Globalisation – Quo Vadis? Economic, supply and technological sovereignty

Weyerstrass, KlausORCID:; Auel, KatrinORCID:; Braun, RobertORCID:; Koenig, ThomasORCID:; Pacher, Lea; Latzenhofer, Martin and Rhomberg, Wolfram (May 2021) Globalisation – Quo Vadis? Economic, supply and technological sovereignty. [Research Report] 137 p.

Final Report IHS Weyerstraß et al 2020.pdf - Accepted Version

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Executive Summary
Europe finds itself in a systemic competition in which the social market economy meets state capitalism. This competition is about economic as much as military supremacy, but also about whether the fundamental Western values related to individual freedom, the rule of law and freedom of speech have a future. A new balance must be found between global free trade and autonomous governing; new forms of international and European cooperation must be designed; and the scope for action of a sovereign state must be re-explored on the basis of realistic economic foundations.
Across Europe, this has led to renewed and intensifying discussions regarding more independence and autonomy. How does Austria want to contribute to this ambitious aspiration, and where does it see its own interests best represented? While not a foresight exercise in the strict definition, this report is an analytic contribution based on information and data available towards that end. Specifically, it focuses on proactive preparedness for sovereignty challenges. To do so analytically, this report employs the concept of sovereignties to analyse three different domains of interest to Austria, namely economic, supply and technological sovereignty.
A comprehensive analysis of future challenges Austria and the EU are facing shows that in all three sovereignty domains, there exist considerable weaknesses, but also strengths. To start with, this report investigates the domain of economic sovereignty and argues, based on current empirical evidence, that open markets are, in general terms, beneficial for economic welfare. For the EU, which is dependent both on imports of certain raw materials simply not available in Europe and on exports, autonomy in the sense of autarky is not a realistic policy option. A policy of isolation would clearly reduce the welfare of the European people. For the small and very open economy of Austria, this applies to an even greater degree, even though it is necessary to recalibrate interests so that societal as well as environmental issues are taken into account.
Supply vulnerabilities include both, temporary disruptions of supply chains and more general vulnerabilities resulting from import dependencies regarding strategic or critical goods. Here, the COVID-19 pandemic demonstrated not only the EU’s dependence on critical imports, but also challenged the strong international fragmentation of supply chains and just-in-time production. The globalisation process is characterised by, inter alia, a relocation of parts of the production process to countries with low production costs and the transferral of expensive warehousing to the street or the seas through just-in-time delivery systems. Such systems are vulnerable not just to large scale disruptions as in the case of the pandemic, but also to more local or regional disruptions due to man-made or natural disasters as well as political developments or strategies in the supplying countries, to name but a few. Resilience and robustness therefore need to be addressed beyond conclusions based on the immediate experience with the pandemic.
When it comes to technologies, one key aspect concerns threats that result from the actions of adversarial forces but also from the negative effects that agglomeration of market power by large (tech) companies have – not only economically, but even more importantly socially and politically. Another aspect concerns the capacity, and the capability, to seize emerging opportunities, among others through increasing competitiveness and smart innovation policies. Empirical evidence indicates that innovation is requiring an increasing amount of input, which means that Austria, and Europe in large, need both to focus on continuing its investments and seek ways to make sure these investments are made in the most efficient way. For this, horizontal as well as vertical policy options are already established but also need further calibration.
The report discusses different proactive strategies to mitigate vulnerabilities and seize opportunities in the three domains.
Regarding economic sovereignty, there are clear benefits from free trade; numerous studies show positive macroeconomic effects where regional trade agreements were enacted. With tariff barriers increasing between China, USA, and also Europe, state aid and subsidies are often referred to as a potential remedy, but the empirical evidence strongly indicates that these policies weaken trade and may lead to fratricidal subsidy competition.
With regard to supply sovereignty, strategies include stockpiling, reshoring as well as supply diversification. Stockpiling and reshoring can be identified as potential strategies to achieve robustness for very specific critical goods. By contrast, the empirical evidence does not point towards reshoring as an efficient strategy to achieve resilience, given that disruptions can occur within the EU and that reshoring will increase manufacturing costs substantially, does not per se protect against a potential explosion in demand during a crisis (e.g., for face masks during the COVID-19 pandemic), may limit the opportunities for companies to adjust their supply chains in case of disruptions and may affect EU exports negatively.
Concerning technology, Europe is following a distinct model of ascertaining value-based technological sovereignty, with the European Commission pushing for a comprehensive reform of the digital space to rebalance rights and responsibilities of users, intermediary platforms, and public authorities, and to establish a common European data space. In addition to those efforts to step up regulatory measures and standard setting, the European Union now also follows a more active policy with respect to important projects of common European interests, based on value chains identified as critical to technological sovereignty. While this is still an emerging topic, preliminary findings indicate areas of proactive engagement for Austria.
Instead of pursuing some form of (illusionary) autarky, experts largely agree on strategies aimed at establishing redundancies and greater diversification within supply chains, identification of key technologies through foresight exercises combining technological and industrial strengths with a high-quality digital infrastructure and a regulatory framework based on fundamental values, emphasising increased risk awareness and management, greater transparency and sharing of data. There are some far-reaching conclusions to be drawn from this analysis, with respect to both content and procedure.
In terms of economic sovereignty, Austria and the EU in general should work towards agreements on global rules regarding minimum social and environmental standards and apply market-conform instruments such as emission trading systems or a border-adjustment mechanism to obtain a level playing field regarding EU and global production costs. Recommendations include
• Less dependence on imports from a small number of countries might be achieved by a diversification of suppliers while securing free access to markets
• Observance of social and environmental standards in global trade agreements
• Establishment of a border adjustment mechanism accounting for international cost differences that are due to lower environmental and social standards in other parts of the world
• Caution when it comes to the identification or definition of specific strategic industries and focus on providing a regulatory framework and funding
• Regarding EU state aid rules, which protect Austrian companies from unfair competition, but also Austria as a member state from a fratricidal spending competition, it is in Austria’s crucial interest to contribute to ensuring that state aid control regarding foreign companies is made more effective, both within and outside of the EU.
• Reform of the WTO Agreement on Subsidies and Countervailing Measures with the aim of reducing market distortions, increasing transparency and adapting the framework for trade in services.
Regarding supply sovereignty, the report emphasises the need to develop further strategies to mitigate supply chain vulnerabilities. This includes both the development of methods to gain adequate data on supply chains and potential vulnerabilities as well as strategies to achieve supply chain robustness and resilience. Recommendations include
• The establishment of a common European list of critical goods for which robustness is considered essential, complemented by a joint European stockpile of such goods that can sensibly be warehoused and where the need in a crisis can be reasonably anticipated
• Alternatively, or additionally, the development of national or, ideally, European public-private robustness-oriented procurement strategies with the aim of developing a network of selected, and where necessary redundant, producers of critical goods both within the EU and abroad
• Limited and targeted reshoring or development of production capacities for specific critical goods
• The implementation of European legislation that rules out any form of “Harm-Thy-Neighbour” policies, i.e., seizures of, or export restrictions on, goods considered critical and in short supply during a crisis
• National or European programs aimed at supporting efforts of, especially smaller, companies to build more diversified and thus resilient global value chains
• The development of mechanisms for collecting and sharing data regarding supply chains and vulnerabilities, for example through voluntary public-private partnerships or data sharing across the EU at the level of customs authorities.
Regarding technological sovereignty, the report emphasises that Europe’s ambitions in designing, governing, and developing future technologies are grounded in core European values of democracy, equity, social justice and privacy. Technological sovereignty is as much about Europe’s quest to (re)enter the global geopolitical domain determining the future of the planet by innovating and deploying new technologies, as it is the ambition to gain the necessary autonomy in governing the democratic and equitable wellbeing of (all) European peoples. Specifically, recommendations include
• Establishing technological sovereignty as a policy-guiding principle for Europe to enhance its position as a standard setter in the global economic and technology arena, enable democratic governance, advance Europe’s access to key technologies and their resources, and navigate societal development in line with the values and welfare of its citizens
• Prioritising regulatory mechanisms that counter the expanding role of private interests in technological governance, with special attention on social impacts of datafied environments
• Development of regular foresight exercises regarding technological advancements and potential impacts
• Continuation of investments in research and innovation and, specifically, more competitive funding for basic research, mission-oriented research instruments, and efforts to establish a venture capital market
• Support of EU wide initiatives of developing new value chains critical to technological sovereignty
• Encouragement of application and inclusion of responsible innovation principles and methods to address the social impacts and unwanted consequences of innovation in disruptive technologies.

Item Type: Research Report
Funders: Bundeskanzleramt
Research Units: Current Research Groups > European Governance, Public Finance and Labor Markets
Current Research Groups > Macroeconomics and Business Cycles
Current Research Groups > Science, Technology and Social Transformation
Date Deposited: 31 May 2021 08:46
Last Modified: 20 Mar 2023 13:32

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