Author : Sabrina Korreck

Occasional PapersPublished on Mar 03, 2021
ballistic missiles,Defense,Doctrine,North Korea,Nuclear,PLA,SLBM,Submarines

Exploring Prospects for Digital Europe in the Age of the US-China Technology Race

  • Sabrina Korreck

    In today’s digital economy, the United States (US) remains a market leader in many digital technologies; meanwhile, China is fast catching up. In Europe, foreign technology companies have a strong presence, often creating dependencies that can undermine digital sovereignty. Digitisation, therefore, is high on the European Union’s (EU) political agenda. This paper analyses recent key policy responses by the EU, and finds that the union can help shape digitisation by using its market power to regulate digital giants and set global standards. It also highlights the high ethical and data protection standards of the EU, which can give the private sector a competitive edge.


Sabrina Korreck, “Exploring Prospects for Digital Europe in the Age of the US-China Technology Race,” ORF Occasional Paper No. 303, March 2021, Observer Research Foundation.


International relations are increasingly being influenced by the rivalry between the United States (US) and China. While the competition first played out in the domain of trade, tensions have emerged in other spheres, including technology. In the struggle for power in the global digital order, the tech companies of both states play key roles: While American technology companies are still market leaders for many digital products, China is fast catching up and aspires to become the new global leader. The competition is not only about which side can innovate faster and achieve economic success; equally important, technological superiority is seen as translating into political power, and the ability to influence the discourse and norms regarding emerging technologies. As both sides struggle for technological leadership, they feel less committed to interdependence and are increasingly prioritising their own interests. Today the world is facing the possibility that the Internet could end up divided into US, Chinese, and possibly further techno-spheres—or a “splinternet”.

This technology race between the US and China has implications on Europe: US tech companies have a strong position in the European Union’s (EU) Digital Single Market, and simultaneously, several Chinese digital giants are seeking to expand their market reach in Europe. Partly, European users rely on one foreign technology provider, which creates dependencies that can create opportunities for economic and political interference from outside. As dependencies can be used to coerce governments, companies and citizens to act in an involuntary manner, the risk is that the EU’s digital sovereignty could be weakened, and thereby, too—its ability to self-determine its “digital fate”.

The subject of digitisation has therefore moved to the top of the European political agenda. The EU has launched several policy initiatives and is currently implementing key regulatory reforms whose aims are to promote fair competition and prevent the abuse of market power, as well as to ensure safe infrastructure and handling of data and online content. These efforts are complemented by investments in digital infrastructure, education, research and development, and support for the startup ecosystem to promote innovation. By implementing this approach, the EU empowers European tech companies to develop technologies that are trustworthy and fulfill high ethical standards and thereby have a good chance to compete against both Chinese and American companies. Broadening the choice of suppliers can result in the decline of dependencies on foreign tech companies. In this way, the EU is able to strengthen its digital sovereignty, but—unlike other states—without erecting barriers and falling back into protectionism. Instead, the EU’s approach affords an opportunity to engage in regulatory cooperation with like-minded international partners and in setting global standards for the digital economy.

This paper explores the implications of the US-China technology race on Europe, and outlines the overall direction and main pillars of the EU’s policy responses. The succeeding sections of this paper provide an overview of the US-China rivalry and its economic, political and normative dimensions; describe implications on Europe and the extent to which dependencies on foreign tech providers exist and which risks they pose; and analyse the EU’s recent significant policy responses, which build on stricter regulation of the tech industry as well as investments to promote innovation.

The US-China Technology Race: Economic, Political and Normative Dimensions

During the first wave of digitisation in the 1990s, the United States (US) was in the lead and secured a dominant role in many core digital technologies.[1] American tech companies, many of them based in the so-called Silicon Valley of Northern California, successfully entered global markets. Over time, the companies – including the five biggest, Google, Amazon, Facebook, Apple, and Microsoft (or GAFAM)—built up immense market power and became influential in the global digital economy. Many countries and businesses became dependent on American products and services. In addition, tech giants got involved in building digital infrastructure and invested substantial capital in their own data lines and networks around the globe. For instance, Alphabet (Google) is laying an undersea cable from New York to Europe, which will be integrated with a line stretching along the African West Coast. This data line will add to existing ones from the US through the Pacific to Chile, and through the Atlantic to the French Coast.[2]

With the rise of China’s own tech companies within the last two decades, US firms face increasing competition as large populations in many parts of the world are using more Chinese digital products and services. In some areas, Chinese companies compete not by offering low prices, but by developing technologically advanced products that challenge the American edge in digital innovation. In its “Made in China 2025” strategy paper released in 2015, the Chinese Communist Party (CCP) explicitly states the aim for China to become the global tech leader by 2025 in key future industries, including IT technologies and artificial intelligence (AI). To reach this goal and nurture its own digital ecosystem, China has used protectionist measures, subsidies, and transfer of foreign technology. And while China limited access to its market and blocked services of international tech companies, its homegrown companies including Baidu, Alibaba, Tencent, and Xiaomi (or BATX) became tech giants themselves. Indeed, it is an explicit aim of the “Digital Silk Road”—a key element of the massive infrastructure project, Belt and Road Initiative (BRI)—that Chinese companies become global champions. With their growing international reach, Chinese tech companies can shape the economic affairs of many states and businesses in a similar way as their US counterparts have done.

By striving for independence from foreign, especially US technology, and then disseminating its own technologies globally, China creates a separate technopolitical sphere of influence as a counterweight to America’s.[3] This goal is supported through massive investments: Close to US$ 1.4 trillion is provided to build new infrastructure through AI, data centres, 5G, the Industrial Internet, and other new technologies; and a US$ 29-billion seminconductor fund has been established to reduce the country’s dependence on the US for semiconductors.[4] Chinese tech giants also play key roles to support these efforts: Alibaba established a semiconductor division; Baidu released a smart chip; and Alibaba and Tencent announced huge new investments in cloud services and data centres.[5]

However, as Chinese companies capture more global markets and simultaneously the Chinese government is tightening links with countries that have signed on to BRI, the US is increasingly pushing back to curb China’s influence and maintain its own. The administration of former US President Donald Trump had taken action against Chinese tech companies, including imposing a ban in 2019 on US companies against doing business with 5G equipment provider Huawei, which allegedly spies on American citizens and accesses sensitive security and trade secrets, and the quarrel that revolved around the video platform TikTok in 2020.[6] Overall, US technology policy is focusing on controlling the flow of technology, restructuring supply chains, and investing heavily in innovative technologies.

As both countries battle for technological superiority and increasingly decouple their technology sectors, the digital world is at risk of becoming divided into rivalling techno-spheres. A vision of a so-called “splinternet” could be as follows: “In half the world, driverless cars built by Baidu and connected by Huawei’s 5G wireless networks carry passengers who shop online with Alibaba and post selfies on WeChat. In the other half, those activities are dominated by companies like Amazon, Google, Facebook, Tesla and Ericsson.”[7] If such a scenario becomes reality, the governance of the digital space will be increasingly shaped by unilateral actions in the name of tech-nationalism, which in turn can cause the escalation of conflicts.[8]  Some analysts see the last few years as forewarning of the intense technological competition yet to come,[9] and suspect that decoupling could lead to a new kind of Cold War. However, others see these analogies with the East-West conflict of over 40 years before 1989 as misplaced: after all in this conflict, there is no unequivocal political bloc confrontation, China’s state-capitalistic system is more integrated into the world economy (unlike the Soviet closed-off system), and the nature of new technologies is different and prevents countries from controlling technologies the way they did in the early days.[10]

These developments have normative implications, as both states and their tech companies play key roles in setting technological standards as well as developing norms and shaping the discourse around the digital economy and governance of emerging technologies. The rivalry takes place within existing organisations such as the United Nations (UN), where China has had increasing clout and is seeking to diminish the institutional hegemony of the multi-stakeholder-approach championed by the US and other countries through reform proposals.[11] Furthermore, China uses its own (co-)founded forums to discursively re-interpret the Western image of the Internet as a global medium of free expression and disseminate alternative norms.[12] Beyond official representatives, even Chinese tech firms, which are implicated in human rights abuses in Xinjiang, play leading roles in setting global standards.[13] In contrast, Silicon Valley firms can no longer be neutral as they struggle to comply with values that are fundamentally at odds.[14] When active in China they are faced with difficult questions, e.g. will they censor and delete online content, or reveal user information when requested by authorities? 

Implications for Europe

To be sure, the US-Chinese technology race does not only concern the two states, but has significant impact on third countries. The presence of US and Chinese tech companies is also noticeable in Europe, where they influence how millions of Europeans do business, shop, communicate, receive news, and consume entertainment. This section explores the situation in the EU, which is shaped by a strong presence of foreign tech giants in the European Digital Single Market, and analyses the causes why Europe’s own tech companies find it difficult to scale and successfully compete.

Non-European Players Have Strong Presence in the Digital Single Market

Since the mid-1980s, there have been extensive EU-funded programs as well as massive national and regional promotion of IT research and development in many EU member states.[15] Europe has universities and institutes that are at the forefront of research in key technologies. And with cities like Berlin, Paris and Stockholm, the EU has its own startup hubs of global importance, and thereby, digital innovation.[16]

Despite such favourable prerequisites and while Europe is a giant in many traditional technology sectors (e.g. automotive and industrial manufacturing industries), only a few local digital players have managed to assert themselves in the global competition around technology. Although Europe has system integrators, telecom providers and network manufacturers that remain global leaders, none of the top 15 digital companies in 2019 was European.[17] Therefore, not surprisingly, Europe only accounts for less than 4 percent of the market capitalisation of the world’s 70 largest digital platforms, while America boasts 73 percent and China, 18 percent.[18]

Due to the lack of indigenous alternatives for many technologies, several American tech companies have nearly monopolistic positions in the European Digital Single Market, while simultaneously, Chinese tech giants are extending their presence in the market. For example, Alibaba and Tencent are expanding aggressively in Europe and Bytedance’s social media platform TikTok has become popular among young people. This situation can lead to dependencies, whereby Europeans have little choice and strongly rely on a single foreign provider of technology. Already existing dependencies will only be amplified as the global economy is becoming more reliant on digital activities; the COVID-19 pandemic reinforced this trend. In addition, further dependencies might arise. For instance, a heavily debated question in Europe is whether the Chinese telecom equipment provider Huawei is trustworthy enough to be involved in the buildup of 5G networks or if the company has a hidden agenda that could bring European states to a position of dependency.

In turn, technological dependencies can pave the way for heightened foreign economic or political influence, and lead to a loss of digital sovereignty, limiting the ability of states, companies or individuals to self-determine their own digital fate. Risks emerge when a dominant actor uses the power arising from dependencies to pursue its own parochial interests: this actor can obtain benefit by coercing a dependent actor to act in an involuntary manner by threatening significant harm. Possible scenarios are that dependencies are leveraged (1) to sabotage, disrupt or even prevent data flows or the availability of digital services in dependent states; (2) to manipulate technologies upon which other states and businesses depend, and use them for cyberespionage and surveillance; or (3) to permeate their political ideas, values and norms through technologies.[19] If the dependent actor strives for stronger self-determination, it can lead to friction and be answered with sanctions that cause further disadvantages.

If a dominant actor is setting norms and standards, while the dependent actors do not have the means to participate, the latter might have no other choice than to adapt. If no action is taken to address the current situation, European states risk weakening their digital sovereignty. Thereby, the next decisive technological stage could be shaped by non-European actors, which do not share European core values, traditions and standards or even try to undermine them.[20] In particular, the concern is that the everyone-for-themselves ethos of the US or the authoritarian centralisation of China will be imposed via the design and accessibility of critical technologies and expanding automation.[21] In that way, dependencies can have far-reaching impacts on how European societies function, as well as their prosperity and security.

Underlying Causes of the Status Quo

Due to the shortage of homegrown digital “champions”, non-European tech companies – i.e., so far, mostly US and increasingly Chinese – grew relatively unhindered. One factor which contributed to the status quo is that digital technologies are often subject to network effects,[a] which favour monopolisation and helped foreign tech companies acquire strong positions in the market. Another crucial factor are the specific characteristics of the Digital Single Market, such as different languages and a plethora of national rules in EU member states. These make it difficult for European digital small and medium-sized companies (SMEs) to scale. But apart from technological and market-related causes, the conduct of non-European tech companies plays a central role in explaining the status quo. Five key issues can be identified:

First, their strong market position allows tech companies to capture huge rents without offering much in return: They operate without making significant investments locally, without creating many jobs, and often without paying much in taxes.[22] As this situation is advantageous for incumbent companies, they seek to maintain the status quo. As digital platforms are important channels for businesses to connect to their customers, tech companies act as gatekeepers that can design the terms of use and control access.  This grants them enormous power, which can be used to undermine competition by threatening disruption of services or making it difficult for competitors to reach their customers. Examples of anti-competitive practices include giving preferential treatment to own services, pre-installing own software, or barring newcomers by establishing market entry barriers.[23]

Second, while European markets are relatively open to foreign companies and investors, large parts of the Chinese economy are not equally accessible for European digital and traditional firms. Discriminatory practices, as well as insufficient transparency and legal certainty make it difficult to do business in China. This prevents European companies from competing on an equal footing with Chinese firms, which again hinders their ability to scale globally. At the same time, the Chinese government supports its national champions through extensive subsidy programs and by “throwing state money” at them, China has created hostility. In particular, German and French companies feel that they are facing some highly unfair competition.[24]

Third, promising European startups often get into the focus of foreign tech companies, which seek to invest in them or acquire them altogether. For instance, over the period 2015-2017, Google, Amazon, Facebook, Apple and Microsoft acquired 175 companies, out of which 47 were located in the EU.[25] The investments can help startups fund their next stage of growth and investors can support their expansion to global markets by providing technological or business knowledge or connecting them with contacts in the market. However, investments and acquisitions can also be used as a strategy to cut off potential rivals, or lead to a sell-out of technology. Another risk is adverse influence on startups as investors get involved in their corporate governance or startups become more integrated into the ecosystems of foreign tech giants.

Fourth, digital companies collect data, which is required to train machine learning algorithms and develop AI applications. European companies follow strict data protection rules in their home market, while US tech companies face less regulatory restrictions and Chinese companies draw on big data gathered through large-scale surveillance of citizens. As a consequence, European companies have smaller datasets than their US and Chinese rivals. This narrows their innovation capacity and gives foreign data-hoarding giants a competitive edge. Further, a bulk of data of European users and companies is currently stored in data centres of large US cloud providers, while Chinese giants have also started to expand their cloud services in Europe. This poses security risks, as US-developed encryption has been subject to repeated indications of purposefully integrated loopholes,[26] and foreign jurisdiction could possibly force cloud providers to give access to data. Moreover, Europeans can be vulnerable by relying too heavily on data lines of foreign entities, or involving them closely in the building of its own telecommunications networks.

Fifth, AI is a key disruptive and cross-sectional technology that promises great potential, but can also pose substantial risks depending on how it is deployed. AI, and particularly facial recognition, is increasingly used for surveillance purposes and its unethical use challenges norms and standards of democratic value systems. Further, intelligence gathered through data collection can pave the way for targeted influence and manipulation. Again, foreign companies act as gatekeepers as they govern the flow of information and decide which content is published on their platforms. They therefore exert tremendous influence on public opinion, and current self-regulatory approaches to tackling harmful content have proven insufficient. As a result, the growing spread of disinformation and hate speech on digital platforms has contributed to the rise of right-wing populism in Europe, which undermines social cohesion and heats up sentiments in favour of protectionism.

Shaping the Digital Future: EU’s Priorities

While Europe has missed the first wave of digitisation, it cannot afford to miss the second. Accordingly, the topic has moved to the top of the political agenda and the European Commission is determined to make this Europe’s “Digital Decade”.[27] This section analyses the EU’s general positioning and its recent key policy responses, which build on more stringent regulation of the tech industry as well as active promotion of the European innovation ecosystem.

The EU’s Overall Positioning and Direction

The EU would like to avoid getting caught between the fronts of the rivalry and be pulled into either a US or a Chinese techno-sphere. Rather, Europeans are aiming to pursue their own approach to digitisation in line with their shared values. Such policy combines digital sovereignty with strategic interdependence and can open the door to a third way in cyber space, which lies between the American model of market freedom and the Chinese one of authoritarian state capitalism.[28]

A unique European approach is also necessary in light of the union’s changing relations with both the US and China. In recent years, the EU has harboured a more critical perception of China: it is both as a partner (in combating climate change, for example) and an economic competitor and systemic rival that is promoting different models of governance.[29] Simultaneously, transatlantic relations have undergone change, and under former President Donald Trump the country’s longstanding alliance with Europe was strained. With Joe Biden as the new president, a rapprochement between the US and the EU is likely, but differences in opinions and interests will remain. In particular, Biden is expected to continue Trump’s hard stance vis-à-vis China, while Europeans believe that there is no future without China and thus do not intend to decouple. The connection to the US is still important, but – as Chancellor Angela Merkel said at the beginning of Germany’s term of the presidency of the European Council in July 2020—in a time of global changes Europe now relies more on its own.[30] Besides political responses on the EU level, France and Germany have together pushed forward to call on Europe to unite forces and develop a European industrial policy, in which digital technology and especially AI play key roles.[31]

Against this background, the EU seeks to strengthen its digital sovereignty, but – in contrast to other countries—without closing itself off and turning protectionist. Indeed, a further fragmentation of the Internet and creation of a European techno-sphere will not be in the interest of the EU for two reasons. One, European companies benefit from global supply chains and the EU has strong foreign trade ties with the US and China, which are important export markets; and two, the EU remains committed to the idea of a global and open Internet. It is aware that a new “everyone against everyone” and potential confrontation is not only risky and costly, but will also prevent cooperation in tackling global challenges. Therefore, the aim of the EU is to keep its digital market open and allow states do business with each other, for the benefit of all.

Making the European Digital Single Market More Competitive

Instead of making the digital market European, the goal is to make the Digital Single Market more competitive in the global digital economy. There is broad consensus in Brussels on the need for stronger regulation that promotes fair competition and ensures that new entrants can access the market without barriers and have a chance to succeed against incumbent companies. To that end, market domination by monopolistic tech companies must be prevented more effectively and competition distortions need to be addressed to enable a level playing field between European and non-European market participants. Moreover, despite a commitment to remain an open economy, some appropriate defence mechanisms must be in place to protect strategic interests.

To address the first challenge, the EU has developed two ambitious regulatory packages: the Digital Services Act and the Digital Markets Act, whose proposals were presented in December 2020. They represent the EU’s first overhaul of Internet regulation in the last 20 years and include EU-wide harmonised rules to prevent loopholes through differences in national laws. Particular focus is on anti-competitive behaviours of gatekeepers and Commissioner for the Internal Market Thierry Breton has declared that the larger companies are, the more they have to comply with rules important to the EU.[32] The EU Commission specified a threshold[b] and criteria that define which companies are gatekeepers and developed a list of “do” and “don’t” obligations for them to follow. The Commission will carry out market investigations to monitor activities of gatekeepers and, if necessary, update obligations to ensure that rules keep up with the digital sector’s fast pace. In case of non-compliance, gatekeepers risk fines of up to 10 percent of the company’s worldwide annual turnover, and in case of repeated infringements, the EU can impose further remedies, which, as a last resort, can go as far as a divestiture of (parts of) a business.[33]

Regarding the second challenge, the EU and China have concluded negotiations for the Comprehensive Agreement on Investment (CAI) in December 2020. Its main aims are to improve market access conditions for European companies, ensure that they compete on an equal footing when operating in China, improve transparency, predictability and legal certainty, and discipline the behaviour of state-owned enterprises.[34] It is not the deal the European side had hoped for when negotiations started seven years ago, but some achievements have been made that improve the status quo of European companies.[35] However, the progress with regard to market access and equality of European companies could in practice be thwarted; toothless enforcement mechanisms and China’s track record concerning compliance with international commitments raise doubts about the sustainability of the agreement.[36] Overall, it remains to be seen how China will behave in the coming years and in case competition distortions are not removed, the EU may ultimately turn to restricting the access of Chinese firms in the European market.

While the EU does not want to turn protectionist, its openness should not be mistaken for naivety and some appropriate defense mechanisms are required. One important measure is the EU’s framework for the screening of foreign direct investments, which entered into force in April 2019 and limits the ability of foreign investors to acquire or invest in critical assets. The new framework encourages cooperation on investment screening, enables information exchange, and allows the Commission to issue opinions when an investment poses a threat.[37]

Ensuring Safe Infrastructure and Handling of Data and Online Content

The described competition and antitrust regulation reform goes hand-in-hand with new rules on data governance as data is a central resource in the digital economy and a crucial factor in determining whether a company has acquired too much market power. The EU’s aim is to strengthen its data economy and realise the potential of AI, while implementing standards for its ethical use and preventing risks. More security requirements are also needed to counter harmful content online on digital platforms. Further, availability and security of data transmission, processing and storage has to be ensured so that data is trustworthy and free of bias.

In February 2020, the European Commission released its new Digital Strategy, which consists of a five-year policy roadmap, a Data Strategy, and a White Paper on Artificial Intelligence. The new rules build on previous legislation, namely the General Data Protection Regulation (GDPR) released in 2016, its concomitant regulation on the free flow of non-personal data (FFD) passed in 2018, as well as the Cybersecurity Act and Open Data Directive, both published in 2019.[38] One central idea in this new legislation is the creation of a single market for data, which builds on strong data protection that respects citizens‘ rights and allows the use of personal data only for narrow purposes, and enables sharing of industrial and commercial data. Further, the plan is to create European data spaces to pool data across several key sectors.[c] By making more data available, European tech companies will be in a better position to compete against foreign incumbents. With regard to AI, the EU promotes a responsible, human-centric approach, which applies particular scrutiny to sectors where essential human interests and rights are at stake, such as recruitment, healthcare, transport, police and law enforcement.[39] In high-risk areas, AI systems must be independently tested and certified before they can be used in the EU. Further, the White Paper on AI proposes measures that will streamline research, foster collaboration between member states, and increase investment into AI development and deployment.[40]

The Digital Services Act includes a set of harmonised EU-wide obligations that ensure that online platforms bear more responsibility for the content which they host. Its cornerstones concern the faster removal of illegal content, services and goods online; transparency rules about their services (e.g. tech companies must disclose how targeted advertising and recommendation algorithms work); and new powers to scrutinise how platforms work, including access by researchers to key platform data.[41] Additional rules apply to very large platforms and relate to risk management, external auditing, and public accountability. The EU member states, supported by a newly-established European Board for Digital Services that has coordinators in each state, are in charge of supervision and enforcement of rules. Fines for non-compliance are up to 6 percent of annual revenue.

Moreover, Thierry Breton announced that it is time to offer a safe harbour to European citizens and companies – meaning that data accruing in Europe should be stored and processed in the region, according to local rules.[42] Therefore, the new legislation promotes the building of new data infrastructure, with the creation of a European cloud federation as hardware foundation for the single data market as a priority. In autumn 2019, the European project GAIA-X was initiated as a platform to create cloud offerings, based on European security standards, as alternative to those of foreign providers. Tech giants such as Amazon, Google, Huawei and Alibaba participate in the project and can strive for certification of their services. Some criticise this involvement as a „Trojan horse“,[43] while others believe an exclusion would be a protectionist mistake.[44] With regards to the building of Europe’s 5G network, the European Commission is of the view that banning certain suppliers is not the right approach and follows a multi-vendor strategy. Instead, in January 2020 the European Commission issued guidelines, which call on member states to assess the risks of suppliers and restrict procurement from suppliers that are considered to be high-risk.[45]

Investing in Europe’s Innovation Ecosystem

In addition to the described regulation, what is equally important is the active promotion of innovation. In her speech on the digital strategy, European Commission President Ursula von der Leyen called on Europeans to find European solutions in the digital age.[46] Even if Europe did not have the same amount of capital, or entrepreneurial culture to mimic China’s industrial policy or create another Silicon Valley, Europe can seize the opportunity of a diverse ecosystem, within which new undertakings can grow and established industries can open up to the existing European and even global ICT environment.[47] To nurture its innovation ecosystem, the EU expands investments in infrastructure, education, research and development, and support for the startup ecosystem. Therefore, the EU aims to nurture global players, although the case of the blocked Alstom-Siemens merger triggered a debate on how big European champions should be allowed to grow without harming competition in the EU itself.[48]

In the context of the EU’s long-term budget (2021-2027), financial resources are provided through the Digital Europe programme, which is worth 8.2 billion Euro and will boost investments in supercomputing, artificial intelligence, cybersecurity, and advanced digital skills.[49] It is complemented by further EU programmes, including the Horizon Europe programme for research and innovation (worth 94.4 billion Euro), the Connecting Europe Facility-Digital that will support and catalyse investments in digital connectivity infrastructure (1.8 billion Euro) and InvestEU (31.6 billion Euro) that will provide crucial support to companies in the recovery phase.[50] Furthermore, at least 20 percent of the expenditure of the Recovery and Resilience Facility (560 billion Euro), which is the key instrument of NextGenerationEU to boost recovery from the COVID-19 crisis, should relate to digital.[51] To finance expenditures, a fair tax system for digital companies would help, but digital business activities are currently subject to relatively low taxes. The EU is hoping that a global agreement on taxation of tech companies can be found and currently awaiting agreement among the OECD to avoid conflicts. However, Angela Merkel said at the beginning of the German presidency of the EU Council that if no arrangement is visible, the EU has to seriously consider how a solution can be found for Europe, and must if necessary introduce its own digital tax.[52]

Capacity-building efforts start with investments in education to equip Europeans with adequate digital skills. The aim is to train digital talent who are capable of confidently using digital media, building innovative technology, and thinking critically about its use. It ranges from promotion of digital literacy at early stages to advanced skills, especially data science. Enhancing research and development is also necessary to maintain technological advantage in core technologies.

This connects to the next focus, which is to accelerate the knowledge transfer between research and business and improve the access to finance for promising startups. One instrument is an EU-wide network of Digital Innovation Hubs, i.e. one-stop shops that support companies through skills and training, provision of testing opportunities, and connecting them with the ecosystem, especially investors.[53] Further, the European Innovation Council (EIC) offers new funding opportunities for breakthrough innovations and has made its first equity investments of 178 million Euro in January 2021.[54] These investments are supplemented by efforts of some EU member states to support their local startup ecosystems. In France, President Emmanuel Macron announced in September 2019 a venture capital fund that will pump 5 billion Euro into the startup ecosystem,[55] while Germany is in the process of setting up a future funds for startups worth 10 billion Euro.[56]


This paper provided an overview of the US-China technological race, described the implications on Europe and the extent to which the strong presence of foreign tech giants poses risks to digital sovereignty, and analysed the EU’s recent key policy responses. Together, these measures create a market environment that remains open to foreign tech companies, but ensures healthy competition and data protection. Along with an investment offensive, the conditions will enable European tech companies to develop alternatives for some – but not necessarily all – key digital technologies. After all, sovereignty is not a binary choice and the EU finds middle ground on a continuum instead of seeking full sovereignty at all cost. As the choice of technology providers will broaden, some dependencies will remain—though they can be offset by Europe’s strengths in certain areas. Indeed, mutual dependencies are crucial to avoid susceptibility to blackmail and US and Chinese companies eventually rely on access to the European market, which no tech firm with global aspirations can afford to ignore.

The EU’s approach offers an opportunity to help shape digitisation by using its market power to regulate digital giants, and by setting global standards. While Europe’s present dearth of tech firms helps it in taking a more objective stance,[57] the EU seeks to impact how other countries respond to the power of global tech companies, as it already did with past regulations. For instance, the EU set a benchmark with its General Data Protection Regulation (GDPR) and most of the 120 countries which have passed privacy laws, have principles that resemble those of the GDPR.[58] Simultaneously, most big tech companies have adopted the rules as a global standard instead of tailoring their offering to different regions. To promote its digital standards, the EU also engages in regulatory cooperation with like-minded international partners. Thus, a Digital Diplomacy Network and framework for action is currently created, and digitisation also plays a key role in the realm of European development cooperation.[59]

Moreover, Europe and its tech companies can lead by example and provide an alternative to the American and Chinese techno-spheres by practically developing necessary technologies. As digital technologies from Europe stand for high ethical and data protection standards, a label “Digitised in the EU“ signals trustworthiness and will therefore give the private sector a competitive edge.[60]

The EU aims to shape interdependence in a way that lies in the interests of all sides to avoid escalation. However, the implementation of the approach does not come without challenges and headwind must be anticipated. Many in Brussels expect a drawn-out fight, as the US tech industry is spending more than ever on lobbying.[61] Some of the regulations are still at a proposal stage, which means they could be diluted during negotiations and make the actual enforcement less effective. The EU must remain steadfast, but this will be more difficult, the more the EU is busy dealing with itself. The EU has experienced several crises that challenge European cohesion, and the 27 EU member states often have diverse views on issues. Of particular concern is China’s engagement with 12 member and five EU candidate states in Central and Eastern Europe in the context of the 17+1 grouping, which other EU states perceive as an attempt to divide the EU. The danger is that nationalist leanings of individual states gain the upper hand and reinforce dividing tendencies. However, by pursuing individual national agendas, they will not only weaken the EU on the international stage, but ultimately themselves. Therefore, it is of utmost importance for EU member states to stand together and act confidently with a joint and coherent strategy.


[a] This essential principle means that the value of a technology increases with the number of people using it.

[b] This threshold is that companies that reach more than 10 percent of the EU’s population are considered systemic in nature.

[c] These sectors are health, environment, energy, agriculture, mobility, finance, manufacturing, public administration and skills.

[1] Matthias Schulze and Daniel Voelsen, “Digital spheres of influence,“ in: Barbara Lippert and Volker Perthes (Eds.), “Strategic rivalry between United States and China: Causes, trajectories, and implications for Europe,” SWP Research Paper 4, April 2020.

[2] Frankfurter Allgemeine Zeitung, “Google verlegt ein neues Unterseekabel nach Europa,“ July 28, 2020.

[3] Matthias Schulze and Daniel Voelsen, “Digital spheres of influence,“ in: Barbara Lippert and Volker Perthes (Eds.), “Strategic rivalry between United States and China: Causes, trajectories, and implications for Europe,” SWP Research Paper 4, April 2020.

[4] Adam Segal, “The coming tech cold war with China,” Foreign Policy, September 9, 2020.

[5] Adam Segal, “The coming tech cold war with China,” Foreign Policy, September 9, 2020.

[6] Cecilia Kang and David E. Sanger, “Huawei is a target as Trump moves to ban foreign telecom gear,“ New York Times, May 15, 2019; Deutsche Welle, “Trump continues fight to get TikTok banned,“ December 2020, 28.

[7] Marc Champion, “Digital cold war,” Bloomberg, December 12, 2019.

[8] Julia Pohle and Julius Lang, “Digitale Souveränität als Frage der Selbstbestimmung im digitalen Raum,” Deutsche Gesellschaft für die Vereinten Nationen e.V., July 2, 2019.

[9] Adam Segal, “The coming tech cold war with China,” Foreign Policy, September 9, 2020.

[10] Kaan Sahin, “The tech cold war illusion,” Berlin Policy Journal, January 6, 2020.

[11] Julia Pohle and Julius Lang, “Digitale Souveränität als Frage der Selbstbestimmung im digitalen Raum,” Deutsche Gesellschaft für die Vereinten Nationen e.V., July 2, 2019.

[12] Julia Pohle and Julius Lang, “Digitale Souveränität als Frage der Selbstbestimmung im digitalen Raum,” Deutsche Gesellschaft für die Vereinten Nationen e.V., July 2, 2019.

[13] Rebecca Arcesati and Martijn Rasser, “Europe needs democratic alliances to compete with China on technology,” Mercator Institute for China Studies, May 29, 2020.

[14] Jacob Helberg, “Silicon Valley can’t be neutral in the U.S.-China cold war,” Foreign Policy, June 22, 2020.

[15] Gabriele Goldacker, “Digitale Souveränität,” Kompetenzzentrum Öffentliche IT, November 2017.

[16] Berlin, Paris and Stockholm are considered “Elite Global Startup Hubs” (along with Austin, Chicago, San Diego and Seattle in the US, Shanghai in China; Bangalore, Delhi and Mumbai in India, Tel Aviv in Israel and Singapore); they account for nearly a fith (18 percent) of global venture capital investment. See: Richard Florida and Ian Hathaway, “Rise of the global startup city: The new map of entrepreneurship and venture capital,” Center for American Entrepreneurship, 2018.

[17] Axel Voss, “A manifesto for Europe’es digital sovereignty and geo-political competitiveness,” January 2020.

[18] Economist, “The EU wants to set the rules for the world of technology,” February 2020.

[19] Matthias Schulze and Daniel Voelsen, “Digital spheres of influence,“ in: Barbara Lippert and Volker Perthes (Eds.), “Strategic rivalry between United States and China: Causes, trajectories, and implications for Europe,” SWP Research Paper 4, April 2020.

[20] Axel Voss, “A manifesto for Europe’es digital sovereignty and geo-political competitiveness,” January 2020.

[21] Chris O’Brien, “France’s $5.5 billion startup fund is a bid for digital sovereignty,” Venture Beat, September 23, 2019.

[22] François Candelon, Hans-Paul Bürkner, Sylvai Duranton, Nikolaus Lang, Rodolphe Charme di Carlo, and Midas de Bondt, “How digital giants and Europe can cooperate to win in AI,“ BCG Henderson Institute, 2020.

[23] For more details on anti-competitive practices see: Shirin Ghaffary and Jason Del Rey, “The big tech antitrust report has one big conclusion: Amazon, Apple, Facebook, and Google are anti-competitive,” Vox, October 6, 2020.

[24] Keith Johnson, “How Europe fell out of love with China,” Foreign Policy, June 25, 2020.

[25] Axel Gautier and Joe Lamesch, “Mergers in the Digital Economy,” CESifo Working Paper No. 8056, 2020.

[26] Gabriele Goldacker, “Digitale Souveränität,” Kompetenzzentrum Öffentliche IT, November 2017.

[27] European Commission, “A Europe fit for the digital age,“; Philip Oltermann, “‘For Europe to survive, its economy needs to survive’: Angela Merkel interview in full,” The Guardian, June 26, 2020.

[28] Annegret Bendieck and Martin Schallbruch, “Europas dritter Weg im Cyberraum,” SWP-Aktuell No. 60, November 2019.

[29] European Commission, “EU-China – A strategic outlook,” March 12, 2019.

[30] Thomas Kirchner, “‘Ich glaube an Europa“ – Merkel zur Ratspräsidentschaft‘,” Süddeutsche Zeitung, July 8, 2020.

[31] Federal Ministry of Economic Affairs and Energy, “A Franco-German Manifesto for a European industrial policy fit for the 21st century“.

[32] Deutschlandfunk Kultur, “Wie die EU die Tech-Konzerne regulieren will,” December 19, 2020.

[33] European Commission, “The Digital Markets Act: ensuring fair and open digital markets“.

[34] European Commission, “EU-China Comprehensive Agreement on Investment,“ February 13, 2020, .

[35] Mikko Huotari, “Das EU-China-Abkommen birgt Chancen – aber auch drei große Risiken,” Handelsblatt, December 31, 2020.

[36] Mikko Huotari, “Das EU-China-Abkommen birgt Chancen – aber auch drei große Risiken,” Handelsblatt, December 31, 2020.

[37] European Commission, “EU foreign investment screening regulation enters into force,” press release, April 10, 2019.

[38] Adil Nussipov, “Data governance in the EU: Data sovereignty & cloud federation,” Medium, March 23, 2020.

[39] European Commission, “Press remarks by President von der Leyen on the Commission’s new strategy: Shaping Europe’s digital future,” Speech, February 19, 2020.

[40] European Commission, “Artificial intelligence,” December 23, 2020.

[41] European Commission, “Europe fit for the digital age: Commission proposes new rules for digital platforms,” Press release, December 15, 2020.

[42] Till Hoppe, “Neue Datenstrategie: EU will keine weitere Chance verpassen,” Handelsblatt, January 17, 2020.

[43] Christian Sachsinger, “Gaia-X: Was bringt EU-Cloud, wenn Google und Amazon mitmischen?,“ BR, December 7, 2020.

[44] Bastian Benrath, “Europa setzt Standards,” Frankfurter Allgemeine Zeitung, November 20, 2020.

[45] BBC, “5G: EU issues guidance on ‘high-risk‘ suppliers,” 29 January 2020.

[46] European Commission, “Press remarks by President von der Leyen on the Commission’s new strategy: Shaping Europe’s digital future,” Speech, February 19, 2020.

[47] Simon Rinas, “Digital sovereigty – a prospect,” Alexander von Humboldt Institut für Internet und Gesellschaft Blog, February 5, 2016.

[48] Konstantinos Efstathiou, “The Alsom-Siemens merger and the need for European champions,” Bruegel Blog, March 11, 2019.

[49] European Commission, “The 2021-2027 Multiannual Financial Framework: Digital shines through in the EU’s long-term budget,” January 20, 2021.

[50] European Commission, “The 2021-2027 Multiannual Financial Framework: Digital shines through in the EU’s long-term budget,“ January 20, 2021,

[51] European Commission, “The 2021-2027 Multiannual Financial Framework: Digital shines through in the EU’s long-term budget,” January 20, 2021.

[52] Thomas Kirchner, “‘Ich glaube an Europa“ – Merkel zur Ratspräsidentschaft‘,” Süddeutsche Zeitung, July 8, 2020.

[53] European Commission, “Digital Innovation Hubs (DIHs) in Europe,” July 10, 2020.

[54] European Commission, “European Innovation Council Fund: first equity investments of €178 million in breakthrough innovations,” press release, January 6, 2021.

[55] Romain Dillet, “Macron announces €5 billion late-stage investment pledge from institutional investors,” TechCrunch, September 17, 2019.

[56] Till Hoppe and Christoph Kapalschinski, “Bundestag bringt Zehn-Milliarden-Programm für Start-ups auf den Weg,” Handelsblatt, November 27, 2020.

[57] Economist, “Why big tech should fear Europe,“ March 23, 2019.

[58] Economist, “The EU wants to set the rules for the world of technology,“ February 2020.

[59], “Strengthening Europe’s digital and technological sovereignty,”.

[60] Axel Voss, “A manifesto for Europe’es digital sovereignty and geo-political competitiveness,” January 2020.

[61] Adam Satariano, “Big fines and strict rules unveiled against ‚big tech‘ in Europe,“ New York Times, December 15, 2020.

The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.


Sabrina Korreck

Sabrina Korreck