On August 27th the Netherlands Scientific Council for Government Policy (WRR) published the report 'Europe in the Era of Geoeconomics: Rebalancing Trade, Boosting Innovation.' The report was presented to Heleen Herbert (Minister of Economic Affairs and Climate) and Sjoerd Sjoerdsma (Minister of Foreign Trade and Development Cooperation).
Image: © WRR
Geopolitics and economics are becoming increasingly intertwined. Countries such as China and the United States are more frequently deploying their economic power as a geopolitical weapon. The European Union is particularly vulnerable in this situation, because the EU is dependent on the US and China in many key areas, but there are fewer vital dependencies the other way around.
A major effort is required to develop a truly effective industrial policy with sufficient direction and scale. Without it, Europe and the Netherlands will fall further behind and vital dependencies will only increase. To strengthen innovation policy, Europe can learn from the innovation systems of China and the US. They use a clever combination of direction and competition. Essential to this is organising competition in such a way that the best innovations advance to the next round until companies emerge that are ready to enter the market.
But innovation policy alone is not enough. China has a large export surplus. At present, Chinese products are often more than 30% cheaper than European products. This is no coincidence, but the result of an economic strategy pursued by the Chinese government that is strongly export-oriented. This strategy rests, among other things, on low wages, enormous state subsidies and an undervaluation of the yuan. This creates price differences that make it very difficult for European companies to compete and that cannot be bridged by innovation policy alone. A solution must therefore also be found for the distorted trade relationship.
To conclude, in policy debates, the global innovation race is often front of mind – and with good reason. But unless simultaneously a solution is found for the growing trade imbalances, we risk losing an important part of our industry, spending vast amounts of public money, and jeopardising key European values and aspirations in areas such as privacy, working conditions and climate policy – without actually reducing our critical dependencies.
To address this challenge, Europe and the Netherlands must be prepared to think outside existing frameworks and to consider policy instruments that we have not previously dared to deploy.