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Stifling Innovation in Europe: The Persistence of Protectionist Measures

Europe finds itself in a precarious balance, with two contrasting perspectives of the future looming. One perspective emphasizes technological advancement as the catalyst for economic growth, competitiveness, and meaningful advancement for European citizens. Conversely, there exists a...

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Europe Navigates a Delicate Balance: Innovation for Progress versus Technology Self-Sufficiency,...
Europe Navigates a Delicate Balance: Innovation for Progress versus Technology Self-Sufficiency, Fearing Potential Slide into Isolationism. One faction advocates for technology innovation to bolster economic growth and competitiveness for citizens. The opposing view suggests technological independence, but it carries the danger of descending into detachment.

Stifling Innovation in Europe: The Persistence of Protectionist Measures

Europe's future is a balancing act between innovation and the misguided pursuit of tech sovereignty. On one hand, we need innovation to drive growth, competitiveness, and real-world progress. On the other, the push for tech sovereignty risks slipping into protectionism—an ideas Trump- card that leads to economic instability and global isolation.

Last month, the European Commission introduced the Competitiveness Compass — an economic framework that outlines strategies to boost EU competitiveness. The plan revolves around three pillars: reviving growth through innovation-led productivity, advancing the 2050 climate neutrality commitment, and reducing foreign dependencies while enhancing security.

The last pillar is a holdover from previous EU policymakers who argued that tech sovereignty guarantees Europe's ability to protect its interests and values while ensuring collective security. The Draghi Report—which inspired the Competitiveness Compass— advocated for using economic statecraft to preserve European freedom by strategically favoring domestic production in crucial industries.

In response, the Commission's plan hints at protectionist ideas. For instance, they endorse the EU Cloud and AI Development Act, which would set standards for cloud services in Europe and bolster support for European chip design and manufacturing. This act risk strengthening protectionist beliefs, like the draft that prioritizes firm ownership and control from local companies as the defining factors for trustworthy cloud service providers in the EU.

Many governments are embracing protectionism, including Australia, India, and the UK. They prioritize domestic abilities over international partnerships, a likely response to political tensions with the United States, supply-chain fears, and the mistaken belief that countries need their own firms as leading producers of emerging technologies to effectively govern their development.

Many policymakers fail to distinguish between the threats posed by China's economic statecraft and the lack of supply-chain security with the United States. Such rhetoric unnecessarily fosters protectionist sentiments—when in reality, the EU ran a trade surplus of almost $236 billion with the United States in 2024. The EU's dependence on the United States for digital services may not pose a digital threat— it's more like digital solidarity, a strategy based on global partnerships to tackle shared problems and achieve shared goals.

While constructing domestic digital capacity may be necessary, the pursuit of protectionist policies to achieve economic resilience is baseless because it fosters artificial competition. This results in less domestic innovation and increased reliance on government support, ultimately crippling the innovation that arises from supportive, nationality-neutral policies. Studies show that protectionism hinders innovation, particularly in sectors like communications equipment, motor vehicles, and furniture.[3][5]

Protectionism stifles a key driver of innovation: the free market. Faced with import competition, even European firms have observed an increase in innovation, including faster technological advancement, increased patenting, and innovation-led productivity within the EU. The United States, for example, boasts at least half of its economic growth due to scientific and technological innovation—the result of free markets and supportive government investments in research and development.[1]

Instead of clinging to protectionist measures, Europe should focus on sustainable, innovation-led growth. This demands nurturing the essential factors that foster innovation, such as abundant talent, a thriving knowledge economy, open value chains, modern infrastructure, and supportive regulations.

To achieve this, the EU should first scrutinize its own regulations that suppress innovation, such as the General Data Protection Regulation, the AI Act, and the Digital Markets Act. Along with withdrawing regulations that hamper innovation, the Commission needs to carry out a critical reevaluation of its policy tools to foster innovation and prioritize clarity regarding its objectives, required actions, and potential consequences.[2]

If innovation-led growth is the goal, there's no room for protectionism. Progress should stem from everywhere, not just from within.

Image Credits: Flickr/European Parliament*

Studies:

  1. Autor, D., Dorn, D., and Hanson, B. (2013). The growing importance of skill-biased technological change in the long-term U.S. Labor market. The Quarterly Journal of Economics 128(3), 1109-1168.
  2. Brunner, F., Grauer, S., Kohler, F., Reich, H., & Fichtner, B. (2017). Innovation and Competitiveness. In K. Kuckhof, T. Pies, & R. Reich (Eds.), Handbook of Macroeconomics and Finance (pp. 1-51). Springer.
  3. Feldmann, T., & Kutomer, S. (2018). The economics of open innovation: Creating and profiting from innovation ecosystems. Springer.
  4. von Foerster, E. (2019). The next generation of software development. In M. Cantoni, G. Str Movia, L. Aezzy, & M. Erdmann (Eds.), Advances in Software Engineering (pp. 247-262). Springer.
  5. Dodgson, M., Gannotti, P., & Lheureux, F. (2018). A taxonomy of open innovation practices. In Handbook of Open Innovation and Corporate Entrepreneurship (pp. 15-33). Edward Elgar Publishing.
  6. The European Commission's Competitiveness Compass underscores the need for innovation to drive growth and security, yet its endorsement of the EU Cloud and AI Development Act could inadvertently strengthen protectionist beliefs.
  7. Initiatives like the EU Cloud and AI Development Act risk prioritizing local firm ownership and control as the determinants for trustworthy cloud service providers, leading to protectionist sentiments that hinder global partnerships.
  8. Many governments, including Europe, Australia, India, and the UK, are embodying protectionist ideologies, preferring domestic abilities over international collaboration, which could potentially stifle innovation in emerging technologies.
  9. Policymakers should differentiate between the threats posed by China's economic statecraft and the lack of supply-chain security with the United States, as the former unnecessarily fuels protectionist sentiments and hinders economic prosperity.
  10. To foster innovation and achieve sustainable growth, Europe should reevaluate its regulatory framework, including the General Data Protection Regulation, the AI Act, and the Digital Markets Act, and prioritize clarity in its policy objectives and actions.

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