem and the European obsession for regulation may be the best chance to protect consumers, freedom of expression, accountability and transparency around the world.

The world leader in regulation

The US Food and Drug Administration (FDA) is faster to expedite its approval of new drugs than the European Medicine Agency. Pharmaceutical firms are also allowed a larger profit: drugs in the US are on average more than three times more expensive than in the rest of the OECD.

So it makes sense for pharmaceutical companies to develop their products in the US first. The same is true if you want to develop a new synthetic meat, a modified crop, or a product linked to artificial intelligence (AI).

Europe could grow faster by changing its model. But ask European leaders which precise regulation they are happy to relax, and you will hear a deafening silence.

Britain is perhaps the best illustration. A large part of the Brexit project was to simplify European rules that were perceived as excessive. However, the UK is yet to make any major regulatory change eight years after the referendum, and the government shows no interest in changing tack.

In the US, innovation has gone hand in hand with market concentration and market power. When companies have high market power, they may have fewer incentives to innovate. They also start to gain political power.

This is where the role of Europe as an independent regulator is very important. The largest companies tend to abide by EU law because they want to keep access to the EU. They also have a tendency to offer the same products all over the world, which means European rules apply to everyone.

European rules have clear objectives. The EU’s Digital Markets Act, which comes into force in March 2024, establishes rights and rules for large online platforms – so-called “gatekeepers” such as Google, Amazon or Meta – to prevent them from abusing their market power.

Europe is also credible when it comes to protecting consumers, citizens and transparency. It cannot be suspected of favoring European tech champions, because there are none. Europe can, for instance, judge TikTok based on whether it breaches child protection rules, and not based on fears that a Chinese company is taking market share away from a European one.

Technology and democracy

Perhaps the best example of the benefits of old regulating Europe and unleashed America is the current race for AI. The US is positioned as the market leader in AI technology, which can power products and applications such as image generators, voice assistants and search engines. Roughly half of the world’s investment in AI currently happens in the US.

At the same time, Europe has already taken several steps to regulate. The EU’s Artificial Intelligence Act, for example, defines different levels of transparency and the auditing of algorithms depending on how dangerous they could become.

Europe will certainly not win the global innovation race for AI. But it has the chance to write the global rules according to its own values. This means it can make companies liable for the actions of their AI tools and transparent on the data used for training them. It also means it can require a company’s AI algorithms to be audited.

But for the EU to write the new rules of AI, Western companies must win the innovation race. The main competitor is China, where companies are given massive access to government data, including facial recognition. The Chinese government can largely choose its champions by deciding who gets access to data.

China’s concerns about regulation could not be further away from those in Europe. China is not interested in improving transparency and fair political competition – it wants to use data to promote the policies of the Chinese Communist Party, and discipline and foster the national economy.

Far from a competition between Europe and the US for tech dominance, Western democracies should see their different approaches as a unique opportunity to promote their shared values. In that context, the lack of large, global European tech leaders might actually be a blessing.

Renaud Foucart is Senior Lecturer in Economics, Lancaster University Management School, Lancaster University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Today, China is in a dramatic predicament for itself and others. What is the grand strategy to use to cope with the world? The big question hangs over the thousands of delegates convened in Beijing for the ritual plenary session of the National People’s Congress, the most important political appointment of the year due to begin on March 5.

The People’s Republic of China started in 1949 with the lofty goal of defeating international imperialism and spreading socialism worldwide. When Mao broke up with the Soviet Union in the early 1960s, he started his own international socialist movement supporting Maoist groups in Europe, Africa, and Asia. After he died in 1976, China dropped its internationalist ambitions and went on a different path.

Deng Xiaoping’s coming to power was marked by a clear, though ambiguously framed, strategy. He stated that the country should “cross the river by touching the stones” 摸着石头过河. The sense was that China had to modernize, that is, Westernize, that is, Americanize, step by step, being careful about possible mistakes.

It was no accident that Deng put on a cowboy hat on his famous American trip, concretely showing the Chinese and the world what he wanted to do. The walk had to be cautious, one step at a time, feeling stones and avoiding falling in the water, but the general direction was certain.

The strategy matched and dovetailed with a similar US strategy. In 1980, the US granted China lower export tariffs to America than those given to Japan or South Korea at the time. It allowed technology transfers and encouraged the World Bank to recommend a path for economic reforms.

These concessions had generated a virtuous circle between the two countries. US companies were relocating factories to China, lowering production costs, thus expanding the international market and helping to control inflation. China invested the proceeds in improving its manufacturing base and buying US Treasury bonds, with which the US financed new purchases of Chinese products.

The agreement was based on a definite geopolitical interest: Both countries feared the USSR. As evidence of its commitment against Moscow, Beijing had attacked Vietnam in 1979, thus stopping a possible Vietnamese advance toward Thailand. It had also provided an alternative route to Pakistan in supplying arms to the anti-Soviet Afghan Mujahideen. The alternative was vital because it gave the US leverage to pressure Pakistan, which demanded increasingly high prices for its support of the Mujahideen.

Globalization and Belt & Road

Therefore, the relationship was very structured, geopolitically, militarily and economically. The relationship began to fray with the end of the USSR, which eliminated the common enemy against which to be united. But it still held for years because the US expanded the model of economic integration with China to the whole world, calling it “globalization.”

There was no geopolitical and military collaboration with China or others in the new globalization. It was now considered unnecessary given the American “overpower” of the period. However, American overpower proved to have strategic, military, and economic limits from 2004 to 2009.

After destroying the old authorities in Afghanistan and Iraq, it failed to build a new order in these countries. This was followed by the financial crisis of 2008. Together, the two elements proved to China, touching the stones of its transition to Americanization, that the American model had jammed.

Indeed, Beijing came to believe that perhaps the American model was indeed in decline; that, in its place, the Chinese model was on the rise; and that Beijing could do without following the US. In this atmosphere, the idea of changing the development paradigm, in essence, and adopting the design of a new Silk Road, renamed the Belt and Road Initiative, matured. It sprang around 2013.

Belt and Road was not a multilateral structure (albeit it was a Chinese-initiated one) like the UN or the IMF, launched by the US after World War II. Instead, it was basically an arm of Chinese foreign policy.

In its initial phase, the IMF essentially had been funded by the US but, seeking political consensus, the US had involved many countries in the coordinated management of the fund. Belt and Road appeared conversely as an act of Chinese assertion, without China’s having won a world war.

Still, Belt and Road was a project that, if it had succeeded, would have changed world geopolitics.

It created a direct line between China and Europe by reversing a 500-year communications pattern centered on the American continent. Moreover, China and Europe never had direct trade but always through Central Asian peoples, Persia, or India. To open direct economic-political communication with Europe was revolutionary. This was precisely why it should have involved in the first place the countries potentially most harmed by the initiative.

Belt and Road was opposed by the US, Japan and India, which felt marginalized and excluded.

Even assuming that the US was really in decline in 2014-15, it still far outstripped China economically, militarily, technologically and in its alliances. Prudence should have prompted Beijing to be cautious by involving America, Japan, and India at the beginning of its Belt and Road effort.

What China apparently lacked, however, was “open thinking power.” China was apparently unwilling to involve other countries in a forum it had initiated. It possibly felt uncertain how to exercise control more softly about its own initiative.

There might have been also the problem of engaging in a positive and constructive confrontation with democratic countries.

Vibrant and vocal Americans might have wanted discussions at the beginning of Belt and Road. Strong thoughts would emerge in those discussions, and states would then adopt them.

However, thoughts about Belt and Road in China were worked out within the Politburo. Some considerations might have been kept secret because of strict party discipline.

Then, a Belt and Road initiative effectively open to international collaboration might have posed new governance challenges for the party. Moreover, Belt and Road failed because China’s naive conceit in pursuing it alienated so many countries formerly suspicious and wary of American arrogance. More than the American failures in Iraq or on Wall Street, Chinese naiveté pushed many countries back to the US embrace.

The failure to handle Covid (when Americans produced the only effective vaccines) and the error of judgment in Ukraine (when Beijing believed in a quick Russian victory) further eroded national confidence in the future.

No roadmap

Today, there is the Belt and Road failure due to the lack of cooperation of the major international players and there are China’s domestic difficulties with the collapse of the real estate market, the main driver of development over the past 25 years.

This leaves China without a roadmap for the future. “Crossing the river by touching the stones” is gone because Beijing no longer wants to become American. Belt and Road is also gone, and what Beijing intends to do is unclear.

For now, apparently, China is trying to deal one by one with the various challenges that come its way. There is the problem of electronics maker Huawei, withdrawn from the once lucrative US market. The battery manufacturers are trying to cope with tariffs and barriers that are rising higher every day. And there are the threats of new, higher duties and prohibitions against port cranes or any other kind of Chinese goods.

There is a lack of overall design, so Beijing is constantly on the defensive and trying to implement an old Chinese tactic – 钻空子, zuan kongzi, meaning exploiting loopholes. This can work for some time with an entrepreneurial, active, and astute population. It gives the government breathing space, but it is unlikely to change the situation dramatically in the medium to long term.

It is unclear how much time China has. The recent funeral of Russian dissident Alexei Navalny in Moscow, attended by thousands despite Putin’s bans, shows possibly significant rifts in that regime. It is unclear how this will impact the Ukrainian battlefields, but it certainly does not help the Russian offensive.

Israel’s intervention against Hamas in Gaza is proceeding, if with difficulty. Pro-Palestinian protests in the West frighten Muslim governments that do not want to go under the political blackmail of Hamas after having been blackmailed by al-Fatah, Al Qaeda or ISIS in the past.

After the end of the Gaza conflict, which may fade from its most crucial stages in the next few months, Israel may be more central than ever in the Middle East.

China may soon return to the center of international attention as other international fires die down or wane. The absence of strategic vision may thus become more burdensome.

In theory, there is a “reason of state” that could make up for the strategic vision: China advances and defends its national interests by reconciling them for mutual benefit with the national interests of others. In this, China knows what to do. It can talk to everyone, keeping all channels open and perhaps trying to turn one against the other to its advantage.

But this can work fine for some time in a small country. For a big country like China, it is much more difficult because, as happened with Belt and Road, it may end up that everyone coalesces against Beijing.

Large, ambitious countries, such as the US, Russia and Iran, certainly have the thrust of their national interests well in mind. Still, there is always a genuine, general ideal steering that can appeal to the rest of the world and become common ground for future agreements.

The US defends the value of free markets and freedom, cherished by many worldwide. Russia proposes a return to Orthodox Christianity and argues against the evils of modernity, appealing to conservative and reactionary impulses present in many modern societies.

Iran is a champion of Shiite orthodoxy, which has also kindled a rediscovery of the faith of the Sunni believers in so much of the Islamic world.

An ideal message became necessary after the rise of states with a “reason of state” and the end of states structured around kings and ruling dynasties. It is unclear today what China can or will propose.

It flashes the myth of ancient imperial China. But that rested on China’s economic, cultural, and demographic strength relative to its surrounding countries, which represented a limited basin, sphere of influence, relative to the whole world.

Today, China has no basin where its leadership is widely and peacefully accepted. On the contrary, some countries in China’s ancient cultural basin, such as Japan, Vietnam, and South Korea, are active against Beijing.

Today, China is structured around the raison d’être of its ruling dynasty, the Communist Party of China. It may work internally but has little traction externally. It is also because, unlike the Communist Party of the Soviet Union, which was internationalist (in fact, Stalin was Georgian), the CPC is nationalist – not only toward foreigners but also toward non-Han ethnic minorities (the majority ethnic group in China).

We don’t know how long this may last or what it may lead to.

Perhaps the greatest challenge to China’s lack of strategy and inability to make an impact, however, is the beginning of a de facto alternative Asian strategy.

The Indian-sponsored Cotton Road opens, in fact, the prospect of an Asia that no longer gravitates only to China. Suppose the Cotton Road becomes an inclusive and multilateral initiative, as Belt and Road was not. In that case, it may create positive dynamics that could perhaps even cause China to rethink many of its ideas.

It would be crucial, then, for Delhi to treasure Beijing’s mistakes so as not to repeat them and to set a new, positive, preferably nonconfrontational direction for the whole continent and world.

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