Transatlantic Cooperation vs. Tech Nationalism
Values and Standards in the New Systemic Competition
Dr. Andreas Freytag, DAAD/AGI Research Fellow
Peter Rashish, Vice President and Director of the Geoeconomics Program at AGI
This webinar explores the idea that transatlantic relations should be further strengthened through joint standard setting to gain traction in the intensifying systemic competition between the West and autocratic countries, first and foremost China. Based on similar values, cooperation in standard setting can be an instrument to secure economic prosperity across the Atlantic and make the transatlantic market attractive for companies from third countries.
The ability to set technological standards has become a prerequisite for a country’s success in global markets. To reap maximum benefits, it is important that a standard be widely used. Not only that, in the existing dynamic of systemic rivalry, technologies and technological standards are becoming weaponized.
Under this current situation of distrust, a tendency to favor tech nationalism has risen, even within close partnerships like the transatlantic relationship. But history shows that subsidy races, protectionism, and isolationism lead to inefficiencies.
From a geopolitical perspective, the United States and the European Union instead need to cooperate.
If the transatlantic partners can manage to create and enforce joint high standards that respect technical and environmental regulations—as well as social aspects of trade and investment—they will not only improve the well-being of their citizens, but also be able to attract businesses from other countries. And by generating familiarity with Western values, these commercial partners may even help to secure the global Westphalian and liberal order that is currently under stress.
Dr. Andreas Freytag is Professor of Economics at the Friedrich-Schiller-University Jena, Honorary Professor at the University of Stellenbosch, and Visiting Professor at the Institute of International Trade, University of Adelaide. He is also Director of G20 Trade and Investment Research Network. Dr. Freytag obtained his diploma from the University of Kiel and his doctorate as well as his Habilitation from the University of Cologne. He has published a number of books and articles in first-class peer-reviewed journals on economic policy, international trade policy, development economics, and international policy coordination. He contributes to blogs and for over ten years had a weekly column on wiwo-online, a German magazine.
During his time at the AGI, Andreas Freytag is focusing on the substance and path of tightened transatlantic relations against the background of the systemic competition between the West and autocratic states. The latter comprise some emerging economies, including Russia and China. This escalation has geo-political and geo-economic consequences and makes it necessary to strengthen the ties between transatlantic partners as well as to reach out jointly to attract third countries to the Western values. To maintain Western leadership in standard-setting as well as helping developing countries to enforce universal human rights and environmental standards, there needs to be a coordinated and broad-based strategy to (1) react to Chinese et al. attempts to define and set standards, which become binding for third countries’ companies. Similarly, (2) due diligence legislation may also be more effective if coordinated across the Atlantic. Although not in the center of analysis, another (3) aspect deals with the transatlantic trade relations as such, which are also in need of a revitalization. This project focuses on the geo-economic aspects of systems competition although it is difficult to disentangle economic and political relations. It analyzes ways to intensify the transatlantic relations with the objective to maintain economic welfare as well as to position the Western partners better to counter autocracies’ attempts to gain influence in the world economy.
Regulations and Standards
Regulations, for example in the forms of contracts or general conduct, are primarily imposed by states to ensure actors adhere to their agreements, enabling the division of labor to function without constraints. State regulations play a crucial role, especially when the market fails due to factors such as information asymmetry between sellers and buyers, externalities like climate change, or imperfect competition.
In contrast to regulations, standards are typically developed by private entities, which have a better grasp of persisting problems and the motivation to find good solutions. Once established, states can transform these standards into official regulations. Standards are essential for reducing transaction costs by establishing similar norms and for leveraging network externalities, meaning that the widespread usage of a standard increases the potential for labor distribution. However, standards can present challenges when they fail to benefit everyone or become inefficient over time, with the associated costs of changing to another standard being high. Those whose standards are adopted wield soft power, gaining political leverage as a result.
Europe and the United States: Differences and Similarities
Europe and the United States diverge in their reliance on regulatory versus standard-setting approaches. Europe tends to exhibit greater risk aversion, evident in areas such as data protection and food policies, thereby necessitating more extensive state involvement. Successful regulation in Europe gives rise to the “Brussels effect,” wherein a substantial regional entity like the European Union can extend its regulations to all those seeking access to its market. The larger the entity, the more effectively regulations can be imposed on others. Conversely, the United States tends to be more risk-tolerant, leading to a higher prevalence of private sector involvement. Competition within private standard setting continually drives improvement, yielding enhanced products, processes, and increased benefits—a phenomenon known as the “California effect.”
Despite the differences, regulations and standards in the United States and Europe share a common underpinning. They are inherently linked to the norms and values shaping human interaction within Western societies. Both transatlantic partners are deeply rooted in comparable informal institutions, customs, and traditions that have evolved over centuries. Additionally, they possess similar institutional frameworks, for example concerning the rule of law. This alignment places their procedures for setting standards on common ground.
Increasing Systemic Competition
In contrast, autocracies operate with a significantly divergent set of both informal and formal institutions and values. Historically, the West believed it could alter this foundation through trade, especially in the context of China. The notion was that increased access to material goods would correspond with a heightened demand for greater liberties, ultimately transforming China into a more open and democratic system. Despite ongoing efforts by the West to promote universal values, for example via Trade and Sustainable Development (TSD) clauses within Free Trade Agreements (FTAs) and due-diligence legislation, this approach has yielded minimal success. Instead, it has often resulted in considerable resistance, misunderstandings, and trade-offs.
Increasingly, the focus of systemic competition extends beyond fundamental values into the realm of standard-setting. China, most notably through initiatives like the Belt and Road Initiative (BRI), has been proactive in attempting to establish new standards. This is not only concerning from a value-led perspective but also a strictly economic perspective because the proliferation of additional choices does not benefit network externalities. This systemic competition necessitates enhanced cooperation in standard-setting among transatlantic partners. By extension, it presents an opportunity to use this economic tool as a means of advancing adherence to fundamental values.
Tech Nationalism on the Rise
The problem is that there is currently little movement toward increased cooperation across the Atlantic. Numerous attempts in recent years to foster deeper integration, such as TTIP, have proven unsuccessful. In response to the most recent crises, the United States has adopted an increasingly protectionist stance, notably by the introduction of the Inflation Reduction Act (IRA). This trajectory is not unilateral; the European Union, through initiatives such as the European Standardization Strategy, along with policies introduced by individual member states, is contributing to concerns about the rise of tech nationalism. These developments suggest that both the United States and the European Union are inclined to establish their own standards and subsidize industries, rather than relying on the advantages of a shared division of labor.
This inward-looking approach on both sides of the Atlantic carries substantial costs. It amplifies transaction costs, diminishes competition, and subsequently stifles innovation. Additionally, it entails a presumption of knowledge, wherein governmental entities assert an understanding of where businesses should be headed, rather than providing a flexible framework. This inclination toward specific standards sets the stage for path dependency issues, wherein the government’s selection of standards, once chosen, becomes difficult to alter. Ultimately, this approach fosters rent-seeking behavior, characterized by income generation without active market participation (e.g., through subsidies), rather than fostering profit-seeking entrepreneurial activities.
Cooperation Is the Way Forward
There is potential for enhanced cooperation in the future. Not only do the European Union and United States share a common set of values, but they also remain each other’s most significant trading and investment partners. Substantial activity is underway within private spheres, particularly concerning artificial intelligence or the E.U.-U.S. Trade and Technology Council (TTC). Still, there is an increasing need for the United States and the European Union to collaborate more extensively in standard-setting endeavors.
Advocating for cooperation does not negate the necessity for competition. On the contrary, competition is vital for the progression of standards. Hence, delineating areas of confidentiality and exclusivity should be meticulously defined within a cooperative framework. Establishing these standards stands to benefit both the United States and European partners by maximizing network externalities and broadening the range of potential solutions. This California effect engenders expectations for the implementation of the most optimal standards. Concurrently, the expansive and attractive market in the United States and Europe is likely to draw businesses from third countries. This Brussels effect has the potential to foster adherence to human rights and universal values in the long term.
The discussion addressed whether the Chinese Belt and Road Initiative offers valuable lessons for the United States and the European Union. It will be a challenge to strike a balance between upholding values, setting appropriate standards, and embracing a certain pragmatism. There is a contrast between Chinese investments, particularly in Africa, and the approaches of the European Union. Chinese investments often demonstrate efficiency and effectiveness by sidestepping human rights standards. In contrast, the European Union has faced criticism for being perceived as overly paternalistic and slow to engage. While adhering to standards aligns with values, excessive rules and bureaucracy can stifle progress. The EU can take a more pragmatic approach; standards will evolve with engagement.
Other questions during the discussion were similarly centered on the theory suggesting that trade can instigate shifts in values and whether standards serve as an economic tool to facilitate this change. The question arose whether, instead of fostering change, embedding values via standards within the equation might backfire against the West. There is a concern that third-country businesses perceive transatlantic standards as a Trojan horse, forcibly imposing Western values that they might not desire. In the long term, nations will opt to be part of this broader standards landscape, and these standards hold the potential to gradually foster deeper value-level changes. It is important to provide a pathway for accessing markets under transatlantic standards because it is seen as an attractive choice that offers economic opportunities for businesses from other countries. In this context, the West should aim to avoid imposing a binary choice between itself and other regions, particularly China.
Another query revolved around the discussions regarding artificial intelligence as an illustrative example of new technology necessitating future standards between the United States and the European Union. With the understanding that emerging technology often lacks clearly defined economic applications, at what point should regulations be introduced? The critical juncture for standard setting arrives when the economic applications of the technology become evident. During the initial stages, it is crucial to trust the developmental process and permit competition without constraining it through premature standards. As a technology becomes more established, establishing standards becomes more feasible.
This event is supported by the DAAD with funds from the Federal Foreign Office.