Free market has become geopolitical, and Europe is falling behind

The Council warns that innovation policy alone will not lift Europe out of its vulnerable position. Without a response to unfair trade, fragmented investment and dependence on foreign technology, billions spent on industrial policy may yield little.

Economic interdependence was long considered the foundation of European prosperity. Countries that trade intensively with one another, the reasoning went, have little interest in conflict. But according to the Netherlands Scientific Council for Government Policy (WRR), that logic no longer holds. Trade, technology and investment have themselves become instruments of power.

In its report Strategic Action: Policy for a Geopolitical Economy, the WRR sets out this new reality in stark terms. Europe is heavily dependent on the United States and China for critical technology, energy and raw materials. The reverse is true to a much lesser extent. As a result, the Council warns, Europe risks becoming “a pawn” in the geopolitical struggle between the two superpowers.

The Netherlands is already experiencing this. Export restrictions on ASML’s chipmaking machines, the political battle surrounding chip manufacturer Nexperia and concerns about US access to European cloud data demonstrate that technology policy can no longer be separated from foreign policy. The question is no longer simply who makes the best product, but also who can control access to it.

The innovation race is about more than competition between companies

The technological race is often portrayed as a contest between businesses. In reality, entire innovation systems are competing. The United States and China combine public investment, long-term objectives, infrastructure, markets and a strategic approach to foreign companies.

Europe has excellent research institutions and several indispensable players. ASML is the best-known example. The company constitutes what is known as a choke point: an almost irreplaceable link in the global semiconductor supply chain. But such strong positions conceal a structural European problem. New technologies have much greater difficulty reaching the market here and are less often deployed at scale.

“Europe is falling behind in the application and scaling of technological innovations,” the WRR concludes. It is a familiar diagnosis. European startups are developing new battery technologies, quantum applications, AI systems and sustainable production methods, but often seek US capital to finance their growth or move activities to markets where funding and customers are more readily available.

The WRR therefore calls for a coherent innovation system spanning the entire journey from fundamental research to market introduction. Within this system, governments should provide direction without simply shielding established companies from competition. The Council proposes a model combining “direction and competition”: setting ambitious objectives, allowing several companies to compete and providing continued funding only to successful projects.

This also requires predictable policy. Innovation projects often run for ten or twenty years, while political priorities change every few years. European and Dutch funding programmes are also frequently defined in broad terms. Governments invite innovative proposals but offer limited guidance on which technological capabilities Europe should actually possess ten years from now.

Innovation funding alone is not enough

The most provocative part of the report is its warning that industrial policy is insufficient on its own. Europe can invest billions in its own factories and technologies, but European industry will remain vulnerable if foreign competitors can produce at structurally lower costs because of extensive subsidies, low wages or currency policies.

According to figures cited by the WRR, Chinese companies receive between three and eight times as much government support as companies in OECD countries. In some markets, Chinese products are said to be more than 30% cheaper than comparable European products. China’s export surplus is therefore not solely the result of higher productivity or better innovation.

Industrial policy without trade policy could consequently become extremely expensive. European governments would subsidise development and production, only for the market to be flooded subsequently with cheaper imports. The WRR therefore summarises its central message as a dual task: address both distorted trade and Europe’s technological disadvantage.

Doing so could lead to higher prices, retaliatory measures and trade conflicts. But inaction also carries a price. Once production capacity has disappeared, it is difficult to restore in technologies requiring large amounts of capital and specialist knowledge. Moreover, dependence can be used at a critical moment to force political concessions.

Government as the first customer

One of the report’s most concrete recommendations concerns the purchasing power of governments. Public procurement accounts for approximately 14% of the European Union’s gross domestic product. By pooling that demand, governments could create a market for European technology.

Cloud services provide a clear example. Municipalities, provinces, national governments and European institutions currently procure digital services separately. This fragmentation benefits large US providers. Joint procurement could give European alternatives the scale they need.

According to the WRR, the Netherlands could also take the initiative in European cooperation on a DARPA-style innovation agency, strategic technology supply chains and energy infrastructure. If agreement among all EU member states proves impossible, smaller coalitions of frontrunners could make a start.

The report thereby exposes an uncomfortable political choice. European countries want to retain their national powers, while the EU lacks the budget and authority required for a fully fledged industrial policy. The result is a stalemate. Paradoxically, clinging to national autonomy could cause Europe collectively to lose more autonomy to China and the United States.

The WRR does not advocate economic isolationism, nor does it present a simple roadmap. Its message is more fundamental: the world on which Dutch trade and innovation policy was based no longer exists. Those who continue to view free trade, competition and government intervention through the lens of recent decades are responding to a reality that has already disappeared.

Source: Netherlands Scientific Council for Government Policy (2026), Strategic Action: Policy for a Geopolitical Economy, WRR Report 115, The Hague.