China has become a new benchmark for measuring the R&D performance of the European economy, and the comparison is not flattering to Europe. In July, the European Commission issued a report pointing out that China's R&D investment is growing much faster than Europe's, a trend described by Janez Potocnik, the EU Commissioner for Science and Research, as "particularly worrying".
If current trends continue, China's share of GDP spent on R&D will exceed that of the EU by 2010. In 2003, the EU spent 1.93% of GDP on R&D, compared to 1.31% in China. But China's share of R&D spending as a percentage of GDP has grown 10% annually between 1997 and 2002, whereas the EU's has been growing at 0.7% in recent years. The EU has set a target of increasing R&D spending to 3% of GDP by 2010, but at current growth rates, it will reach only 2.2%, poised to be overtaken by China by the decade's end.
The debate in Europe on China's rapid advance in R&D and technology is different from that in the US, where the discussion assumes an American technological supremacy over the rest of the world, an integral part of its superpower status along with its military and economic dominance. A threat to US technological leadership is thus a threat to its superpower status. In Europe, which has no direct strategic interest in Asia, and no focus on maintaining a technological/military lead, security is not really part of the debate. On the contrary, despite Europe's undoubted technological achievements, the main point of Commissioner Potocnik is to highlight how poorly the EU performs in this area.
In a race with China
The dispute over textiles earlier this year brought to public attention the fact that cheap goods from China apparently represented a direct threat to certain sectors of European industry, generally those at the low end of the technological scale with little competitive advantage. The R&D question throws the focus on another area: the belief that China represents a challenge in economic sectors where the EU should have considerable competitive advantage.
Those with an optimistic view argue that the best way for Europe to counter the challenge of China is not to erect protectionist barriers for sectors like textiles, but to concentrate on those sectors where Europe has an advantage. The EU Trade Commissioner Peter Mandelson has argued that Europe should be engaged in a race to the top by focusing on technology. Others argue that this is a flawed model, since China is already moving rapidly up the ladder to more sophisticated technology, and that this is where the real long-term threat from China will come.
The International Trade Committee of the European Parliament recently adopted a report on EU-China trade that attacked the policy of the European Commission in just these terms, and demanded the EU reexamine its commitment to free trade. According to the report's author, Caroline Lucas, a Green MEP, "Those who believe that Chinese competition presents no threat to Europe, since we can give up what's left of our older manufacturing base and concentrate instead on knowledge-intensive industries, appear to be in denial."
The views of the European Parliament are not necessarily significant – it is not the US Congress – but such opinions do represent the current thinking in Brussels.
Whether or not China's move up the value-added chain will be successful remains to be seen. But the rapidity of its advances does provide an invidious comparison for many EU member states. There are enormous variations across Europe in R&D spending. Two of the most successful economies, Sweden and Finland, spend more than 3% of their GDP on R&D, suggesting that with the right policies, Europe can overcome the challenges it faces.
China is increasingly being internalized as part of the policy debate in the EU. As Europe faces its internal economic failings and external challenges, China, and also India, are coming to symbolize the challenges of globalization that are forcing the EU to reflect on its own policies. In R&D, as in other spheres, realization that there is problem is one thing, doing something effective about it is another.
Europe has no influence over China's R&D policies, nor can it even stop European companies from investing in R&D in China, as an increasing number are doing. The Lisbon Agenda was a policy program launched in 2000 intended to make the EU the world's most competitive economy by 2010. Progress has been slow, and nobody today believes the goal is attainable. The agenda has now been refocused on employment and growth, but, as the discussion of R&D demonstrates, the same challenges remain.
At the recent informal EU summit hosted by Tony Blair at Hampton Court, the focus was on the challenges of globalization, especially from China and India, and the need to respond. But the response is entwined with matters such as the divisive EU budget and internal economic reform. A successful response to the challenge of China's increasing technological capacity will require EU leaders to settle their own policy differences first.
Duncan Freeman, writer and consultant in Brussels, specializes in China business.