China-USA-Europe: Rivals in Technical Innovation?
Georges Haour
Technical innovation is increasingly considered by countries as a key contributor to their economic prosperity.
In this arena, rivalry between China and the USA, as well as with Europe (meaning: the EU and the UK), is growing more intense.
Wealth creation through technical innovation
These days, the term ‘innovation’ is used ad nauseam. Few individuals, however, truly champion it. The phrase of the Austrian economist Schumpeter - “the gales of creative destruction” - conveys the pitfalls contained in innovation: it destroys jobs in one area, while creating new ones in another. As an example, within Europe’s vast automotive industry, electric vehicles (EVs) are jolting an entire value chain that includes electric motors, batteries and car assembly (with fewer parts), not forgetting the infrastructure required to charge the batteries, and recycle them.
Effective innovation and R&D (research & development) are more about quality of output than quantity of input. In the currently fashionable field of artificial intelligence (AI), a recent example is the Chinese firm DeepSeek, which, in January 2025, announced a new offering, similar to Open AI’s Chat GPT, developed with a fraction of the cost, thus putting in question the AI business model in the USA.
To achieve quality of output, the keys to the success of innovation projects are the talent and motivation of the people involved in the projects. Management must add value by nurturing these qualities, as well as by ensuring that the right projects are carried out.
Innovation, however, does not operate in vacuum, but within framework conditions. The latter include the availability of a well-educated workforce, an effective university system, the entrepreneurial spirit being valued by public opinion, good infrastructure, pro-business wealth-creation processes and policies, a diversity of companies of all sizes, a sound legal environment, well-functioning fiscal and intellectual property systems, etc.
Geopolitical competition
Rivalry between nations increasingly includes effective technical innovation as a crucial component. In this arena, there are three main rivals in the world: China, Europe and the USA. In addition, there is the technical powerhouse of Japan, while additional players may join in the coming years: India, Brazil and Indonesia.
Of the three main rivals, China is unique. First, it is emerging again as a superpower, after having represented roughly 35% of world trade in the 1850s. Second, in the course of history, China has invented “the big four”: paper, the compass, the printing press and gunpowder. In the 1930s, Cambridge biologist Joseph Needham documented China’s glorious inventive past (1), raising the question: how come did China not turn these technological breakthroughs into economic advantage, as did the West ?
Further to technical rivalry, other areas of competition between countries include:
- access to cheap energy, the absolute lifeblood of “advanced economies”.
- access to sea routes, including the Turkish and Malacca straights, the Suez and Panama canals, the opening Northern Passage and the South China sea.
- access to critical elements such as titanium, cobalt and rare earths, crucial to the production of permanent magnets (cobalt-samarium and cobalt-neodymium, in particular) for electric motors and various devices, as well as crucial components in the defense industry. The European Union (EU) currently encourages the opening of mines in Europe and the recycling of magnets. A plant doing the latter is due to open in Lacq, France, in 2027 (2), aiming to produce 15% of the world’s output of rare earths.
Rare earths are not so rare. They are costly and polluting to extract and refine. A Rhône-Poulenc plant near La Rochelle, France, used to lead production worldwide. Its operations were very polluting, so that, under environmental pressure, its activity was discontinued and transferred to China, a country now ensuring close to 90% of the world’s production in most of the rare earth elements. As retaliation against US tariffs, China used that weapon, selectively banning exports of rare earths to western countries.
For creating wealth through effective technical innovation, how can a country, or region, best mobilise science and technology to fuel economic development? All three main rivals have the same list of priority areas:
- Advanced manufacturing and robotics
- Artificial intelligence
- Advanced semiconductors
- Quantum computing
- Renewable energy
- Biotech
Turning a scientific discovery into a commercial success constitutes a highly difficult journey. Among other things, it requires the right “framework conditions” mentioned above.
In this regard, China continuously surprises the world by coming up with remarkably effective technical innovations (1). This country is clearly putting innovation-led growth on the very top of its agenda.
Restricting access to advanced technologies
Because it cannot accept being surpassed by China as an economical and military power, the USA aims to block or slow down China by attempting to deprive it from accessing so-called “advanced technologies”.
Advanced microchips constitute a crucial arena of rivalry. In this sector, the USA have lost their leadership to the benefit of one world leader, TSMC from Taiwan. Intel has progressively slipped behind, experiencing its worst financial losses in 2024.
Europe is weak in chip manufacturing, but has two ultimate world industry leaders: ARM, in Cambridge, for chip design, and ASML, a Dutch offshoot from Philips, which uniquely produces advanced lithographic equipment in order to manufacture top-end chips. Its latest machine weighs 150 tons and costs well over € 300M.
Restrictions on advanced microchips: the USA demands that ASML does not sell its advanced equipment to China.
By including them in its “entity list”, the USA is restricting Chinese firms from selling products and services, as they are deemed to be a threat to US national security. After Huawei was added to this list in 2020, it was denied access to Android operating systems and certain components. Soon after, China’s main chip manufacturer, SMIC, was also added to the list.
Another school would allow the US to sell all chips to China, in order hook this country in the US technical sphere. Early 2026, the USA allows the sale to China of advanced chips for AI -Artificial Intelligence.
Subsidies to chip manufacturers: in clear infringements to the rules of the World Trade Organisation (WTO), the USA is heavily subsidising the microchips industry on its soil, with the $ 50B CHIPS Act (2022) attracting TSMC to build a plant in Arizona - although its R&D will remain in Taiwan. Moreover, the world’s second largest chip manufacturer, Korean giant Samsung, has been strongly incentivised to build a plant in Texas.
On the other hand, China spends more on the import of chips than on purchasing oil (3). The Chinese government is also heavily subsidising companies in their “catch up” effort in this area. For example, since 2022, Huawei has embarked on an ambitious programme to build plants for the manufacturing of advanced chips in the region of Shenzhen.
As for Europe, it is preparing its CHIPS Act 2, in an attempt to boost its fledgling microchip sector, which includes companies such as STMicroelectronics, Infineon and NXP.
In electric vehicles (EVs), the USA and Europe are behind in terms of technical and manufacturing capabilities. European car manufacturers represent a major share of Europe’s investments in R&D (Research & Development). In spite of this, these companies lag behind in the EV area, demonstrating that doing good R&D is not enough; firms have to do the right R&D innovation projects.
Currently, in China, half of new cars are electric. As mentioned, China heavily subsidizes its manufacturing industry in order to maintain a large capacity and develop a technical edge, allowing aggressive exports. China is sometimes described as “the world leader in subsidised exports”.
This has pushed the EU to impose differentiated taxes on Chinese EVs in order to protect its large automotive industry, which is concentrated in Germany, from “dumping practices” that create a massive influx of cars into Europe, led by fast-growing manufacturer BYD.
That sector includes the field of batteries, where, again, China’s momentum is relentless. The global leader, CATL, based in Shenzhen and BYD’s competitor, commands close to 40% of the world market. In a recent initial public offering (IPO), this firm raised $ 4,6B at the Hong Kong stock exchange. In addition to its current production in Germany, CATL recently announced two new plants in Hungary and Spain.
Production of renewable energy: China is the world’s largest producer of electricity from wind and solar energy. 95% of the world’s solar panels come from China, which also produces the world’s largest wind turbines.
In 2022, the USA began aggressively luring “green industry” investments through the massive subsidies of the oddly-named Inflation Reduction Act, which represented $ 730B of public money.
Blocking the purchase of firms by China: in 2019, Kuka, a manufacturer of industrial robots with 3,500 employees based in Augsburg, Germany, was purchased by a Chinese firm. Following this transaction, deemed to be damaging national security, Germany considerably toughened its criteria for selling a firm in order to prevent China from buying other critical companies.
On the other hand, China makes it extremely difficult for foreign firms to buy local companies. “Reciprocity” is a key word in negotiations between China and the West.
Tariffs: in order to shelter domestic production and hamper international competitors, the USA and the EU impose tariffs on imported goods and services. Instead of the usual, childish “tit-for-tat” response, countries may use more clever schemes to react to an initial tariff initiative. China, for example, retaliated to American tariffs by banning export of rare earths to the USA.
A WTO treaty provides another possible response. Thanks to the Trips regulation (Trade-Related Aspects of Intellectual Property Rights), a country may refuse to pay intellectual property royalties (fees on licenses and software, copyrights…) to firms in the USA if the imposed tariffs are deemed excessive. American companies are thus punished, while customers in the attacked country do not pay higher prices on imports from the USA. The EU, a crucial market for US digital firms, could well use this measure as a response to US tariffs.
“Due diligence” on graduate, or PhD and postdoctoral, students, arriving from China in Western laboratories, in attempts to detect spies and theft of intellectual property.
How well do restrictions work?
Europe’s general approach of consensual rule of law is not to confront China, but to engage with it from a position of strength, which is due to the EU’s values, as well as its massive weight in global trade.
In contrast, the USA aim at “containing” China’s ascension, militarily, as well as by restricting its access to specific technologies. Are these restrictions likely to achieve this goal?
On tariffs: according to conventional wisdom, they are bad for all parties and for the world economy. As exports represent 20% of its Gross National Product, China may suffer most from a global trade war. On the other hand, exemptions, in place or still to be granted, may concern a number of products and services. Unsurprisingly, a current exemption by the USA concerns smartphones, as China produces 90% of the world’s devices. In a hurry, many firms will shift to outsourcing their production to firms in less-taxed countries. Another effect will be a de-americanisation of trade, as countries increase their exchanges with alternative partners.
On boycott: as mentioned earlier, Huawei has been restricted in its access to technologies. As a result, the company developed its own chips and devices, drawing on large subsidies from Beijing to do so. The company thus essentially bypassed the restrictions. In fact, one could well argue that restrictions act as an additional stimulus for an industrial sector to forge ahead in developing specific leading technologies.
On banning products with Chinese content: early 2025, large-scale wildfires affected Los Angeles. In order to detect and survey the fires, the city’s fire department could not make use of its 800 drones. They were banned by the US government because they contained chips and components from China.
These examples underscore the risks that sanctions backfire with unintended, negative consequences for the country issuing the restrictions (4).
Export controls, made possible in the USA by the 1949 Act, were put in effect in 1983 by Ronald Reagan. They were met with mixed success, although at the time, they were more likely to be effective, since the USA and their enemy, the USSR, had almost no trade. Currently, export controls are more problematic, as the economies and financial sectors of China and America, for example, are extremely entangled. In the near future, substantial “de-coupling” of these two economies is thus difficult to envisage.
In brief, a country heckling and harassing its rival constitutes an easy way to win votes and please the national consensus. It may, however, constitute a self-fulfilling prophecy by contributing to spark a cataclysmic USA-China war, through forcing China into a corner and humiliating her.
If they cannot display the remarkable wisdom of the post WWII Franco-German reconciliation, China and the USA could, at least, refrain from throwing oil in the fire, encouraging pointless tension, which may end in a global cataclysm. They should attempt maintaining a modicum of mutual respect, while competing fiercely in the world markets. Engaging with China, while being firm and respectful, should be the position of Europe. A rival does not have to be an enemy: even the world of international trade should innovate.
References
1 Created in China-how China is becoming a global innovator, Georges Haour & Max von Zedtwitz (Bloomsbury, London)
2 La Guerre des Métaux Rares, Guillaume Pitron (Les liens qui libèrent, 2025)
3 Chip war, Chris Miller (Simon & Schuster, 2022)
3 Backfire, Agathe Demarais (Columbia University
Press, 2022)
GH/January 2026
Comments