Government’s analysis, assessment and research activities Europe Facing Geoeconomics: Assessing Finland’s and the EU’s Risks and Options in the Technological Rivalry Mikael Wigell, Matthias Deschryvere, Christian Fjäder, Niklas Helwig, Ville Kaitila, Heli Koski, Josi Seilonen, Arho Suominen P U B L I C AT I O N S O F T H E G O V E R N M E N T ’ S A N A LY S I S , A S S E S S M E N T A N D R E S E A R C H A C T I V I T I E S 2 0 2 2 : 1 2 tietokayttoon.fi /en Europe Facing Geoeconomics: Assessing Finland’s and the EU’s Risks and Options in the Technological Rivalry Mikael Wigell, Matthias Deschryvere, Christian Fjäder, Niklas Helwig, Ville Kaitila, Heli Koski, Josi Seilonen, Arho Suominen Prime Minister’s Office Helsinki 2022 Publications of the Government´s analysis, assessment and research activities 2022:12 Publications of the Prime Minister’s Office This publication is copyrighted. You may download, display and print it for Your own personal use. Commercial use is prohibited. ISBN pdf: 978-952-383-205-3 ISSN pdf: 2342-6799 Layout: Government Administration Department, Publications Helsinki 2022 Finland Publication distribution Institutional Repository for the Government of Finland Valto julkaisut.valtioneuvosto.fi Publication sale Online bookstore of the Finnish Government vnjulkaisumyynti.fi https://julkaisut.valtioneuvosto.fi/ https://vnjulkaisumyynti.fi/ Description sheet 3 February 2022 Europe Facing Geoeconomics: Assessing Finland’s and the EU’s Risks and Options in the Technological Rivalry Publications of the Government´s analysis, assessment and research activities 2022:12 Publisher Prime Minister’s Office Author(s) Mikael Wigell, Matthias Deschryvere, Christian Fjäder, Niklas Helwig, Ville Kaitila, Heli Koski, Josi Seilonen, Arho Suominen Language English Pages 166 Abstract The geoeconomic rivalry is accelerating with the world’s major powers using economic instruments to advance strategic agendas. This poses a challenge to the EU and its member states. The EU’s market-oriented approach to international economic engagement exposes it to risks arising from the geoeconomic power politics of other major powers. These risks are especially acute in the technological domain where Europe’s competitiveness has been decreasing and its strategic dependencies on China and the United States growing. This report examines the risks and options for the EU and one of its member states – Finland – in adapting to the rise of geoeconomics. The report shows how the risk picture for European businesses are undergoing change, highlighting the need to incorporate geoeconomic dynamics into existing risk assessments. It also surveys emerging EU and Finnish policy instruments for managing strategic interdependencies and associated risks. The report gathers in-depth data on European and Finnish interdependencies with China and the United States, taking stock of critical strengths and vulnerabilities. Key policy recommendations following from this analysis focus on 1) introducing national geoeconomic risk assessments; 2) increasing strategic coordination of technological governance; 3) promoting trade cooperation; and 4) ensuring a level playing field for European companies. Provision This publication is part of the implementation of the Government Plan for Analysis, Assessment and Research. (tietokayttoon.fi) The content is the responsibility of the producers of the information and does not necessarily represent the view of the Government. Keywords research, research activities, economic relations, international politics, technological development ISBN PDF 978-952-383-205-3 ISSN PDF 2342-6799 URN address https://urn.fi/URN:ISBN:978-952-383-205-3 Kuvailulehti 3.2.2022 Eurooppa geoekonomian aikakaudella: Analyysi Suomen ja EU:n riskeistä ja vaihtoehdoista teknologisessa kamppailussa Valtioneuvoston selvitys- ja tutkimustoiminnan julkaisusarja 2022:12 Julkaisija Valtioneuvoston kanslia Tekijä/t Mikael Wigell, Matthias Deschryvere, Christian Fjäder, Niklas Helwig, Ville Kaitila, Heli Koski, Josi Seilonen, Arho Suominen Kieli englanti Sivumäärä 166 Tiivistelmä Geoekonominen kilpailu on kiihtynyt maailman suurvaltojen ajaessa strategisia tavoitteitaan talouden keinoin. Tämä muodostaa haasteen EU:lle ja sen jäsenvaltioille. EU:n markkinalähtöinen lähestymistapa kansainväliseen talouteen altistaa sen riskeille, jotka kumpuavat muiden maailmanmahtien geoekonomisesta valtapolitiikasta. Nämä riskit korostuvat teknologian alalla, jossa Euroopan kilpailukyky on laskenut ja sen strategiset riippuvuudet Kiinasta ja Yhdysvalloista ovat kasvussa. Tämä raportti tarkastelee EU:n ja Suomen eri vaihtoehtoja geoekonomian nousuun sopeutumiseksi, sekä tähän liittyviä riskejä. Raportti osoittaa eurooppalaisten yritysten riskinäkymien olevan muutoksessa ja korostaa tarvetta ottaa geoekonomiset näkökohdat huomioon riskejä arvioitaessa. Siinä kartoitetaan myös, millaisilla politiikan välineillä EU ja Suomi pyrkivät nyt hallitsemaan strategisia keskinäisriippuvuuksia ja niihin liittyviä riskejä. Raporttiin on kerätty dataa Euroopan ja Suomen keskinäisriippuvuuksista Kiinan ja Yhdysvaltain kanssa ja arvioitu kriittisiä vahvuuksia ja haavoittuvuuksia. Tämän analyysin pohjalta raportti tekee politiikkasuosituksia, joiden keskeisiä kohtia ovat: 1) geoekonomisten riskiarviointien luominen, 2) teknologian hallinnan koordinaation lisääminen, 3) kauppayhteistyön lisääminen ja 4) tasapuolisten toimintaedellytysten turvaaminen eurooppalaisille yrityksille. Klausuuli Tämä julkaisu on toteutettu osana valtioneuvoston selvitys- ja tutkimussuunnitelman toimeenpanoa. (tietokayttoon.fi) Julkaisun sisällöstä vastaavat tiedon tuottajat, eikä tekstisisältö välttämättä edusta valtioneuvoston näkemystä. Asiasanat tutkimus, tutkimustoiminta, taloussuhteet, kansainvälinen politiikka, teknologinen kehitys ISBN PDF 978-952-383-205-3 ISSN PDF 2342-6799 Julkaisun osoite https://urn.fi/URN:ISBN:978-952-383-205-3 Presentationsblad 3.2.2022 Europa i den geoekonomiska eran: En analys av Finlands och EUs risker och alternativ i den teknologiska kampen Publikationsserie för statsrådets utrednings- och forskningsverksamhet 2022:12 Utgivare Statsrådets kansli Författare Mikael Wigell, Matthias Deschryvere, Christian Fjäder, Niklas Helwig, Ville Kaitila, Heli Koski, Josi Seilonen, Arho Suominen Språk engelska Sidantal 166 Referat Den geoekonomiska kampen har accelererat emedan världens stormakter börjat använda ekonomiska styrmedel för att främja strategiska mål. Det utgör en svår utmaning för EU och dess medlemsländer. EU:s marknadsinriktade förhållningssätt till ekonomisk verksamhet utsätter EU för risker som härstammar från andra stormakters geoekonomiska maktpolitik. Dessa risker accentueras inom teknologiområdet där Europas konkurrenskraft har försvagats och dess strategiska beroende av Kina och USA vuxit. Denna rapport undersöker riskerna och möjligheterna med geoekonomins frammarsch för EU och ett av dess medlemsländer – Finland. Rapporten visar hur riskbilden för europeiska företag har förändrats och lyfter fram behovet av att införliva geoekonomisk dynamik i befintliga riskbedömningar. Den kartlägger också potentiella styrinstrument som EU och Finland kan använda sig av för att hantera strategiska beroendeförhållanden och med dessa sammankopplade geoekonomiska risker. Rapporten samlar in data om europeiska och finska beroendeförhållanden med Kina och USA, och analyserar kritiska styrkor och sårbarheter. Analysen medför följande policy-rekommendationer: 1) införande av nationella geoekonomiska riskbedömningar; 2) ökad strategisk samordning av teknologisk utveckling; 3) främjande av internationellt handelssamarbete; och 4) säkerställande av lika villkor för europeiska företag. Klausul Den här publikation är en del i genomförandet av statsrådets utrednings- och forskningsplan. (tietokayttoon.fi) De som producerar informationen ansvarar för innehållet i publikationen. Textinnehållet återspeglar inte nödvändigtvis statsrådets ståndpunkt Nyckelord forskning, forskningsverksamhet, economiska relationer, internationell politik, teknologisk utveckling ISBN PDF 978-952-383-205-3 ISSN PDF 2342-6799 URN-adress https://urn.fi/URN:ISBN:978-952-383-205-3 Table of Contents List of Abbreviations.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 1 Introduction.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 1.1 Background. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 1.2 Research objectives, tasks and consortium.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 1.3 Research data and methods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 1.4 Structure of the report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 1.5 Policy recommendations.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 1.5.1 Introducing national geoeconomic risk assessments.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 1.5.2 Increasing strategic coordination of technological governance.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 1.5.3 Promoting trade cooperation.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 1.5.4 Ensuring a level playing field for European companies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 2 Assessing evolving geoeconomic risks for European businesses.. . . . . . . . . . . . . . . . . . . . . . . . . . . 24 2.1 Background. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 2.2 Geoeconomic dependence: the securitization of the economy. . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 2.3 Geoeconomic competition: the balkanization of the economy.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 2.4 Geoeconomic disruption: the weaponization of the economy.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 2.5 Emerging geoeconomic risks to Finnish and European businesses. . . . . . . . . . . . . . . . . . . . . . . 41 2.6 Conclusion.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 3 Managing interdependence: the EU and Finland confront geoeconomics.. . . . . . . . . . . . 47 3.1 Background. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 3.2 The EU’s new economic defence capabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 3.3 The EU’s strategic use of economic policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 3.4 The Finnish approach: a focus on security of supply and resilience.. . . . . . . . . . . . . . . . . . . . . . 56 3.5 Beyond security of supply: Finland’s stance towards the EU’s economic autonomy.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 3.6 Conclusion.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 4 Mapping Finnish economic dependencies on China, the European Union and the United States.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 4.1 Background. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 4.2 China, the European Union, and the United States in world trade.. . . . . . . . . . . . . . . . . . . . . . . . 66 4.2.1 Trade in goods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 4.2.2 Trade in services.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 4.3 Finland’s trading relations with China, the United States, and the EU.. . . . . . . . . . . . . . . . . . . 73 4.4 The importance of global value chains.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 4.5 MNEs and their foreign affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 4.6 Conclusion.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 5 Finland’s technological competence and R&D cooperation with China and the United States.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 5.1 Background. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 5.2 Great-power dynamics in scientific publishing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 5.3 Finnish patent activities and their co-ownership dynamics with great powers USA and China.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 5.4 Patent classifications of patent families with international co-ownership by technological area.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114 5.5 Main companies behind the Finland-great power co-ownership of patent families.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 5.5.1 Nokia versus the rest .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 5.5.2 Other key company actors driving co-ownership since 2015.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 5.6 Conclusion.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124 6 Chinese and US technology giants’ acquisitions and technological advantage in Europe.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 6.1 Background. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 6.2 Methodology and data.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 6.3 US tech giants acquire more aggressively European firms than China’s big tech.. . . 131 6.4 Chinese and US-based big tech specialize in ICT.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 6.4.1 China’s technology giants have increased patenting in the US and Europe. . . . . . . . . . . . . . . . . . . . . . . . 132 6.4.2 Technology giants have technological advantage in ICT compared to EU and Finland. . . . . . . . . . . 135 6.4.3 Global technology giants specialize in technologies essential for analyzing personal data. . . . . 137 6.4.4 Technology giants specialize in climate change mitigation technologies in ICT.. . . . . . . . . . . . . . . . . . 142 6.5 Conclusion.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149 7 Conclusion: Implications for Finland.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149 Appendices.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154 References.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159 8 Publications of the Government´s analysis, assessment and research activities 2022:12 L I S T O F A B B R E V I AT I O N S 3GPP 3rd Generation Partnership Project AI Artificial Intelligence BATX Baidu, Alibaba, Tencent, and Xiaomi BEA Bureau of Economic Analysis, U.S. Department of Commerce BRI Belt and Road Initiative CAC Cyberspace Administration of China CAI EU-China Comprehensive Agreement on Investment CBAM Carbon Border Adjustment Mechanism CCP Chinese Communist Party CER Critical Entities Resilience CIPS China International Payment System CNIPA China National Intellectual Property Administration Covid-19 Coronavirus Disease 2019 CPC Cooperative Patent Classification DESI Digital Economy and Society Index DMA Digital Markets Act EC European Council EDT Emerging and Disruptive Technologies ENP European Neighbourhood Policy EPO European Patent Office ERA European Research Area ETLA ETLA Economic Research EU European Union EU27 Member States of the EU FDI Foreign Direct Investment FIIA Finnish Institute of International Affairs FTA Free Trade Agreements GAFAMI Google, Amazon, Facebook, Apple, Microsoft, and IBM GDP Gross Domestic Product GVC Global Value Chain HS Harmonized Commodity Description and Coding System ICT Information and Communication Technology 9 Publications of the Government´s analysis, assessment and research activities 2022:12 Publications of the Government´s analysis, assessment and research activities 2022:12 IMF International Monetary Fund INSTEX Instrument in Support of Trade Exchanges IoT Internet of Things IPC International Patent Classification IPCEI Important Project of Common European Interest IPI International Procurement Instrument IPO Initial public offering IPR Intellectual Property Rights ISO International Organization for Standardization ITU International Telecommunications Union M&A Mergers and Acquisition MNE Multinational Enterprises MOST Ministry of Science and Technology NATO North Atlantic Treaty Organization NCI NATO Communications and Information Agency NESO National Emergency Supply Organization OECD Organisation for Economic Co-operation and Development OFDI Outbound Direct Investment PCI Productive capacities index PLA The People’s Liberation Army R&D Research and Development RTA Revealed Technological Advantage SC42 The standardization association for Artificial Intelligence (AI) SCRI Supply Chain Resilience Initiative SFS Finnish Standards Association SITC Standard International Trade Classification SOE State-Owned Enterprise STI Science, Technology and Innovation SWIFT Society for Worldwide Interbank Financial Telecommunication TFEU Treaty on the Functioning of the European Union UN United Nations UNCTAD United Nations Conference on Trade and Development US/USA United States of America USPTO United States Patent and Trademark Office USTC University of Science and Technology of China VTT VTT Technical Research Centre of Finland WTO World Trade Organization 10 Publications of the Government´s analysis, assessment and research activities 2022:12 1 Introduction 1.1 Background Economic cooperation and strengthening interdependence became a prominent feature of international economic relations in the latter half of the 20th century, especially after the end of the Cold War. While there have been notable setbacks in recent years, most notably the failure of the Transatlantic Trade and Investment Partnership and the rejection of the Trans-Pacific Partnership by the United States, there are signs of enduring economic cooperation and interdependence. For example, the European Union continues to negotiate new free trade agreements with various partners. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership as well as the Regional Comprehensive Economic Partnership agreement have recently entered into force. Despite these developments, recent years have also seen the acceleration of geoeconomic rivalry, characterized by the broad use of economic tools to achieve strategic and security goals. This involves a range of major and middle powers, but most notably for this report, China and the United States. As China and the United States ramp up this competition, economic interdependence is cast in a new light. What was once heralded as a barrier to conflict has now turned into a currency of power, as economic interdependencies are leveraged for power political ends, feeding a geoeconomic chain reaction with states applying broader trade controls, investment screening and data localization measures out of concern for their economic autonomy (see Choer Moraes and Wigell, 2020). This report examines the risks and opportunities for Europe arising from these ongoing geoeconomic dynamics, particularly competitive ones, and assesses relevant policies whereby the EU and one of its member states – Finland – tries to manage its strategic economic interdependencies. This new era of geoeconomic competition is putting pressure on the rules and institutions that govern the international economy. Economic and security thinking are converging due to the increasing significance of economic functions and relations for the strategic interests and national security of various states. Consequently, states are increasingly concerned about “excessive” dependence on others, and the global interdependency is more often viewed as a vulnerability which needs to be addressed by increasing state control over the economy and enhancing self-sufficiency and resilience (Choer Moraes and Wigell 2020). This is particularly true for the technological domain. 11 Publications of the Government´s analysis, assessment and research activities 2022:12 Publications of the Government´s analysis, assessment and research activities 2022:12 Technological innovation has always played a key role in great-power rivalries. Technological leadership has helped fuel the US’s economic advantage and military predominance. To underpin its own rise, China now faces an “innovation imperative”, meaning that it needs to obtain and develop technologies in order to continue climbing the global value chain, overcome the “middle-income trap”1 and equip itself with critical military resources (Blanchette 2021). China has sought to close this technological gap by adopting a wide panoply of geoeconomic means, ranging from new industrial policies to technological cooperation and acquisition, as well as by allegedly engaging in industrial espionage and intellectual theft. The United States has responded by increasingly seeking to decouple from the Chinese economy, especially in the technological domain as this report shows, and by putting pressure on others to follow suit. For the EU, the rise of geoeconomics poses a difficult challenge. The EU was designed on the premise that economic and security policy should remain separate, and now finds itself ill-equipped for their increasing convergence. In this new context, the EU has started to develop policies to enhance its own economic and technological competitiveness and promote its ability to participate in defining the rules of the game for the global economy (Helwig 2021). What this amounts to is a redefinition of Europe’s economic and technological sovereignty in order to better manage its economic interdependencies, reducing dependence on others without resorting to unfounded protectionism that could accelerate the geoeconomic chain reaction and harm the interests of European businesses (see e.g. European Commission 2020a). The EU discussions on how to better manage the risks of global economic interdependencies are held under the banner of “open strategic autonomy”. The term emerged as a reaction to the ongoing debate on European strategic autonomy, and represents a typical compromise between the competing objectives of EU member states (Helwig 2020). Some member states (such as France), with an economic structure that benefits from a more protective industrial and trade policy, broadly emphasize the autonomy aspect. The more market-liberal and trade-reliant member states (including the Nordics) highlight the openness of the European economy. Hence, open strategic autonomy, as the European Commission (2021a) defines it, is not primarily about protectionism. Instead, it also includes goals such as the promotion of the EU’s competitiveness and the rules-based global trade system. The European Commission and EU member states are in the process of finding the right policy mix between protectionist 1 The “middle-income trap” is a somewhat contested notion of how rapid growth from low-income to middle- income levels – fuelled by cheap labour, basic technology catch-up, and the reallocation of labour and capital from low-productivity sectors like traditional agriculture to export-driven, high-productivity manufacturing – is often followed by lower growth (Gill and Kharas 2007). 12 Publications of the Government´s analysis, assessment and research activities 2022:12 measures, innovation and competitiveness, as well as international engagement to advance their economic interests in a more competitive environment (Helwig 2021). In order to influence this EU ambition in line with its own interests, Finland must be able to assess its own vulnerabilities to geoeconomics and gather up-to-date data concerning Finland’s economic and technological interdependencies. At present, there is little systematic analysis of Finnish vulnerabilities or meta-level analysis concerning Finnish economic and technological interdependencies with the United States and China in particular. Such analysis is indispensable for creating situational awareness for Finnish strategy work, policy preparation and decision-making, and security of supply, both at the domestic as well as the EU level, and for supporting Finnish companies that increasingly find themselves at risk of becoming collateral damage in the global geoeconomic struggle. 1.2 Research objectives, tasks and consortium The report’s research objectives can be stated against this backdrop, in that it seeks to improve the existing understanding of ongoing geoeconomic dynamics involving great powers such as the United States and China; advance understanding of related geoeconomic risks and opportunities for the European Union and for Finland in particular; gather up-to-date research data on the economic and technological interdependencies of Finland and the EU vis-à-vis China and the United States; as well as critically assess relevant policy options for strengthening European economic and technological sovereignty. With these overall objectives in mind, the research centred on five specific tasks: First, to identify and assess the evolving geoeconomic risks stemming from the intensifying US-China rivalry. Developing a clear understanding of these emerging risks is needed in order for both European policymakers and European companies, including Finnish ones, to be able to address any potential vulnerabilities and devise policies to enhance competitiveness and economic resilience. Second, to assess current EU policies for managing the ongoing Sino-US geoeconomic rivalry and any policy implications for Finland. Such an assessment is needed to assist both Finnish policymakers and companies to make informed decisions about how to best manage current developments. Third, to map out Finnish economic dependencies on China, the European Union and the United States in order to improve our understanding of both the risks and opportunities for Finland stemming from the accelerating global geoeconomic competition. 13 Publications of the Government´s analysis, assessment and research activities 2022:12 Publications of the Government´s analysis, assessment and research activities 2022:12 Fourth, to map out Finland’s science, technology and innovation (STI) cooperation with the United States and China in order to gain a general understanding of Finland’s technological competences, dependencies and resources. Looking at the overall cooperation dynamics and zooming in on who cooperates in which technology areas is valuable as it reflects technological interdependencies and relative strengths, but also potential vulnerabilities. These insights can contribute towards a national investment agenda that strengthens Finland’s own technological capabilities and preparedness. Fifth, to assess Chinese and US technology-oriented acquisitions of European, including Finnish, companies and their level of specialized technological advantages in relation to European, and especially Finnish, business sectors. Understanding the entry patterns of Chinese and US technology giants into European markets is important because these entry patterns will affect competition dynamics in European markets, consumer welfare and, by extension, European technological sovereignty and competitiveness. The project consortium behind this report was specifically built with such a multidisciplinary research mission in mind, gathering political, economic and technological expertise from its three main consortium partners – the Finnish Institute of International Affairs (FIIA), ETLA Economic Research (ETLA), and VTT Technical Research Centre of Finland (VTT). The actual project team consisted of the following persons: Mikael Wigell, Research Director, FIIA (Project Leader) Christian Fjäder, Senior Research Fellow, FIIA Niklas Helwig, Leading Researcher, FIIA Anu Ruokamo, Specialist, FIIA Josi Seilonen, Associate Specialist, FIIA Heli Koski, Research Director, ETLA Ville Kaitila, Researcher, ETLA Arho Suominen, Principal Scientist, VTT Matthias Deschryvere, Senior Research Scientist, VTT 1.3 Research data and methods The project has adopted a multidisciplinary approach with regard to research material and methodology, combining qualitative research (standard documentary analysis, expert interviews) and quantitative research (descriptive statistics, bibliometric analysis, survey research, data-driven analytics). Close collaboration between consortium partners allowed the project to systematically harness its multidisciplinary expertise and ongoing quality control. 14 Publications of the Government´s analysis, assessment and research activities 2022:12 By utilizing relevant literature and policy documents from Finland, the European Union and the United States, Chapter 2 conducts a conceptual analysis of geoeconomics and geoeconomic risks for the European Union and Finland, with a specific focus on the impact of technological “decoupling” between China and the United States. Based on the analysis, the chapter identifies three underlying trends driving the evolution of geoeconomic risk – the securitization, balkanization, and weaponization of the global economy – and examines their combined impact on the global economy, global supply chains, and Finnish and European businesses. Based on the conceptual analysis and the risk examples gathered, the research for the chapter further focused on testing and validating a tentative typology of geoeconomic risks by conducting a survey on Finnish companies, complemented by six in-depth expert interviews with Finnish policymakers and experts. These interviews were carried out in the summer of 2021. Chapter 3 identifies and assesses the current and emerging EU policy initiatives and frameworks related to geoeconomic risks and their potential impact on Finland. Based on the analysis of EU policy documents and the review of secondary literature, the researchers created a map of current EU policy initiatives, focusing in particular on their defensive versus strategic characteristics. This exercise was complemented by expert interviews with EU and Finnish officials working on trade and economic policies. The interviews were conducted online in the first half of 2021. In order to evaluate the potential impact on Finland, the relevant Finnish policy documents were cross-analyzed with the corresponding EU policies, and recommendations were peer-reviewed in internal workshop sessions. Various descriptive statistics were used to map Finnish economic dependencies in Chapter 4. The economic relations between Finland (and the EU) on the one hand, and China and the US on the other, were first evaluated by using publicly available UNCTAD data on goods and services trade, as well as Statistics Finland and OECD data on the trade of domestic value added. The research method was thus quantitative and descriptive. Since often-used international foreign direct investment (FDI) statistics are problematic in several respects,2 we used Statistics Finland’s data on Finnish multinational firms’ foreign subsidiaries abroad and foreign multinational firms’ subsidiaries in Finland, as well as the respective Bureau of Economic Analysis (BEA) data from the US. The data in goods trade are available at the very disaggregated HS 6-digit level, and they can also be used to analyze the development of trade linkages between the United States and China. In this way, it is also possible to analyze how these two countries’ interdependencies have developed generally and in selected products or product groups. The analysis was 2 The flows are influenced by tax regimes, which delinks them from actual physical investment activities. Furthermore, FDI flows do not capture all investments made by multinational firms. 15 Publications of the Government´s analysis, assessment and research activities 2022:12 Publications of the Government´s analysis, assessment and research activities 2022:12 complemented with services trade data, although it is not as comprehensive as the data in goods trade. Services trade is more important for the US, while goods trade accounts for a higher share for China. In order to map Finland’s technological capabilities as well as research and development (R&D) networks with the US, China and the EU, Chapter 5 combines big data sources on R&D activities with analytical methods applied on proprietary databases containing (1) scientific publication data (Scopus) and (2) patent data (Patbase and Patentsight). Within the scope of the chapter, a descriptive analysis is conducted on co-publication and co-patenting dynamics between Finland and the USA, and between Finland and China. While important technological areas and key players are highlighted and a concise case study is demonstrated on a full set of critical quantum technologies, the approach remains quantitative and does not include a qualitative assessment of separate critical technologies. In Chapter 6, data were obtained from multiple sources to map how Sino-US companies’ actions may shape the competitive field in Europe and Finland. Data concerning large Chinese- and US-based companies’ acquisitions during 2000–2018 were extracted from the Crunchbase database. Descriptive data analysis was used to explore the annual total number of acquisitions of the US and Chinese technology giants and, further, the relative importance of acquired companies’ product market areas. The data concerning patent applications to the European Patent Office (EPO) and the United States Patent and Trademark Office (USPTO) during 2005–2019 were acquired from the PatentInspiration database and the OECD “Patents by technology” statistics covering 2005–2017. We calculated the revealed technological advantage (RTA) index to measure the US- and Chinese-based technology companies’ (innovation) specialization in different technology domains compared to European countries, Finland, and the world. During the course of this project, a number of internal workshops and webinars3 were organized. In particular, the project organized a FIIA webinar Recognizing ‘geoeconomic risk’: Rethinking risk management for the era of great power Competition (17.6.2021) in conjunction with the publication of FIIA Briefing Paper 314 (see below). The project came to its conclusion with the organization of the FIIA webinar Europe facing geoeconomics: Risks and options in managing economic and technological interdependencies for the EU and Finland (3.2.2022), where the final report of the project was published. 3 Due to the Covid-19 pandemic, in-person seminars were replaced by webinars organized via Microsoft Teams. Internal workshops and project meetings were organized as hybrid events when possible. 16 Publications of the Government´s analysis, assessment and research activities 2022:12 The project has also published two policy briefs: FIIA Briefing Paper 314 (06/2021) Recognizing ‘geoeconomic risk’: Rethinking corporate risk management for the era of great- power competition, and the ETLA column (24.9.2021) Miksi vientimme Kiinaan muuttui raaka-ainevetoiseksi? [Why did our exports to China become raw material-driven?]. 1.4 Structure of the report The report has been structured with a view to its main objectives, namely to analyze the risks and opportunities for the European Union, and Finland, from the current Sino-US geoeconomic competition, and to assess relevant policy options for managing it. Part 1 concentrates on examining the risks for European and Finnish companies from the accelerating geoeconomic competition, and major policy instruments for dealing with those risks. Chapter 2 looks at how economic policy has become a key strategic means in great- power rivalry and how states, as a result, are attempting to control the economic networks that connect the world. By instrumentalizing businesses, they change the risk picture for both public and private companies. The securitization of the economy entails a first source of new risk as states attempt to strengthen their control of companies in sectors considered strategic and security-sensitive. Another source of risk stems from the balkanization of the global economy, whereby it would disintegrate into separate spheres of economies decoupled from each other. The competition for control of the global standard-setting regimes constitutes an emerging area of such risk. A final source of risk is the weaponization that accelerates the use of sanctions and export controls. It entails more barriers for companies and puts pressure on the rules-based international system. The critical risk from these dynamics for both public and private firms is that they increasingly become used as pawns in the accelerating geoeconomic rivalry between major powers. Moreover, as geoeconomics is hollowing out the predominant market rules which have prevailed until recently, the risk picture for many businesses is undergoing major change. Importantly, this not only concerns private and public corporations in sectors of immediate and obvious strategic importance. The inclusion of data as well as research and development (R&D) information and know-how in the sphere of critical security technology further complicates this picture. The chapter consequently suggests that there is an increasing need to develop typologies for geoeconomic risk. Both public and private sector parties can utilize such typologies in identifying, assessing and mitigating their unique risk picture. 17 Publications of the Government´s analysis, assessment and research activities 2022:12 Publications of the Government´s analysis, assessment and research activities 2022:12 Chapter 3 assesses the EU’s current and emerging policies for managing its interdependencies and associated geoeconomic risks, as well as major policy implications for Finland stemming from them. In recent years, the EU has been remarkably active in reassessing its economic relations with the wider world and in making them more strategic. While the EU’s defensive policies aim at making the bloc more competitive and shielding European companies from distortive and coercive measures of external origin, the EU has also adopted a more strategic approach and uses its economic power to promote its interests and values globally. In contrast to some of the protectionist and market-interventionist solutions discussed and pursued at the EU level, the Finnish approach focuses more on managing the risks of an internationally connected economy. Beyond Europeanizing its security of supply focus, there is a need for Finland to actively shape the current EU agenda and toolbox on countering geoeconomic risks. The chapter suggests that it is in Finland’s strategic interests to promote multilateral rules-based frameworks in order to maintain an open global economy and seek means to hedge against the potential balkanization of the global economy. Finland should consider following the EU’s emerging approach to integrate various policy areas concerning the strategic environment. Part 2 of the report gathers more detailed data on European and Finnish economic and technological dependencies, taking stock of some critical strengths and vulnerabilities. Chapter 4 focuses on collecting and analyzing data concerning Finnish economic relations and dependencies with regard to China, the European Union and the United States. The current state and recent development of Finland’s economic relations with China, the EU and the US are reviewed mainly by using different trade statistics and statistics on foreign subsidiaries. The chapter also compares the results with the EU27 average and selected member countries such as Sweden and Germany, which are important for Finland. It analyzes general economic interdependencies as well as selected product groups. This largely descriptive analysis highlights the current relative economic importance of China and the United States for Europe and Finland, and discusses US- Chinese economic relations. In terms of goods and services trade and multi-national enterprises’ foreign operations, the United States remains more important for Finland than China. China’s importance has increased since the turn of the century, but in many respects its share is no longer growing. Instead it is the United States that has become relatively more important for Finland during the past decade. Chapter 5 focuses on mapping Finland’s technological competences and its R&D cooperation dynamics with the United States and China. The analysis contributes to a better understanding of the interdependencies that can preserve, produce or undermine technological competences. By using multiple data sources that focus on research and industry equally, the analysis quantifies the extent to which there is academic and 18 Publications of the Government´s analysis, assessment and research activities 2022:12 business cooperation in research and development. These proxies of technological advancement include a plethora of different vantage points from which to analyze the change in dynamics. For example, based on publication data, Finland is arguably a true science powerhouse when normalized to its size. Despite the rising number of publications and cooperation, the challenge that generally applies not only to Finland but to Europe more broadly is that the investments in science do not lead to valorization within Europe. Based on patent data, Finland’s R&D activities with the US have followed a downward trend, while those with China have increased and stand out in their relative importance. The uncovered evidence from patents can point towards a decoupling of R&D between the USA and multiple EU countries. Key in understanding R&D cooperation dynamics with the great powers are the activities undertaken by Nokia and Huawei respectively. Both companies deserve continuous attention in forging opportunities and limiting risks. While a focused case study on quantum computing sheds light on a key set of critical technologies, a set of policies oriented towards developing technological competences will be needed to tip national investment dynamics – both in capabilities and infrastructure – in the right direction. There is an open window of opportunity to contribute to the “4% R&D by 2030” agenda. Chapter 6 concentrates on the economic and technological competition between the United States and China in Europe via the actions of large global players. The global markets are shaped by US and Chinese technology giants. So far, regulation has not succeeded in reducing the market power of US-based companies in Europe. Their dominance in different technology areas and product markets, and the domains in which these companies expand their activities, affect European and Finnish companies’ possibilities to succeed. The exceptional number of users of the platforms of data giants, generating massive data pools for the platform owners, gives these companies a competitive advantage not only in the platform markets, but also in the traditional markets they access. Technology giants’ acquisitions have generated competitive concerns as their buyouts of small, innovative companies may be targeted to eliminate their potential future competitors and their innovation. The chapter first assesses the Chinese and US technology giants’ acquisitions of European companies in different product markets. The ownership of intellectual property rights of key emerging technologies will further determine companies’ success in global competition. Second, the chapter explores global technology giants’ technological advantages or specialization in different technology domains compared to the European and Finnish business sectors. Data gathered and laid out in the report shows that the US-based technology giants have rather aggressively targeted and bought European companies. Chinese big tech companies, on the other hand, acquired only a few European firms during the 2010s, but their buyout activities in Europe have recently increased. The global technology giants had a technological advantage over Europe and Finland in information and communication technology (ICT), but not in other sample technology domains. 19 Publications of the Government´s analysis, assessment and research activities 2022:12 Publications of the Government´s analysis, assessment and research activities 2022:12 Chapter 7 in Part 3 of the report summarizes key arguments and implications for Finland. 1.5 Policy recommendations For the EU and its Member States, such as Finland, the key challenge in the current environment of intensifying geoeconomic rivalry is the balancing of economic openness and preparedness. Maintaining Europe’s open economic platform is central for the efficient allocation of resources, ensuring competitivess and for continuing to reap benefits from Europe’s comparative advantages. Yet, the rise of geoeconomics requires enhancing Europe’s preparedness to economic disruptions and risks caused by critical external dependencies. The EU and its Member States, including Finland, have demonstrated awareness of the need to prepare for geoeconomic risks, as Chapter 3 of this study demonstrates. Current EU policies focus especially on promoting the EU’s open strategic autonomy as a framework to balance openness and preparedness. Finland’s security of supply model similarly aims to sustain national preparedness within a framework of an open economy. However, as Chapter 2 of this study shows, current geoeconomic dynamics requires us to step up these efforts. To this end and based on the analysis conducted in this study, we propose four bundles of recommendations. 1.5.1 Introducing national geoeconomic risk assessments At present, national risk assessments in EU member states consider a wide range of natural, anthropogenic and socio-natural risks, including national security risks such as terrorism, cybersecurity and hybrid threats. However, recent developments requires national security risk assessments to put much stronger emphasis on geoeconomic risks, both of a “systemic” and “strategic” character. Systemic geoeconomic risks are those that stem from disruptions in global sypply chains because of pandemics, natural disasters or regional instabilities. Strategic geoeconomics risks are those that stem from policy actions meant to lever economic instruments for power political goals. Herein, it is essential to include private sector actors that are in the forefront of these risks and responsible for the majority of critical economic infrastructure and services. Advancing joint situational awareness between both public and private actors is a key pillar of preparedness to geoeconomic risks. 20 Publications of the Government´s analysis, assessment and research activities 2022:12 Specific measures include the following: a. Establishing a strategic-level public-private dialogue on geoeconomic risk with the aim of creating a living situation picture on critical dependencies in trade, finance, supply chain, critical technology and data. b. Incorporating geoeconomic risk assessments into existing national risk maps with the help of corporate risk assessments. 1.5.2 Increasing strategic coordination of technological governance The Sino-US competition is focused on technological supremacy and containment. For the EU and its member states, it warrants a focus on technological sovereignty while maintaining a measure of open cooperation in order to improve competitiveness, innovation and productivity. Herein, Europe faces coordination challenges. Access to up-to-date and formatted information on technology sourcing needs to be improved. Strategic investments in science, technology and innovation competences and infrastructure are needed. The Finnish government has set a target of 4 percent R&D expenditures by 2030, but China is stepping up the game with its recently announced 14th 5-year plan that includes a 200 percent deduction rule for R&D expenditures. A key observation made in this report is that, compared to its European peers, Finland’s high co-owned patent share with China is exceptional and mainly driven by Nokia and Huawei.  To understand the cooperation dynamics between Finland and USA and between Finland and China the strategic capability and critical technology development of Finland’s heavy weight Nokia has been and is expected to continue to be of crucial importance. At the same time, Huawei activities in EU member states, including Finland, need to be closely monitored. Huawei has been a top patent applicant at the European Patent Office. As part of its new diversification strategy, Huawei has recently announced to set up a new fintech R&D center in Finland together with the University of Helsinki and Aalto university. This latest Huawei investment follows the rising trend of Huawei patent activities in Finland that started with the 2012 set-up of its R&D center in Helsinki. As Finnish research institutes and universities have been confronted with high uncertainty during the last decade, cooperation offers from foreign firms can look especially attractive. However, in terms of national interests, also the industrial espionage risks need to be integrated in the decision-making process on R&D deals between Finnish and non-Finnish organizations.  21 Publications of the Government´s analysis, assessment and research activities 2022:12 Publications of the Government´s analysis, assessment and research activities 2022:12 Specific measures include the following: a. Setting up an Observatory of Critical Technologies at member state level to cooperate closely with its EU counterpart(s) to inform the government on its technology strategy by leveraging existing networks of technology experts. The aim of the observatory would be to (1) monitor developments in the technology domain, and (2) develop and update roadmaps on critical technologies. b. Reinforcing EU-US cooperation in technology and global standard-setting, including the EU-US Trade and Technology Council, with the aim of adopting common principles on export controls, cooperation on artificial intelligence and semiconductor supply chains, and exchanges of information on investment screening. c. The launching of strategic investments in science, technology and innovation activities with the aim to ensure productivity growth and future comptences. 1.5.3 Promoting trade cooperation As with many EU member states, Finland is critically dependent on international trade, wherefore an open and rules-based international trading system is matter of central importance. Not only does Finland benefit from being part of the largest common market in the world, but the EU also wields significant influence in international negotiations. For the EU as a whole, but especially for its smaller, export-oriented member states such as Finland, extending trade agreements remains vital. Trade agreements are an important means in ensuring the resilience of supply chains. The EU also needs to continue advocating for reforming the multilateral trading system, embodied in the World Trade Organization, to mitigate the escalation of the geoeconomic chain reaction. The restoration of the WTO’s two-step dispute settlement mechanism could ensure that geoeconomic rivalry does not escalate uncontrollably into a security conflict. Specific measures include the following: a. Pushing forward with EU’s bilateral trade agreements with African, Asian and Latin American partners, and ensuring that existing agreements are efficiently implemented. b. Advocating reform of the WTO, the restoration its dispute settlement mechanism and the upgrading of global rules and norms with regard to digital trade. 22 Publications of the Government´s analysis, assessment and research activities 2022:12 1.5.4 Ensuring a level playing field for European companies A renewed emphasis on establishing level playing field is needed to ensure Europe’s future competitiveness. At present, this level playing field is challenged in a number of ways. First, global technology giants’, particularly US-based but increasingly also China- based, growing number of aggressive acquisitions in Europe risk slowing down European innovation and kill potential European competitors. Particularly Chinese-based, heavily government-subsidized companies may gain an unfair advantage over European companies due to public subsidies, with detrimental consequences for fair competition within the EU. The EU-China Comprehensive Agreement on Investment (CAI) was intended as EU’s countermove against these Chinese state-led acquisitions and as a restriction on uncommercial market behaviour. Yet, the agreement remains unratified and its coming into force is in serious doubt. Second, the EU struggles to adapt and reap benefits from the digital revolution due to the balkanization of the digital economy and ensuing competition over global standards. Chinese and US-based global technology giants, by specializing in technologies essential for gathering, storing and analyzing personal data, have gained a technological advantage over Europe, including Finland, in crucial sectors such as ICT. The number of applied EPO and USPTO patents by the big Chinese technology companies have been growing expeditiously in recent years, and neither Europe nor Finland any longer seems to be at the global technological forefront. Part of the problem in Europe seems to be what has been referred to as “knowledge valorization” – or lack thereof. The European Union, including Finland, has struggled to effectively bring knowledge and technologies to the market, and the economic benefits of European innovation often seem to be realized outside Europe. Third, standarization is emerging as a critical field of geoeconomics competition. Technical standards not only set the technical procedures for interoperability, which is vital for safeguarding global market access to technologies, but also set the norms that guide the codification of privacy and security of technology. Due to the divergence in basic values, China’s increasing domination in standard setting organisations is a potential strategic risk. Consequently, Europe and Finland should become more strategic about technical standards and be prepared to defend European values also in the context of technical standard setting. 23 Publications of the Government´s analysis, assessment and research activities 2022:12 Publications of the Government´s analysis, assessment and research activities 2022:12 Specific measures include the following: a. Approving the Digital Markets Act regulation in the proposed format regarding the technology giant’s data sharing obligations. This would mean that data which is exclusively in the possession of technology giants would become available to European companies in digital markets and provide them with possibilities to compete and innovate in digital markets. b. Enacting new EU-wide regulation to address: (1) “killer” acquisitions of technology giants, and (2) acquisitions using public subsidies outside the EU area. c. Implementing a strategy for increasing participation in technical standard- setting bodies and collaboration with other EU member states and other parties that share values with Finland and the EU. For instance, cooperation with the United States should be enhanced in order to safeguard a Western value-base in technical standards. 24 Publications of the Government´s analysis, assessment and research activities 2022:12 PART I 2 Assessing evolving geoeconomic risks for European businesses 2.1 Background Recent years have witnessed the acceleration of geoeconomic competition characterized by the broad use of economic tools to achieve strategic and security goals. As China and the United States ramp up this competition, economic interdependence is cast in a new light. What was once heralded as a barrier to conflict has now, at least momentarily, turned into a currency of power, as economic interdependencies are leveraged for power political ends (Leonard 2016; Scholvin and Wigell 2018). As the major powers, chiefly in Europe, China and the United States, are waging this geoeconomic battle, they need and seek to leverage businesses that make up the present- day networked global economy. For both public and private firms, the threat is that they increasingly become used as pawns in these great-power ambitions. For companies around the world, this introduces a new source of business risk that combines geostrategic interests with economic dynamics (Fjäder, Helwig and Wigell 2021). In this report, we refer to this new phenomenon as “geoeconomic risk”. More specifically, we see geoeconomic risk as denoting the risks associated with economics being used by states for power political objectives. This not only affects US and Chinese companies but reverberates throughout the networked global economy. States defend themselves against this geoeconomic power politics by increasing their control over businesses in strategic sectors of the economy. It manifests itself in the panoply of new means of trade and export controls, investment screening mechanisms, data localization measures, sanctions and subsidies (Choer Moraes and Wigell 2020). Some of these measures include: y Increased public scrutiny over direct investment and foreign state subsidies in order to prevent the foreign control of critical infrastructures or technologies, and to ensure fair competition. 25 Publications of the Government´s analysis, assessment and research activities 2022:12 Publications of the Government´s analysis, assessment and research activities 2022:12 y Controls regulating the export of certain technologies with a dual-use potential, and thus deemed to pose a risk to national and international security. y State incentives aimed at the redesign of global supply chains, with the purpose of ensuring the supply of sensitive technologies. y Actions to discourage universities and research centres from hosting students from certain countries so as to prevent the dissemination of knowledge considered strategic. y Measures to limit access to fresh capital, such as the US delisting Chinese companies from stock markets, or redirecting government pension funds. y Public infrastructure and R&D investment in disruptive technologies, such as the EU’s efforts to boost the digital transformation (cloud computing, AI). y EU tools to unilaterally enforce trade obligations (e.g. through tariffs), bypassing the paralyzed WTO dispute settlement system. y EU instruments to shield companies from economic coercion, such as US extra-territorial sanctions (Blocking Statute, INSTEX). These measures defy the market-liberal logic that has underpinned global economic relations in recent decades in the post-Cold War era. They illustrate the broad readoption and use of economic tools by states to attain strategic and security goals, and the way the relationship between economics and security is changing. States are increasingly concerned about the security risks that “hyper-connectivity” and interdependence pose for state sovereignty, economic resilience and even the fate of democratic governance (in democratic countries), while still simultaneously recognizing the positive opportunities they offer. This increased convergence of economic and security interests is putting pressure on the rules that govern the international economy, and by extension the operating environment of both public and private economic actors. A key driver of change seems to be the digital transformation. It is kick-starting a new form of economy in which data is becoming the most important factor of production (Vuorisalo and Aaltola 2021). These developments also challenge the rules-based free-market principles that have provided a foundation for Finland’s economic success. As a small trade and technology dependent country, Finland is particularly exposed to the geoeconomic strategies of other states. States’ pursuit of strategic and security interests is gradually encroaching upon the economic realm, largely led by market actors since the end of the Cold War. Strategic interests, such as controlling access to critical technologies, increasingly clashes with profit and efficiency. This collision expresses itself in the emergence of geoeconomic risk that both companies and states need to address. States are faced with the challenge of balancing between safeguarding their strategic interests and sovereignty while trying to minimize economic damage at the same time. For businesses, this means that they need 26 Publications of the Government´s analysis, assessment and research activities 2022:12 to update their risk assessment framework and make sure that they keep track of the sector-specific strategic and security-related developments. This chapter looks at the emergence of geoeconomic risk and provides some tentative thoughts on its implications. In particular, it shows how three geoeconomic drivers – the securitization, balkanization, and weaponization of the global economy – are refashioning the operating environment for European businesses. 2.2 Geoeconomic dependence: the securitization of the economy The increased rivalry between major powers is taking place at a time when the level of global connectivity and interdependence is unprecedented. It casts the concept of interdependence in a new, more nuanced light than the positive angle from which it has predominantly been viewed during the post-Cold War period.4 As recently stated by EU High Representative Josep Borrell, “today we are in a situation where economic interdependence is becoming politically very conflictual” (Borrel 2020). Hence, for states, global interdependence has emerged as a national security issue. There are two principal drivers of this trend. First, the centralization of global economic networks creates an infrastructure in which economic exchanges flow in a hub-and-spoke-like manner. Contrary to earlier expectations, globalization has not produced a “flat” world of diffuse power relations and reciprocal dependencies whereby states will refrain from coercive strategies to avoid damaging themselves. Instead, global economic relations and networks have tended to generate ever more asymmetric dependencies that can be manipulated, exploited and leveraged for strategic benefit by the less vulnerable parties in these relationships (Leonard 2016; Farell and Newman 2019; Scholvin and Wigell 2018). States that fail to recognize and counterbalance these dependencies run the risk of having their strategic autonomy circumscribed and, by extension, becoming pawns in the game of 21st- century power politics. The new data-driven economy seems to be heightening this tendency, with the control of data and its exchange becoming ever more centralized (Ciuriak 2021). Later, in Chapter 5 of this report, we will see how the related issue of technological sovereignty has become a subject of rising concern for all major powers in the international system. 4 For a discussion, see Fjäder 2018. 27 Publications of the Government´s analysis, assessment and research activities 2022:12 Publications of the Government´s analysis, assessment and research activities 2022:12 Second, the privatization of critical infrastructures has broadened the scope of national security to the economic realm. Today, many of the critical infrastructures of society are owned and operated by private sector actors, who in turn are highly dependent on global supply chains and markets (Fjäder 2018). Relatedly, the notion of security of supply has also gained increasing salience recently, especially in the wake of the Covid-19 crisis, with states starting to pay more attention to self-sufficiency, extended supply chain security and national resilience. In most countries, critical societal and economic functions cannot be secured by the state alone, as a result of which various forms of comprehensive and whole-of-society approaches to security have proliferated (Wigell, Mikkola and Juntunen 2021). These arrangements also tie companies into the national security frameworks of their host countries. In the worst case, such linking will create pressures to choose sides, as links to national security in one country become increasingly viewed as a potential risk in others. China’s push to excel in critical technologies, for instance, is driven by these security concerns. Firstly, the 14th Five-Year Plan in March 2021 not only highlighted the importance of critical technology, but also data as a critical “factor of production” for China’s prosperity and security, making broad categories of technologies subject to national security oversight and control (Grünberg and Mussee 2021). Secondly, the new national data security law that entered into force on 1 September, 2021 aims to protect Chinese critical networks and data against external threats. As such, it is principally protective in nature and focuses on reducing the risk of the loss of critical data that could compromise “state security”. However, the new regulations also permit the government to stockpile “zero- day” vulnerabilities that could also potentially become weaponized and utilized for hostile purposes.5 This is yet another good example of the securitization of international flows of data, and it may put international companies operating in China in a difficult position of either violating Chinese law or, if they comply, laws in other countries in which they operate. Considering that the new law requires companies to report vulnerabilities within 24 hours to Chinese authorities, and to refrain from disclosing them to other parties overseas, the risk of such conflict cannot be easily dismissed. 5 See Thorne and Hoffman (2021) for further details. 28 Publications of the Government´s analysis, assessment and research activities 2022:12 Chinese FDI activity Acquiring the latest technology and improving R&D capabilities through investments and purchases is a key factor in China’s Made in China strategy. Despite increased foreign direct investment (FDI) screening and the common blocking of Chinese acquisition attempts, which China tries to counter using the new dual circulation strategy, mergers and acquisitions (M&As) in particular are an important financial tool for China to drive its industrial upgrade as the deals are a powerful means of acquiring know-how and technical expertise, in addition to the opportunity to obtain new customer bases and resources. A good example of such strategic acquisitions is that of Finnish semiconductor manufacturing technology company Beneq in 2018 by Chinese SRI Intellectual, a company 50% owned by the Military-Civilian Development Fund (Datenna 2021). Between 2005 and 2015, the value of Chinese cross-border acquisitions rose from less than US$10 billion to US$60 billion, only to more than double to US$140 billion in 2016 – or 14% of the global cross-border M&A value (USA leading with a 19% share) (White and Case n.d.). Chinese state-owned enterprises (SOEs) have, historically speaking, played a key role in outbound direct investments (OFDI): some estimates point to a share as high as 90% of China’s OFDI coming from SOEs (Wang et al. 2017). China’s FDI activity has been slowing down since 2016 due to increased political opposition in destination countries as well as domestic constraining of outbound capital flows, with a 13-year low occurring in 2020 largely due to the pandemic. China’s outward FDI (OFDI) development shows that China has been investing more in the European Union than in the United States, although in 2020 the completed Chinese FDI in Europe reached a lower total than in North America for the first time since 2016 (Kratz et al. 2021). In spite of public opposition to Chinese investments, the financial impacts of these on the recipient country can be significant, especially considering smaller economies such as Finland. Despite its size, with EUR 13.3 billion in received investments, Finland ranked on the top 5 list of the highest cumulative value of completed FDI transactions from China in the EU 27 and the UK between 2000 and 2020. As such, Finland is only slightly behind France (EUR 15 billion) and Italy (EUR 16 billion), with the top destinations being Germany (EUR 24.8 billion) and the UK (EUR 51.9 billion) (Statista 2021b). Such economic incentives can be difficult to refuse, even if the Chinese OFDI could have ulterior motives, such as affecting EU policies and institutional processes, as well as stirring transatlantic competition vis- à-vis the USA (Meunier 2012). 29 Publications of the Government´s analysis, assessment and research activities 2022:12 Publications of the Government´s analysis, assessment and research activities 2022:12 In addition to tightening data security regulations, the Chinese Communist Party (CCP) appears to be tightening its hold on Chinese technology companies by other means. More specifically, the CCP has utilized anti-trust and other market regulations to discourage national technology champions from listing their stock overseas, and thus from increasing their exposure to foreign influence. A recent example of this is Chinese ride-sharing giant Didi, which was slammed with the full wrath of the Chinese authorities after it launched an initial public offering on Wall Street in late June 2021 in order to go global. Only two days after launching the IPO, which increased its stock value to a whopping USD 70 billion, the Cyberspace Administration of China (CAC) launched an investigation into the company on the basis of its practices of collecting and using data. Didi’s app was consequently removed from app stores in China and it lost approximately USD 22 billion in value within a week.6 Other Chinese technology giants launching IPOs overseas, such as the Ant Group and Tencent, have also experienced similar retaliation measures. In August 2021, Chinese authorities revealed a plan to ban Chinese companies that handle sensitive consumer data from going public in the United States (Zhai 2021). The CCP has also applied the same rules in order to remind tech tycoons where their loyalties should lie, as demonstrated by Jack Ma’s fate (Ryan 2021). It therefore appears that China’s strategy is at least partially driven by a pervasive sense of vulnerability. China has perceived a critical vulnerability in its dependence on high-end components in particular, such as semi-conductor chips, an issue where the geoeconomic risk has materialized from China’s perspective. From the geoeconomic perspective, China views it as an example of a vulnerability to coercion by the West, which could be used for pressuring it into changing its policies regarding, for example, the Uyghur minority, Taiwan or the South China Sea. Although Beijing has intensified efforts to ensure supply, both from external sources and by boosting domestic production (in the spirit of the “dual circulation” strategy), its level of self-sufficiency in semiconductors is expected to reach only 19.4% by 2025 (Cho 2021). Taken together, these trends are elevating economic security to the scale of strategic priorities for most states around the world. The economy is being “securitized” as states intervene out of strategic and national security concerns to safeguard “strategic assets”, “critical infrastructures” or “emerging technologies” against the free operation of market forces. New trade and export controls, investment screening and data localization measures are being adopted in order to reduce vulnerabilities to geoeconomic dependence. Take the EU’s framework for foreign direct investment screening which has been fully operational since October 2020, for instance. While it does not bind member states to any specific mechanisms or industries to protect against foreign acquisition, 6 For details, see e.g. The Economist 2021; Li and Zhu 2021. 30 Publications of the Government´s analysis, assessment and research activities 2022:12 it may well give rise to a wave of tighter public scrutiny across the EU. Finland’s Act on the Monitoring of Foreign Corporate Acquisitions has already been in force since 2012 (updated in 2020) and gives the government the possibility to prohibit, fully or conditionally, a foreign acquisition if it is considered to present a risk to national defence or security. For the private sector, the increasing securitization of the economy entails a new source of business risk. Firms can no longer safely assume that the state will adopt an arm’s length approach to markets. Market-led transactions are coming under increasing scrutiny, motivated by national security considerations. Interpreting this simply as a traditional political risk would be misleading. Due to the critical importance of open markets for economic competitiveness, state interventionism in the developed world will not become as broad as in traditional state capitalism, but likely will remain more targeted and selective, mainly focusing on safeguarding the control of strategic assets (Choer Moraes and Wigell 2020). State leverage will vary significantly depending on the economic sector and can be abruptly adjusted as the strategic environment experiences a change. In sectors considered strategic and security-sensitive, states will attempt to coordinate business operations and exchanges to a larger degree, whereas other sectors will be left to operate according to market-oriented principles. Those sectors that will be considered security-sensitive in the future are often unpredictable. As interdependence in economies and supply chains increases, the pressure for the state to secure more sectors increases. A timely example of this is the proposed new Critical Entities Resilience (CER) Directive by the European Commission (2020b), which would broaden the focus to ten sectors from the two sectors in the 2008 European Critical Infrastructure Protection Directive (Council of the European Union 2008). The same trend is evident in an increasing number of similar national legislations and strategies. It is likewise notable that intangible assets can also be security-sensitive, meaning that data, research and know-how relating to security-sensitive assets are increasingly considered targets of national security measures. Consequently, geoeconomic risk is subject to dynamic change and requires constant monitoring throughout the entire value chain. This will place a new burden on companies in an increasing number of fields. To respond to these new realities, Finland will have to carry out more thorough analysis and monitoring of its own dependencies and make sure that new problematic dependencies are not formed. To this end, Finland will face added pressure to determine more clearly which sectors it considers strategic and what this definition duly means for those sectors. As Finland’s trading partners are taking a more interventionalist approach to the economy, growing tension in trade and investment relations can be expected. Finland needs a clearer strategy regarding which relationships it wants to deepen in different areas, such as trade, investment, security, climate and development, as well as 31 Publications of the Government´s analysis, assessment and research activities 2022:12 Publications of the Government´s analysis, assessment and research activities 2022:12 how it wants to manage the US-China tensions, which can limit its possibilities to seek closer cooperation with both parties in all areas. So far, Finland seems to be aiming for the middle ground, focusing on economic cooperation with China in order not to complicate existing relations, while at the same time maintaining strong relations with the US, including in security and defence (Gaens and Kallio 2020). Whether such a balancing act will be feasible in the future, especially if the current dynamics accelerate, remains to be seen. As the European Union builds its defences against economic coercion and sharpens its trade policies to beef up its strategic autonomy, Finland needs to consider what the risks and opportunities associated with hedging behind EU policy frameworks are. Chapter 3 of this report will explore these aspects in greater depth. 2.3 Geoeconomic competition: the balkanization of the economy The growing propensity to see global interdependence through the lens of geoeconomic dependence breeds antagonistic dynamics in global economic relations, which is currently evident in the decoupling of technology value and supply chains.7 While principally taking place between China and the United States, it has global implications and the potential to become globally pervasive as global technology value and supply chains are not neatly organized around the United States and China. As the race for global dominance in technologies deemed critical for economic competitiveness and national security extends to global value and supply chains, the likelihood of disruptions increases simultaneously. While the “great decoupling” is primarily seen as a strategic-level great-power game, it also inevitably has a negative impact on the norms and processes of global trade. It will therefore also impact private businesses and consumers. An emerging area of geoeconomic competition is global technical standard-setting, which takes place in various regimes specializing in the task. These regimes and the standards they produce function as key enablers of global markets in technology products and services. In many ways, standards have served as the backbone of globalization. Without technical standardization and the interoperability it establishes, many of the technical solutions that we have grown accustomed to would not work, or even be available globally. After all, the interoperability established by technical standards allows us to utilize our mobile phones overseas, make payments and cash withdrawals overseas, 7 See e.g. Inkster 2020. 32 Publications of the Government´s analysis, assessment and research activities 2022:12 and purchase products and services from global markets with the expectation that they will work safely in any location. Technical standards have also enabled global flow infrastructures, such as airports, ports and standardized shipping containers. Despite their strategic significance, the traditional approach to technical standards in the developed nations has been a bottom-up effort led by standardization associations and technical experts, organized in voting committees making decisions based on the consensus principle. As such, technical standards have been primarily industry-led and voluntary in nature. This technocratic approach seems to be changing, however, as we are witnessing a renewed effort by states to engage in standard-setting. The hitherto prevailing Western paradigm of technical standards has largely been based on a market-based and bottom-up approach. In sharp contrast to the traditional Western approach, China views technical standards as an instrument to advance strategic goals. These strategic goals are directly related to the Made in China 2025 strategy and making China a global innovation powerhouse by 2035. China wants to become a technological superpower and technical standards are a tool for securing its place in the global technology race. Consequently, standards in China are determined by ministries and their subordinate agencies, at both national and local levels. The rest of the world needs to be aware of the risks involved with incompatibility between Chinese aspirations and the underlying principles of the voluntary standards-setting regime, including the geoeconomic risks associated with it. The Chinese approach to technical standards is distinctly strategic. The China Standards 2035 strategy aims not only to increase standardization in critical technologies recognized in the Made in China 2025 strategy, including 5G, cloud computing, Artificial Intelligence (AI), quantum computing, industrial robotics and semiconductors but, in doing so, to internationalize them as well. Consequently, the presence of Chinese representatives has increased in many international standardization bodies and their committees and subcommittees. These positions also increasingly include chair and co-chair positions, and have not only given Chinese representatives the possibility to influence the agendas of the committees, such as the International Telecommunications Union (ITU), and the International Organization for Standardization (ISO), but also a number of industry-specific standardization associations. Huawei and ZTE, for instance, have managed to increase their presence in the 3rd Generation Partnership Project (3GPP) – the industry association responsible for the bulk of global telecommunications standards, including 5G-related standards, while probably also eventually playing the same role in 6G. As of February 2021, Chinese companies accounted for 38% of approved 5G patents, in comparison with 17% by US companies (Yan 2021, 46). Huawei is currently leading the race in 5G patents (see Figure 1 below). 33 Publications of the Government´s analysis, assessment and research activities 2022:12 Publications of the Government´s analysis, assessment and research activities 2022:12 Figure 1.  Share of 5G patents by manufacturer Note: The categorization of 5G technologies varies somewhat in different statistical sources. In general, however, the share of Huawei in applied, granted and active patents appears to be increasing sharply. Huawei also leads in patent filings according to WIPO Statistics Database (February 2021). Source: Statista 2021a. China has also been particularly active in SC42 – the standardization association for Artificial Intelligence (AI), as well as those concerning other emerging technologies, such as the Internet of Things (IoT) and blockchain. While China’s increased participation in international standards has its positive aspects as well, the recent surge in Chinese representatives has raised concerns in the West that China could utilize standards not only to dominate technology ecosystems but also to compromise the principles of privacy and security that have thus far been based on Western values and norms. In any case, China’s increasing dominance in standards may be inevitable; as the country’s innovation capacity grows in key technologies, its capability to influence international standards will grow on a par with it. China’s race towards global patent dominance is logical from an economic and industrial policy point of view, as innovation arguably accelerates productivity, which leads to economic growth. As effectively stated in the Made in China 2025 strategy, China wants to climb the proverbial ladder of global value chains to become an innovator in its own right and start earning fees for itself. Thus far, the global value chains have been organized in such a way that the United States and Europe have occupied the higher rungs on the ladder and have also controlled the technical standards as a consequence. In the course of China’s success as a global trading power, it has distinctively been a follower and paid licence fees to its Western counterparts (see Figure 1). 15,4 % 13,3 % 13,2 % 12,9 % 8,7 % 5,6 % 4,6 % 4,6 % 0,0 % 2,0 % 4,0 % 6,0 % 8,0 % 10,0 % 12,0 % 14,0 % 16,0 % 18,0 % Huawei Samsung Nokia (incl. Alcatel-Lucent) QUALCOMM LG ZTE Sharp Ericsson 34 Publications of the Government´s analysis, assessment and research activities 2022:12 China now feels that this position has become increasingly unfair. By pouring double- digit investments into research and development for decades, China has subsequently produced its fair share of leading technologies. Yet from China’s point of view, the West continues to block market access for Chinese technologies, hindering its ability to climb the global value chain and overcome the risk of a “middle-income trap”. Chinese observers have, for instance, pointed out how Huawei has invested more in R&D than its European competitors Nokia and Ericsson. In this context, it is not surprising that China aims to increase its control over global technical standards. The ongoing 5G security debate and Huawei’s troubles in the West is another good example of what geoeconomic risk looks like from the Chinese point of view. Whereas Huawei and ZTE have principally been blocked from certain markets on national security grounds, allegations of intellectual property theft and unfair competitive practices are also rife. Consequently, the list of Chinese entities subject to export controls is constantly growing. The “Entity List” of US Export Administration Regulations currently includes over 400 entities (and their subsidiary organizations) in China that are subject to export controls and trading, which requires a licence for exports, re-exports, and transfers in country (US Department of Commerce 2021a). In addition to the entities listed in China, the list contains Chinese entities registered in other countries. Consequently, a growing number of Chinese companies deemed to have an intimate connection with the government have been excluded from trading in much of the world. While all eyes are focused on 5G security, it is worthwhile noting that the same issues are likely to be replicated in connection with the development of 6G. Whereas 5G has sparked national security issues due to its importance for critical infrastructures and services, 6G is expected to bring about new critical capabilities for public safety organizations and the increasingly data-dependent militaries. Consequently, cyber security is emerging as a major focus area with “embedded trust” as the ultimate goal. Embedded trust requires universal standardization of 6G security. In the event that decoupling has not become a problem of the past by the time 6G security reaches the standardization phase, security issues in 5G may actually become multiplied in 6G. While 6G is still in the embryonic stage and networks are expected to be deployed no earlier than the 2030s, dividing lines are already appearing. Finland is emerging as a frontrunner in the race for 6G development with the 6G Flagship project hosted by the University of Oulu emerging as one of the major hubs. The 6G Flagship, which organized the world’s first 6G summit in 2019, recently announced that it has joined forces with Japan’s Beyond 5G Promotion Consortium, involving major Japanese telcos, such as NTT Docomo, SoftBank Group, KDDI and Rakuten Mobile. Nokia is also expected to join soon. Indian companies, such as Tech Mahindra, are also already involved. The competing consortium – the Next G Alliance – involves US tech behemoths, such as Apple, Google and ATT, but also the South Korean LG Electronics. China, on the other hand, has chosen a government-driven approach and established 35 Publications of the Government´s analysis, assessment and research activities 2022:12 Publications of the Government´s analysis, assessment and research activities 2022:12 a 6G R&D Working Group under the guidance of the Ministry of Science and Technology (MOST). Thus, we could again be witnessing an emerging competition between two competing approaches to technology development, involving two relatively loose coalitions between academia and industry in the West and a government-driven approach in China. Hence, the risk of competing standards and, therefore, competing ecosystems that would decouple from each other could potentially emerge in 6G even more forcefully than in 5G. Ericsson’s CEO Börje Ekholm recently warned that should this happen, China is quite likely to dominate the race (Bicheno 2021). While the race is still in its early stages, and thus uncertain, there is some evidence that China is certainly making progress, at least by its own account. According to the China National Intellectual Property Administration (CNIPA), China currently leads in 6G-related patent applications with a 35 per cent share of the total, in comparison to 16 per cent in the United States (Yang 2021). What is notable, however, is that the majority of patents in China’s accounts have been filed by foreign firms, such as NEC, Samsung and Qualcomm (Clark 2021). The accelerating geoeconomic competition for controlling standards as well as notions of self-sufficiency and economic autonomy risk leading to a balkanization of the global economy, namely to its disintegration into regional economies largely decoupled from each other. The decoupling that is underway, particularly in the technological sphere between China and the United States, may in some scenarios be followed by the splintering of Europe into its own economically autonomous sphere of control. The risks for European businesses depend on the extent of this balkanization. A modest differentiation of standards would already increase development, production and distribution costs. However, as the experience around 5G security standards and the banning of Huawei from the US market shows, the balkanization may go much further. In fact, the United States has been active in convincing its allies to not only ban Huawei and ZTE from national networks, but also to take measures towards coordinating 5G security risks and even deployment, as well as diversification of supply chains (reducing dependence on China) and reshoring the development and production of critical materials and components, such as semiconductors. In NATO, the United States has actively promoted a NATO approach to 5G security, although thus far it remains the only NATO state that has banned the two suppliers. The NATO Communications and Information Agency (NCI Agency), however, recently announced that it is commencing an assessment of 5G’s implications for the Alliance and its military applications (NATO Communications and Information Agency 2021). Another increasingly relevant grouping in this context is the “Quad”, involving the United States, Australia, India and Japan. The Quad has made headway in coordinating the grouping’s actions towards emerging and disruptive technologies with strategic importance. For instance, the Quad Critical and 36 Publications of the Government´s analysis, assessment and research activities 2022:12 Emerging Technology Working Group,8 announced during the leaders’ summit in March 2021, is exploring coordinating the members’ 5G deployment, as well as the diversification of the supply of critical materials, possibly setting up a “rare-earth procurement chain”. The Supply Chain Resilience Initiative (SCRI), signed by India, Japan and Australia and backed by an executive order by President Biden to review semiconductor supply chains, aims at reshoring critical chip development in order to reduce critical dependencies on China (Kim 2021). Furthermore, the SCRI may potentially be extended under the umbrella of the “Quad Plus” framework, involving South Korea, Israel, New Zealand, Brazil and Vietnam. In the worst case, should the process of balkanization broaden and deepen, companies will be forced to either give up one market, or rather extensively tailor products for individual markets. As the sanctions, export licensing regulations and other related regulations not only concern finished products and parts, but also intangibles and data, this would not even mitigate geoeconomic risk effectively. The spread of the decoupling into data and cloud services will also further risk a splintering of technology development into separate technology ecosystems. This poses a particular risk to European businesses, as these ecosystems are primarily led by US or Chinese champions. Decoupling will continue Experts interviewed for the project believed that decoupling between China and the West is likely to continue. Most experts argued that the West should also further decouple from China in critical technologies, so as not to indirectly support the technological development of the Chinese military. It was argued that decoupling should be carried out in collaboration between like-minded countries, in that the EU, the USA and others, such as Australia and regional groupings like the Quad, should coordinate the decoupling process. The decoupling of supply chains can already be observed in the way in which technological products designated for export to the US are not allowed to include certain Chinese parts, or when US authorities restrict certain parts for export to China. China may also seek to protect its domestic market by standard-setting, in line with the “dual circulation” strategy, to the detriment of Western companies. Uncertainty with regard to planning, the monitoring of regulations, and the detangling of supply chains comes 8 See e.g. Australian Government 2021. 37 Publications of the Government´s analysis, assessment and research activities 2022:12 Publications of the Government´s analysis, assessment and research activities 2022:12 with a steep price tag. Finnish companies have already been reported as having to make changes to their supply chains due to the intensifying rivalry between the US and Chi