Economic relations are increasingly used as instruments of geopolitical power. We are living in an era of geoeconomics. The European Union is particularly vulnerable in this situation. While the urgency of this issue is increasingly recognized, Europe’s dependencies are not diminishing. This is the result of two underlying dynamics: the global innovation race and the growing imbalances in international trade.
The global innovation race
A global innovation race is underway, which is seeing not only companies compete with each other, but also countries and their innovation systems. For a long time, the US was the clear frontrunner in technology, but it has since been overtaken by China in several areas. Both countries have robust and coherent innovation systems. Europa is lagging behind in this area.
Image: © WRR
Growing imbalances in international trade
We are also confronted with major imbalances in international trade. The US runs a substantial trade deficit, while China has a massive surplus in goods exports. This large surplus is no coincidence; it is the result of an economic strategy that relies heavily on exports. The surplus stems in part from a weak domestic demand, high state subsidies and an undervalued Chinese currency, the yuan.
In the report ‘Europe in the Era of Geoeconomics: Rebalancing Trade, Boosting Innovation’ the WRR advocates for an integrated response to both challenges, addressing trade imbalances as well as investing in a strong innovation system. The report discusses various possible pathways and the key considerations involved.