Europe’s Awakening to China’s Tech Dominance

Europe’s Awakening to China’s Tech Dominance

. 10 min read

As the European countries navigate the risks of Chinese 5G, it is time to reconsider tech independence in other sectors critical to national security and privacy protection. But China’s growing tech dominance poses even more fundamental challenges to Europe. To become a global tech power in its own right, the European Union must take unprecedented measures to allow its market to innovate at scale. To compensate for its loss of world regulatory power, the EU must lead the effort among like-minded democracies against the predominance of Chinese technology in the global standardization bodies.

Navigating Chinese 5G

In contrast to the United States, Europe only fully woke up to the dangers of Chinese technology during the COVID-19 crisis. A growing number of European countries have decided against Huawei as a 5G-network provider, which gives reason for cautious optimism about the collective will to protect critical infrastructure from Chinese tech suppliers. In short, Chinese tech suppliers cannot be trusted because of the illiberal nature of the People’s Republic. Other than the additional financial cost, there is little argument against protecting sectors vital to national security and personal data protection.

An increasing number of countries are deciding against using Huawei, which gives hope that most of Europe will reach a safe harbor. Norway, Denmark, and the Netherlands are examples where telecom providers are phasing out their current contract with Chinese companies while phasing in trusted suppliers to roll out 5G. France joined this group of countries by giving its telecom operators three to eight years to phase out. Additionally, the United Kingdom moved to ban all Chinese equipment by 2027 under US pressure. Similarly, Czechia, Estonia, Latvia, Poland, and Romania have all committed to limit the role of Chinese suppliers.

However, several EU states have a less certain future with regard to Huawei. Germany remains the big unknown regarding Huawei’s future role in Europe. Berlin is still debating 5G due to disputes about the out-phasing costs and the significant German export interest in the Chinese market. While Berlin is unlikely to go against the EU recommendations to restrict high-risk suppliers in the critical or sensitive parts of the 5G networks, Berlin’s decision ultimately depends on its interpretation of the trustworthiness of suppliers and the period over which the out-phasing is supposed to take place. Similarly, Italy and Spain have yet to make decisions about the role of Chinese equipment. Furthermore, Hungary, Greece, and Serbia all remain dependent on China to an extent that makes it questionable whether they will restrict Chinese equipment even from their core networks where the sensitive data is stored. Europe may have to come to terms with the fact that not all countries will decide to phase out Huawei.

Strategizing Europe’s Independence

High-tech has become highly politicized, with 5G acting as a catalyst for Europe developing technological independence in other critical areas. While Europe so far has been reactive in its approach, the time is now to decide in which sectors Chinese-European cooperation can be permitted and in which sectors it cannot be permitted. Decisions about whether to accept or reject Chinese companies will remain mostly country-by-country basis. However, Europe’s wake-up call to the dangers of technological dependency on China is much-needed momentum for collective action in recognition of the values of privacy and individual freedoms that the European countries share.

The first obvious security instrument is screening of the operations of foreign companies. China’s acquisitions prompted a new EU-wide framework that has just entered into full force allowing the European Commission to give an opinion and warn about investments into critical sectors on grounds of security or public order, but falls short of blocking a member state. The COVID-19 crisis made countries step up the protection of their industries, and the Commission likely will get more actively involved in individual screenings going forward. Suspicion about questionable use of personal data through social apps, TikTok and WeChat, shows that China is there to stay as a tech challenge that will have to be mitigated to the extent possible. Such efforts will require coordination between the Commission and the individual countries about appropriate security measures. This includes the United Kingdom, which continues to share the EU’s values and which may not necessarily agree with US assessments of what constitutes a national security threat.

Pre-COVID, China was successful in driving a wedge between the “periphery” and the “core” of Europe through state-guided investments. As a result, adaptation of the EU’s exclusive jurisdiction is urgent. The EU needs to protect its internal market from the distorted competition that China’s state-guided investments pose. 5G is a case in point: Huawei is a heavily state-subsidized company with opaque corporate structures that benefits from privileged treatment on China’s domestic market. In another significant sector in the high-tech competition, China has found sophisticated ways of backing its national shipbuilding industries, which now have grown so strong that they may outcompete their European counterparts.

Current mechanisms to settle such trade and national security disputes are insufficient. The established mechanism under the WTO to settle disputes is too dilatory to redress such pressing market distortions. It is likely for this reason that the European Commission earlier this year started a public consultation process with a view to legislative amendments to treat foreign subsidies with the same strict rules as for internal illegal state subsidies, with the possibility of imposing remedies and blocking a foreign firm.

Capacity for Innovation

Giving the EU the additional regulatory power to enforce a level playing field is definitely a step in the right direction. The EU must look out for itself when the global trade system falters and in the face of a China showing no sign of redressing its practice of rules circumvention. However, Europe should not lose sight of the ultimate need to regain its innovation potential and global competitiveness. Data from the World Intellectual Property Organization show that Europe is falling immensely behind the capacity of China and the United States to advance innovation. This is a troublesome development, where Europe in the long run might find itself at the tail end of the global supply chains.

The EU must be a tech superpower in its own right with a far larger number of large companies than it has today. The tech industry operates in an oligopolized world market with a handful of suppliers. Europe in most technologies faces a choice between either China or the United States. An exception is 5G where Europe has its own technological superstars, Nokia and Ericsson (the United States, by contrast, has no significant 5G market competitor). The increasing number of country decisions to discard Huawei already gives the two companies a strong foundation on the European home markets.

The EU must come to the realization that the only way to make European tech companies able to compete globally is to allow them to grow into global champions that can innovate at scale. China’s mercantilist methods and proactive promotion of its national tech champions compel a revision of the EU’s original focus to create the best possible conditions for competition on the internal market. It was arguably a strategic mistake when the European Commission blocked a 2019 merger between a German and a French rail manufacturing company (Siemens/Alstom), a manifestation for the EU’s laggardness in prioritizing global competitiveness. The European Commission's decision is especially disconcerting when taking into account the risk of global dominance of Chinese state-owned or state-subsidized enterprises as well as China’s restriction of foreign access to its own domestic market. China-like subsidies can hardly come into question. However, Europe’s consolidated aerospace industry with Airbus stands out as a successful example of the use of infrastructure support, beneficial loans, and the advancement of research and development to gain global competitiveness.

Similar support measures today could boost European tech and manufacturing hubs, beginning with the existing telecom giants that need to remain competitive beyond 5G/toward 6G. Artificial intelligence requires both EU and national investments to narrow the gap with the US and China and should aim to consolidate the fragmented European market, whose strong regulations in favor of ethics and human rights distinguishes it from especially China. The COVID-19 crisis has elevated the debate about Europe’s digital sovereignty to the level of shortcomings of its own industrial-technological base that hinder its ability to innovate and compete at the global level. Building on this awareness, export control should become more strategic to prevent a proliferation of dual-use technologies where the EU still has an edge over China.

Battle over Global Standards

The geopolitical implications of China’s forwardness on 5G caught the Western community by surprise, even though China openly declared its ambition to pursue high-tech leadership five years ago. Chinese innovation is fast—in addition to the allocation of $1.4 trillion to its high-tech sectors over the next five years, Beijing later is set to release its new plan ‘China Standards 2035’ to influence the next generation of technologies: the Internet of things, artificial intelligence, and 5G. The EU, the European countries, and their tech communities need to be forward-looking and understand that the competition with China is also a competition over global standards. Whereas China developed its own 3G and 4G standards to protect its domestic market from external competition, it clearly turned this ambition outward with 5G for its own mercantilist advantage. The importance of global standards cannot be stressed enough: the standards for the Internet we use today were set by the leading US companies like IBM, Intel and Microsoft in the 1990s.

Recognizing the importance of standard-setting, the Chinese government and Chinese companies have stepped up their efforts in contributing to and leading the global standards-setting bodies, notably the UN’s International Telecommunications Union (ITU) and the industry-led 3rd Generation Partnership Project (3GPP), a key player in 5G. On the one hand it is positive that China, which has the largest share of the 5G “standard-essential” patents, is engaged in the global bodies to set common standards. On the other hand, China could potentially politicize the global standardization processes to give its own companies first-mover and perhaps a permanent advantage. The Chinese companies are under strong pressure and state coordination by the Chinese Communist Party to vote against technologically superior standards when they disadvantage the Chinese industry. Shedding light on and pushing back against China’s practices requires global leadership. The EU, its member states, and tech companies need to step up their efforts and internal coordination in the standardization bodies to maintain their still strong positions and ensure that the processes are politically neutral and that technologies remain interoperable.

The alternative to global standards may be competing standards that could divide the digital economy and, in the long run, underpin a beginning bifurcation between an old Western-led and a new China-led order. Not to forget, China in parallel to its activism in the global bodies facilitates the deployment of its own standards bilaterally through the “Belt and Road” and other initiatives. It is hardly surprising that the consolidated autocracies around the world follow China’s technological leadership. However, it is worrying that the developing nations in Asia, the Middle East, and Africa tend to tag along, as they depend on Chinese investments and loans and because China’s Digital Silk Road satisfies their growing appetite for inexpensive connectivity.

The EU must adapt to what seems to be a new reality: the “Brussels effect”—the externalization of its regulations and norms through market mechanisms—works well within liberal democracies that cherish privacy protection and human rights as well as with the big tech companies that operate within them. However, the “Brussels effect” may not provide a crucial pull or competitive edge in the rest of the world’s digital economies. China’s cooperation with Greece, Hungary, and especially Serbia speaks volumes about how easily even relatively well-developed countries in Europe fall for the temptation of the cheaper and faster rather than the safer tech options. Even if other countries have adopted legislation in line with the General Data Protection Regulation—the prime example of European rule setting—the reality of the digital economy is such that the EU cannot assume that the world around will purchase equipment with adequate safeguards to guarantee these rights. In short, the EU will need a more activist approach to promote its own standards and norms going forward.

Standards beyond 5G

Most attention is currently on 5G technology, which is expected to underpin the functioning of autonomously driving cars, energy grids, “smart” manufacturing and medical treatment in the coming decade and beyond. But the EU must look further ahead and not again let Chinese tech forwardness catch it by surprise. The fact is that China is already using the United Nations for the promotion of its own standards for facial recognition technology, the Internet, and its interpretation of human rights. The European countries must not let China’s radical tech initiatives go unopposed, which would give them political legitimacy. The EU needs to give careful attention to the ethical concerns about the spread of surveillance and information technology that can harden authoritarian and semi-authoritarian regimes around the world.

Compared to the United States’ confrontational approach to Chinese companies, the EU’s more measured approach to regulate the use of technology seems more suitable to build coalitions in the interest of the standard processes remaining market-driven and (where appropriate) reflecting human rights concerns. The Europeans do not want to be part of an anti-China “decoupling” alliance with the United States but rather lead a coordinated approach to ensure that standards remain interoperable. Even Washington now seems to realize that it is in its own interest that US companies participate fully in the standards developments with the Chinese. China’s continued engagement with the international bodies will depend on its ability to shape the standardization processes, which again depends on the degree to which the EU and other industrialized democracies believe that the new standards adequately reflect their ethical and security concerns.

China has bigger leeway within the United Nations, where one country has one vote, than with the many industry-led global standardization bodies. At the same time, the COVID-19 crisis showed how little soft power China actually has among the world’s nations, even if they are in need of its cash and technology. The COVID-19 crisis also revealed that China has concerns about the legitimacy of its actions abroad to an extent that it may refrain from an aggressive promotion of its own tech standards out of fear that this would backfire. The only wrong strategy would be that of passivism, which would allow China to silently grow its influence within both the UN and industry-led bodies. The EU shares a fundamental value community with other democracies including the “Five-Eye” intelligence community. Moreover, Japan and India do not wish to see future technology as instruments for human rights abuses and Chinese espionage. The EU must work with these countries through the global bodies for standardization to maintain the legitimacy of these fundamental values and in the interest of the rest of the world remaining at least formally committed to them.

Global standards for new technology in the end come full circle with the EU’s need to become a tech power in its own right. Standards risk becoming politicized and ethical considerations risk becoming less of a competition parameter, if the EU, like-minded countries, and their tech industries do not match China’s energetic standards diplomacy with a similar level of engagement. The systemic effect of China’s rise may not be avoidable but its predominance in the definition of new international tech norms should be.

Henrik B. L. Larsen, PhD, is a Senior Researcher at the Center for Security Studies (CSS) at the Swiss Federal Institute of Technology, ETH Zürich. He was a predoctoral, then postdoctoral fellow at the Harvard Kennedy School’s Belfer Center during 2013-15. He is grateful to Lisa Watanabe, Julian Kamasa and Erik Brattberg for inputs and ideas.