A striking element of the current European Commission is its emphasis on supporting individual technologies, sectors and “ecosystems”.
On one level, this is a definitive departure from the historical caution about a more interventionist industrial strategy, and the associated risks of picking winners (or losers) with public funds. However, it is also an interesting recognition of businesses’ role in meeting the EU’s new targets: to deliver decarbonisation, to ensure that digitisation is inclusive rather than exclusive, and to improve public health. In these items, our experts look at the ways that sectoral interests are informing trade policy and the priorities for transatlantic co-operation, as well as the development of regulator tools for online payments and the sharing of health data.
From efficiency to “resilience”: is a paradigm shift underway in the EU’s trade policy?
EU policymakers are looking differently at global value chains, which have historically been assessed through the prism of seeking efficiency. The past three decades have witnessed an ever-growing push to embed European domestic production into global value chains, partly to boost profitability and productivity and partly to give European companies a stake in fast growing, export-oriented economies. However, the covid-19 crisis revived the debate around the ability of longer and more segmented value chains to absorb and adapt to external shocks. This concern has coincided with a broader political push to promise protection, and a level playing field for firms and workers exposed to international competition.
The policy consequences are potentially enormous, with two broad camps emerging in the EU. Two key policy documents – the EU’s trade policy review and the update to the industrial strategy – both helpfully capture the divides on what post-covid trade policy will look like. One camp argues that the EU should provide a framework built around diversification and flexibility, through the establishment of strategic partnerships and the deepening of the network of trade agreements and international standard-setting. Another camp argues more radical solutions are needed to exert greater public control over critical supply chains. Here, the focus is entirely on reshoring supply chains within Europe and building domestic and regional capacity in ‘strategic’ ecosystems through public support and regulatory efforts.
A definitive victory for one side or the other is unlikely, but individual strategies for sensitive sectors in 2021 will reveal whether Europe is heading in a liberalising or protectionist direction. As part of implementing its industrial strategy, the commission is assessing the EU’s capacities and external dependencies in sectors deemed important for the digital and green transitions: semiconductors, batteries, and critical raw materials. The toolkit that is developed and used in these areas will include a mixture of unilateral action and initiatives negotiated with third countries, with the latter cautiously trailed in the recent EU-US summit.
A new era in transatlantic tech relations
After a decade of tensions on digital policy, the EU and US have signalled an ambition for a new era in transatlantic tech relations. Both at the G7 summit and during President Biden’s visit to Brussels, the mood music from the EU and the US was one of opportunity and partnership after the turbulent years of the Trump administration. High amongst the policy priorities is technology and digital regulation. This newfound momentum reflects not only concern about competition with China, but also the fact that European and American domestic regulatory agendas on tech are closer than for some time. While the EU has a well-established agenda of regulating data practices and dominance issues related to tech platforms, the Biden administration has recently made moves in this direction, exemplified by the appointment of Lina Khan as Chair of the FTC. The initial G7 agreement on corporate taxation is a significant, early policy success in this renewed transatlantic digital cooperation.
The EU-US Trade and Technology Council (TTC) is, however, unlikely to shape the EU’s digital legislative agenda, particularly for consumer software markets. Both the EU and the US will be anxious that the TTC avoids the fate of the Transatlantic Economic Council, which was launched in 2007 but which quickly lost momentum and was replaced by the equally ill-fated Transatlantic Trade and Investment Partnership negotiations. The TTC has a varied mandate ranging from cooperation on standard-setting, strengthening cooperation on supply chains, and encouraging regulatory cooperation and even “convergence”. It is the latter where progress will be most difficult. This is largely for practical reasons and that of timing. In areas identified by the EU and US, such as AI, the EU has already moved forward with its own regulation of the use of AI, limiting the scope for a common regulatory approach, let alone convergence. Likewise, common approaches on “data governance” will be constrained by the lack of a federal data protection law in the EU, standing in stark contrast to the importance attached to the General Data Protection Regulation (GDPR) in the UK.
The TTC’s impact is likely to be most significant in digital industrial policy where the application of the “high-risk vendor” concept could shape markets. Both parties are acutely aware of the growing influence of China in global standard setting organisations, such as the International Telecommunication Union (ITU), and are looking to use the TTC to ensure western countries are coordinated in applying a counter-weight on standards for emerging technologies. A key aspect will be the extent to which the EU and US look to widen the concept of “high-risk” vendors. The introduction of the “high-risk vendor” concept, whereby the geographical origins of a 5G supplier is considered as part of its security suitability, has de facto excluded Huawei and ZTE from many European 5G markets. Other technology sub-sectors where similar security arguments arise include smart transportation, drones, autonomous vehicles and industrial IoT applications and platforms. Should the TTC push in this direction, as is the logic of the TTC’s focus on common western standards, it could materially shape the supply chains and market structure in these sectors and push further towards separate digital regulatory spheres of influence between China and the west.
Senior Practice Lead, TMT
Examining the overall approach and intention of the European Health Data Space
Covid-19 has prompted governments worldwide to rethink how to manage healthcare systems in the future. This has included a raft of proposals for the better use of data to help prepare authorities for the next international health crisis. During covid-19, data has been used to assist stretched hospitals and clinicians to shift services online to manage increased demand and reduce infection risks while also providing the basis to monitor and respond to the spread of the virus. Alongside this, the commission has announced the European Health Data Space initiative, highlighting a need for member states to work more closely together on improving the quality, governance and interoperability of health data. The initiative is part of a broader data sharing strategy, which was published last year as “the Data Governance Act”. Although several health data sharing initiatives exist across Europe, challenges remain. Data quality processes and skill levels can vary substantially between member states, while investment in data infrastructure is also inconsistent. Consideration also needs to be made of the potential clash of competencies, with member states remaining firmly in control of day-to-day health policy. Data integration across the EU is arguably more advanced when it comes to life sciences research but the urgent focus for policymakers will be on the operational environment; how to deal with the current and future pandemics in terms of efficient allocation of resources.
Data protection remains the cornerstone of policy. One of the main challenges for integrating data is how to maintain privacy and security. This stems from devising a robust information governance framework, with data sharing currently managed through a complex framework of EU and national regulation. This constrains what actions the EU can take to integrate health data resources. Some of the potential solutions include the introduction of a pan-European code of conduct, EU-level legislation, or a range of non-legislative measures, some of which would take longer than others to implement and would likely need to navigate a complex stakeholder environment. A substantial citizens rights lobby in Brussels has, for example, affected the trajectory of regulation. A particular issue that could create friction is the way in which patients can or should give their consent to a wider use of their health data. A key area of concern here is over pseudonymisation and whether as a technique it sufficiently safeguards the public from having their sensitive data re-identified by third parties. Currently, there are large discrepancies in how this is governed at nation state level, with pseudonymisation a common requirement but with varying and often incompatible approaches. This means that if the EU seeks to legislate or create a code of conduct that unifies approaches in member states, it could create substantial delays in the ultimate implementation of data strategy initiatives.
Regulatory Framework on AI. Artificial Intelligence will need to be at the heart of the European Health Data Space in order to support the growing use of such technology in the healthcare sector. Some stakeholders feel that this will require institutions to act quicker to keep up with the pace of change in AI and provide necessary updates to legislation or guidance at more regular intervals. Following GDPR, the EU has been a global leader in setting a robust regulatory framework on data usage. This has, however, been cited by some as an inhibitor for technology innovation, particularly for AI driven digital health interventions as they depend on substantial availability of data. As it stands, the legislative framework has also been described by investors and innovators as unclear, particularly with regard to healthcare. Industry groups have requested that policymakers provide firmer definitions of what constitutes Primary data collection and Secondary data usage. AI also requires data sets to be of a uniform quality, and with data currently being collected in member states with a variety of approaches to information governance and data quality, coordinated action would be required to improve the value of data sets. The EU will need to devise a nimbler, more pro-innovation regulatory framework to realise the opportunities in AI healthcare, or risk losing out to competitors such as the US, Singapore and South Korea.
Anticipating changes in consumer payments
The pandemic has rapidly increased the use of digital payments, raising the stakes for the EU’s retail payment strategy. Across the euro zone, e-commerce sales have doubled over the past six years and increased by one-third during the lockdown. This rapid rise has challenged retailers and businesses to keep up with consumer trends, but also puts central banks and policymakers under pressure to ensure consumers are not denied vital services through a lack of skills, infrastructure or money. The forthcoming retail payment strategy was already set to review contentious issues such as customer authentication and the data sharing obligations of the payment services directive. However, increased reliance on digital services now points to a more holistic consideration of how this market operates; who is providing these services, and who owns or controls critical payment services infrastructure.
The European Commission and European Central Bank are increasingly pursuing a more principled review of how payments firms operate and are regulated. Supervisors have historically focused on operational oversight, but at the root of the retail payment strategy is also a political objective, often characterised as “same business, same risks, same requirements”. Since the launch last Autumn, the commission, council and supervisory authorities have continued to promise more consistent requirements and approaches to all payment services providers. This highlights a tension familiar from other elements of the EU’s digital agenda. On the one hand, the EU is keen to encourage the investment and roll-out of innovative fintech firms, which requires some risk-taking. On the other hand principles-based regulatory thinking affects a much broader range of political objectives where risk appetite is generally very low: the regulation of crypto assets, economic crime and cyber security. Commissioner McGuinness’ recently announced intention to expand the application of current anti money laundering provisions to all crypto assets is just one example of this potential tension.
The desire for control and oversight may yet overshadow short-term consumer interests, and is therefore increasingly highlighted by those promoting particular technological innovations. There is a strong desire from both the ECB and the commission to ensure the EU’s retains control over who provides this critical national infrastructure, in one of the clearest and most practical examples of the EU’s new doctrine of “open strategic autonomy”. Concerns continue to grow about the market dominance of US card schemes and the entry of non-EU big tech in the payment’s market. Eurozone politicians, and some in the ECB, have supported industry calls for implementation of the EU’s instant payments system and completion of the European Payments Initiative (EPI), strengthening the case for cross-border European alternatives to existing global providers. The EPI seeks to replace national schemes for card, online and mobile payments with a unified card and digital wallet that can be used across Europe. There is even a desire to pursue legislation if necessary to make instant payments the new normal within the EU. Traditional payment providers, fintech firms and tech companies behind these changes will therefore all face political opportunities and risks over the coming years, even as they fight for market share in a rapidly changing market.
Senior Practice Lead, Financial Services