Europe is a technology loser as China and the US clash

The clash of civilisations between China and the US will drive technological innovation to new heights – to the detriment of Europe.

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  1. Garry White

Conflict, not profit, is often the most important driver of innovation. It creates urgency in a country’s leaders to do everything possible to come out on top.

The rocket technology developed to power V2 bombs that rained on London in the Second World War was refined and reused in the Cold War space race to put the first man on the Moon. That one small step for Neil Armstrong was meant to demonstrate America’s technological – and cultural – superiority in the face of an aggressive communist system led by Moscow.

In yet another instance of history repeating, a comparable technology race is emerging today with China and it’s becoming a real headache for Europe, which has already been left behind. The situation is likely to get worse.

Hawks eye a rising China

Washington hawks have watched with horror as China has moved up the value chain from being a low-cost manufacturer to a world leader in a number of key areas – outclassing the US in 5G, AI, biotechnology and quantum computing. They regard this as an existential threat to America.

As this wider conflict accelerates, the collateral damage to Europe’s economy is likely to grow, primarily because of its failure to nurture global tech champions. Where is Europe’s Facebook, Google or Amazon?

Boris Johnson is already feeling the heat from the White House over his decision to allow Huawei technology into Britain’s next-generation communications network. Huawei’s product is superior to anything else on offer and, following our exit from the European Union, Britain needs the best communications infrastructure possible to raise our productivity and compete with our rivals.

Even the compromise solution offered by the UK of keeping the Chinese technology at the periphery of the system does not appear to be good enough for the US. Donald Trump went so far as branding the decision a “betrayal” and his vice president, Mike Pence, hinted that it could have some repercussions on any UK-US trade deal.

While all of this is likely to be political theatre, it underscores the depth of feeling in the US establishment and is a clear signal of the longevity of the US-China clash. We are clearly seeing what is known as a “forever war” between them – a lasting state of conflict with no clear conditions that can bring a conclusion.

Vodafone has shown how this battle of ideas can result in great cost. This week, the communications behemoth said removing Huawei equipment from the sensitive, core parts of its mobile networks across Europe would cost the business €200m (£170m) over the next five years.

Red tape is no solution

In response to its lack of global technology champions – and the resultant streams of profits heading from European consumers’ pockets to the bank balances of US investors – Europe is taking aim at successful American businesses operating online instead of making improvements to benefit innovators.

The US and Europe are now feuding over plans to introduce a digital service tax (DST) as big, powerful companies shuffle money through various jurisdictions to minimise the tax they pay.

Supporters of the DST argue this is right because their people, as users of the services provided by such companies, generate value for these corporate giants so it should be taxed in the country where that value is generated. Its detractors say that DSTs are a blunt and capricious attempt to grab tax revenue from successful American companies.

Washington is firmly in the latter camp and the moves could create more problems than they resolve. This is part of a package that includes competition inquiries, fines for misconduct and increased regulation. Trade hawks have already threatened a 100pc tax on French wine, and the DST is likely to be weaponised by the Trump administration in its current battle to reduce its trade deficit with the Continent.

EU not really competing

Although overdue, a more positive move comes in the form of the EU’s paper on Artificial intelligence (AI), released earlier this month. Rather predictably, the proposals are littered with regulations so the cost of compliance is likely to be high. Europe will probably end up tying its innovators in red tape so tightly that it is unlikely to provide a launchpad for Europe’s entrepreneurs to compete.

US Big Tech is more lightly regulated and nimble, and Chinese state-backed companies are riding the wave of Beijing’s “Made in China” policy, its strategic plan for technological dominance. As the UK leaves the EU this is one situation that needs to be addressed.

However, a major problem for the UK is that our home-grown technology champions are often snapped up by foreign companies, as we have seen with chip designer Arm Holdings and cybersecurity group Sophos, among many others.

The 2002 Enterprise Act restricts the power of ministers to act, with a few exceptions for defence, media plurality and financial stability. This has now been loosened slightly to include national security interests. As the situation with Huawei plays out, it’s clear that preserving what’s left of Britain’s technological leadership meets this requirement. The value of technical innovation to our future security and prosperity cannot be underestimated. After all, there’s a war on.

A version of this article appeared in Friday’s Daily Telegraph.

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