Indispensable leverage: How the EU can build its technological edge

The United States and China are competing fiercely to lead the innovation, production, and trade of today’s and tomorrow’s critical technologies. Both have made technological leadership of key sectors a central strategic principle, and are increasingly aligning their security, trade, and research policies to this end. Meanwhile, they are passing ever more stringent restrictions on exports, investments, and other transactions, as well as spurring diplomatic initiatives to rally their partners to support them.

The European Union needs a strategy that will ensure it remains an indispensable technology player with its own geo-economic levers to shape the future economic battlefield. Otherwise, it will be trapped in a cycle of responding to whatever comes out of Washington, Beijing, or elsewhere. One leg of that strategy should aim to reduce the EU’s dependencies on other countries in critical supply chains. European leaders and the G7 largely agree on this approach, aiming to “de-risk – rather than decouple” their economic engagement with other countries, although it is still unclear how this will work in practice. Another leg of the strategy, however, must essentially reverse this logic and maintain and increase other countries’ dependencies on the EU for certain key technologies.

A technological edge

Technological leadership of entire key technology sectors is neither realistic nor desirable for the EU. It simply does not have the capabilities and resources to dominate whole sectors, and pursuing these would throw it into a counter-productive subsidy race at a time when its fiscal space will already be overstretched because of other priorities such as climate change action and rebuilding Ukraine. To increase its own geo-economic leverage, the EU should instead focus on securing leadership in specific technologies that are vital to key supply chains and to the global economy as a whole.

Japan is already following a similar approach as part of its national security strategy, aiming to ensure its “strategic indispensability” in key technologies. As part of this approach, the Japanese government has, for example, provided considerable funding to companies producing the niche materials and tools used in the manufacture of advanced semiconductors in an attempt to maintain the country’s edge.

This strategy would give the EU geo-economic leverage which it can use tactically. In combination with other tools of statecraft – including diversifying supply chain dependencies – this leverage would make Europe less vulnerable to external pressure and add to its deterrence potential. Economic and technological advantages alone will not prevent military escalation – indeed, Russia invaded Ukraine despite its deep dependencies on the West for technologies ranging from military, energy, and aircraft equipment. But critical technological edges can deter economic coercion against European companies, support continent-wide cyber and digital resilience, and give the EU a hand on the steering wheel in industries and supply chains that could determine the future balance of geo-economic power.

Building the EU’s technological edge

To bring its technological edge to life, the EU needs to determine in which critical technologies it holds, or can realistically gain, an edge. To begin with, it needs to identify the technology sectors that are of crucial importance or will be in the near future, both for Europe’s prosperity and security, and for the global economy and geopolitical power. The European Commission has started a similar exercise to identify key dual-use technologies as part of its economic security strategy. However, critical technologies extend beyond those with a commercial or dual-use application. Technologies that enable the mining, processing, and recycling of critical raw materials, for example, arguably fit neither of these bills, but are vital for Europe’s economic security agenda.

So are advanced materials and nanotechnology (crucial for clean technology, aerospace, and medical technology); AI-enabling technologies (from cloud and data analytics to computing, which are set to revolutionise manufacturing and warfare); biotechnologies (vital for both agriculture and bio-warfare); quantum technologies (which could be revolutionary for both commercial and defence industries); cyber technologies; robotics; network technologies such as 6G and Open RAN; and space technologies.

But given the scope of these sectors, the EU cannot position itself as a leader across their entire ecosystems. It therefore needs to identify crucial points in the supply chains where it already controls or can realistically occupy a leading position. Take, for example, quantum technologies, which span quantum computing, sensing, and communication, and are already moving towards the centre of technology competition. The EU should determine its position in critical parts of the supply chain, and develop its edge, for example, in specialised equipment that enables quantum applications, such as specialty lenses and lasers, adhesives, cooling systems, and single-photon detectors. Similarly, while Europe is a minnow in global mining, EU-headquartered companies provide some of the most cutting-edge mining and recycling equipment. Such elements are often produced by highly specialised technology suppliers, which can operate at the fringes of the industry in question. Mapping these edges in rapidly moving industries is therefore a tall order, for which European policymakers need to acquire more in-depth industrial intelligence.

Some member states, such as the Netherlands and Germany, have begun gathering more techno-industrial knowledge for their domestic positions. The Dutch government, for example, increased its capacity to analyse the semiconductor value chain and the positions of Dutch companies in it. However, the industrial intelligence gathered by national governments on domestic positions cannot produce a complete picture of the EU’s strengths and weaknesses. The EU needs a common approach that identifies which sectors and technologies are critical for the EU as a whole, how they interlink in the single market, and how they relate to the industries and policies of other countries.

Furthermore, the criteria for identifying which niches to focus on needs to take into account how quickly other countries could develop alternative supplies of the technology in question or alternative technologies through innovation. The Dutch company ASML’s advanced semiconductor lithography (EUV) machines are so complex – made up of hundreds of thousands of parts from thousands of different suppliers, which took decades to develop – and far ahead of competitors’ technologies, that replacing them is close to impossible, at least in the medium term. They are therefore indispensable to the global economy and represent an enormously powerful edge. By contrast, Europe’s telecommunications suppliers Nokia and Ericsson are currently at the forefront of 5G network solutions, along with China’s Huawei, but their leadership may erode in the coming years if Open RAN – in essence an approach towards a more open technology architecture – gains footing, allowing new competitors to enter this currently highly concentrated market.

The strength of an edge also depends on how reliable and secure the supply of the necessary components or materials is. China’s stranglehold over many critical raw materials, for example, undermines the resilience of technological edges that rely on them, such as Europe’s currently eroding leadership in wind energy technology. Technological edges higher up the value chain, from materials to chemicals or pharmaceutical ingredients, therefore often constitute powerful levers over many downstream industries and should receive particular attention.

Finally, when building the EU’s technological edge, European policymakers need to consider the needs and technology gaps of other powers, especially for technologies of strategic relevance or related to the future of warfare. This is particularly important for geopolitical rivals. To maximise their geo-economic leverage, Europeans should identify which technologies their rivals depend on them for and shore up these strongholds. While Russia has suffered from its dependencies on the West for military-industrial technology, such as the necessary chips for a modern military, it remains able to circumvent export controls on many of these items even after more than 18 months of sanctions. European countries therefore need to strongly invest in identifying their technological edges in relation to other powers and integrate this knowledge into their wider economic statecraft. European policymakers and analysts should therefore map out the technologies that China is dependent on – from industrial machinery and chemical and physical analysis tools to military relevant items such as in the aerospace sector – as well as the many avenues Beijing is investing in to reduce such dependencies.

The EU should also keep its allies in mind. One of the key advantages it holds over its systemic rivals are its technologically savvy allies including the US, Japan, South Korea, and the United Kingdom. But to truly benefit from this advantage, the EU should seek to advance complementary strengths in critical technologies to build allied geo-economic leverage and deterrence. The semiconductor industry provides a good example of how this can work: the US, the EU, Japan, South Korea, and Taiwan have combined their strengths to result in allied technology leadership. Without the combined parts and skills from these countries, no modern economy can currently be maintained. Europe should aim for a similar approach for other critical technologies that it identifies.

Europe has recently embarked on a path to improve its economic resilience. But to avoid falling prey to the accelerating power struggle over technological leadership, the EU also needs to boost its own advantages over other powers. This requires a clear and common EU strategy for targeted investments and protective measures in critical technologies in which it can maintain an edge that will increase the geo-economic power of the whole bloc.