Falling behind and in between the United States and China. Can the European Union drive its digital transformation away from industrial path dependency?

The increasingly pervasive importance of computer and digital industries in all stages of the economy has revealed Europe’s growing reliance on foreign technologies. Twenty years ago, the EU considered US first-mover advantage in Information and Communications Technologies (ICT) a sectoral competitiveness issue. In the intervening years, China has been the sole economy to significantly demonstrate an ability to challenge US high-tech dominance, notwithstanding the existence of niche players in the rest of Asia and Europe. In this period, digital industries have unleashed an extended range of general-purpose and dual-use applications, needing key hardware and software inputs that are better-served or only served by US and Chinese firms. EU overreliance on ICT imports has shifted from being a sectoral issue to a cross-sectoral one, spanning from the provision of digital services and goods to the consumer (Business-to-Consumer), progressively extending to businesses (Business-to-Business), and currently heading towards the digitalization of everything — objects and processes. It strongly calls into question the capacity of European traditional industries to retain control and reap the full benefits of their now necessary digital transformation. It also casts doubt on the EU’s ability to provide — if necessary — secured and autonomous digital supply chains reliant on homegrown industries.
This debate over Europe’s digital dependency has gained momentum since the mid-2010s and the deterioration of US-China relations. Over the last few years, China and the US have set a series of policy goals aiming at localizing strategic layers of the digital supply chain on their respective territory and therefore at “decoupling” their tightly interwoven production networks. Beyond the search on both sides for increased industrial self-sufficiency and leadership, the Trump administration has also justified this decoupling in terms of the national security threat posed by collaborations with Chinese companies and experts. In doing so, the US administration clearly expressed its willingness to see Europe as a political ally and as an economic partner taking the same stance and cutting industrial ties with strategic Chinese suppliers such as Huawei. The EU’s inability to develop strong European digital capabilities compromises the ability of EU Member States to make autonomous choices in terms of digital policies and supplies, with potentially far-reaching consequences for foreign policy, security, and military affairs. Against this backdrop, some key European decision-makers and stakeholders, including the European Commission (Commission) itself, have increasingly invoked notions of “strategic autonomy” and “digital sovereignty.” From a cross-sectoral challenge, the digital transformation of Europe has become an issue of political power.
The European Union’s perceived drift towards progressive technological and political disempowerment brings into question the industrial policy path followed by the EU over the twenty-year period since US-based ICT pioneering companies started to successfully develop and market Internet-related services and products. With the digital gap steadily widening over time, European institutions have progressively shifted their digital objectives from a full catch-up policy to a specialization strategy recentred on the current digital transformation of European industry, described today as the fourth industrial revolution. In doing so, the EU has in a way acknowledged that US tech prime movers and Chinese followers have become strong incumbents, making the building up of a European competitive advantage in digital services to the consumer unlikely. By contrast, EU industrial policy instruments have remained relatively constant over the years although results failed to convincingly materialize, recognition of which has entailed the adaptation of EU digital objectives. The EU has maintained a two-pronged approach throughout, on the one hand coordinating decentralized Member States’ Research & Development (R&D) policies to boost digital innovation and adoption, and on the other hand setting Europe-wide norms to help innovating companies scale up and reinforce their market position worldwide. Although the EU is increasingly considered a digital standard setter on the regulatory front, this two-fold approach has so far failed to spur the emergence of strong leading digital innovators apart from a few corporate icons such as Spotify, SAP, Nokia, and Ericsson. The perpetuation of failing policies, this chapter shall argue, is strongly linked to the long-standing resilience of technological rivalries between key Member States and between their national champions, mainly specialized in mature and traditional sectors. These rivalries have structurally shaped industrial policies and the related EU institutional framework, and in so doing, they have stymied the objectives of developing the overarching political instruments underpinning both US and China industrial policies: a centralized management of public financial resources and a centralized management of strategic research, development, and procurement policies. It could be argued that the EU, being a regional construction, can hardly claim state apparatus prerogatives. Indeed, as key industrial policy instruments have remained at the level of EU Member States, the industrial path carved out by the EU could not result in unifying political and social cohesion around the rising stakes of the digital transformation, unlike in the US and China. The EU’s digital transformation is less a matter of digital dependency to be solved than a matter of industrial path dependency to be overcome.