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THE C OMPLEX GEOPOLITICS OF DIGITAL R EGULATION : THE T HREE B ODY P ROBLEM Jorge Padilla and Vanessa Yanhua Zhang* May 2025 A BSTRACT. This paper explores the complex geopolitics of digital regula- tion by analyzing how divergent regulatory models in major jurisdictions – namely the European Union, the United States, China, the United King- dom, and others – are reshaping global economic governance and digital trade. The paper examines how digital regulation increasingly functions as a Behind-the-border Trade Barrier (BTB), complicating cross-border data flows, market access, and competition. Special attention is given to the EU’s Digital Markets Act (DMA) and its extraterritorial reach through the so-called “Brussels Effect”, which has generated significant friction with the US and raised questions about digital sovereignty and regulatory he- gemony. The analysis is situated within the broader context of the US– China technology rivalry, showing how regulatory asymmetries dispropor- tionately affect firms from these two countries while offering middle pow- ers, like the EU, leverage through norm-setting. Finally, the paper explores the potential escalation of regulatory disputes into trade conflicts, discuss- ing the limits of existing trade agreements and the increasing use of retali- atory tariffs. The study concludes that digital regulation is becoming a critical vector of geopolitical competition, with far-reaching implications for international economic law and global digital governance. K EYWORDS: Antitrust, Digitization, Geopolitics, Regulation, Rent-Seek- ing, Tariffs, Technology, and Trade. JEL N OS: D72, F51, L51, L52, K2,1 and K23. ∗ Jorge Padilla (D.Phil. (Oxon)) is Senior Managing Director at the economic consultancy Compass Lexecon and Senior Fellow of the GW Innovation and Com- petition Lab, George Washington University, and CEMFI in Madrid. Vanessa Yanhua Zhang (Ph.D. (TSE)) is Executive Vice President at Compass Lexecon and Senior Research Fellow at the Market & Regulation Law Center (MRLC) of Renmin University. -- 1 of 41 -- 1 T ABLE OF C ONTENTS I. INTRODUCTION .................................................................................. 2 II. A N O VERVIEW OF E XISTING R EGULATORY A PPROACHES ............... 5 II.A. The EU Ex-Ante Approach: the DMA ...................................... 5 II.B. The US Ex-Post Approach ........................................................ 6 II.C. The Chinese Integrated Approach............................................ 8 II.D. The UK Case by Case Approach: the DMCC .......................... 9 II.E. Other Countries: Ex-Ante v Ex-Post Approaches .................. 10 III. D IGITAL R EGULATION AND T RADE .............................................. 11 IV. T HE G EOPOLITICS OF D IGITAL R EGULATION ............................... 13 IV.A. The Brussels Effect ................................................................ 14 IV.B. The Transatlantic Controversy .............................................. 15 IV.C. The US-China Technology Race ........................................... 17 IV.D. Implications of the DMA for the US-China Technology Race ......................................................................................... 21 V. F ROM R EGULATORY D ISPUTES TO T RADE WARS .......................... 22 V.A. The Limits of Trade Agreements ............................................. 23 V.B. Retaliatory Tariffs................................................................... 25 V.C. The Interplay between BTBs and Retaliatory Tariffs ............. 26 VI. T HE EFFECT OF T RADE WARS IN T ECHNOLOGY R ACES ............... 27 VI.A. Economic Effects of Trade Wars ........................................... 28 VI.B. Winners and Losers ............................................................... 28 VI.C. Worldwide Implications of US-China Decoupling ................ 29 VI.D. Risks for the Narrow Corridor of Growth............................. 33 VII. T HE T HREE B ODY P ROBLEM ....................................................... 37 VIII. C ONCLUDING R EMARKS ............................................................ 39 -- 2 of 41 -- 2 I. INTRODUCTION All countries – developed or developing – stand to benefit mas- sively from the digitization of their economies. Digital platforms acting as intermediaries between business users (suppliers, advertisers, con- tent providers, etc.) and domestic users (consumers, viewers, etc.) play a key role in pushing economies, both in developed and developing countries, towards digitization. That is especially true for large digital platforms, whether global players – such as Alphabet, Amazon, Apple, Meta, Microsoft, and Bytedance – or regional, sub-regional, and na- tional champions – like Yandex in Russia, Alibaba, Tencent, JD and Meituan in China, or Mercado Libre in South America. Yet, the digitization process may be delayed and its benefits may be limited because the economic characteristics of the markets in which those platforms operate are such that, when taken in combination, may lead to an accumulation of market power among a few platforms, often only one. These features include: (a) the importance of collecting user data as an input to improving product quality and possibly as a barrier to entry; (b) the existence of economies of scale and scope; (c) the avail- ability of zero-price products and services; (d) the existence of network effects creating competition for the market rather than in the market; (e) the multi-sided nature of these markets; (f) the low marginal costs of many platforms; etc. Due to these features, these markets may exhibit limited contesta- bility:1 once a platform has achieved a prominent position in a digital market, it may be difficult for new entrants to displace it. Furthermore, platforms may leverage their power to monopolize the markets where their business users operate; or may develop strategies, including ac- quiring potential or emerging rivals, to entrench their dominance and control the accessibility and contestability of the markets within which they themselves operate. Finally, by their very nature, large platforms enjoy an unequal position vis-à-vis their domestic users and business users, whose business operations may be wholly, or in part, dependent on access to the platform provider’s services. Platforms’ domestic users and business users thus risk being treated unfairly or discriminatorily. Governments, legislatures, and competition authorities in devel- oped and developing nations have become concerned with the power of large digital platforms. Some have developed new regulatory tools to discipline their market power. Australia, the European Union (EU), France, Germany, China, South Korea, Japan, and the United Kingdom 1 This is not a foregone conclusion, however. See Padilla, J., Gins- burg, D.H. and Wong-Ervin, K. 2025. “Dynamic Competition and Anti- trust: Quick-Look Inferences from the Analysis of Big Tech’s R&D Expenditure Ratios”, forthcoming in the Antitrust Law Journal. -- 3 of 41 -- 3 (UK) have implemented novel regimes to regulate digital platforms. Similar initiatives are being considered or implemented in various other countries (such as Brazil, India, Mexico, South Africa, Thailand, and Turkey, to name a few). This has led to many different interventions across many jurisdictions and will produce a vast web of rules and reg- ulations aimed at conditioning the conduct of such large digital plat- forms in many countries. One of such novel regulatory instruments is the EU’s Digital Mar- kets Act (DMA).2 The DMA is purported to address the limitations of traditional competition law in the digital context and, as such, it repre- sents a significant shift in the European Union’s approach to regulating digital platforms, aiming to ensure fair and contestable markets. The DMA represents a bold initiative by the EU to assert regulatory author- ity over digital markets and address concerns about platform domi- nance. However, its implications for international trade have sparked sig- nificant controversy, particularly within the United States (US). The controversy over the DMA underscores the challenges of regulating the digital economy in a manner that balances domestic policy objectives with international trade commitments. As countries seek to assert greater control over digital markets, the risk of regulatory fragmenta- tion and trade disputes increases. The EU’s approach, while aimed at promoting competition and consumer protection, may inadvertently create barriers to trade and provoke retaliatory measures, thereby un- dermining the principles of open and fair international commerce. Balancing the DMA’s objectives with the principles of open and fair trade requires careful navigation, emphasizing the need for dia- logue and cooperation among global stakeholders. As digital markets continue to evolve, establishing harmonized and inclusive regulatory frameworks will be essential to ensure that competition and innovation thrive in a globally interconnected economy. Engaging in constructive discussions to address mutual concerns and align regulatory approaches could help prevent further escalation and promote a more harmonized framework for digital market governance. Such collaboration would not only benefit international relations, but also contribute to the devel- opment of global standards that support innovation, competition, and consumer welfare in the digital age. The remainder of this paper is structured as follows. 2 Regulation (EU) 2022/1925 of the European Parliament and of the Council of 14 September 2022 on contestable and fair markets in the digital sector and amending Directives (EU) 2019/1937 and (EU) 2020/1828 (Digital Markets Act), published in the Official Journal of the European Union as OJ L 265, 21 September 2022, pages 1–66. -- 4 of 41 -- 4 In Section II, we offer an overview of existing regulatory ap- proaches across key jurisdictions. It begins with the EU’s ex-ante framework under the DMA, then contrasts this with the US’s ex-post antitrust tradition, followed by an examination of China’s integrated and state-driven model, the UK’s emerging case-by-case method under the Digital Markets Competition and Consumers (DMCC) Act,3 and a survey of other national approaches that reflect a broader divide be- tween ex-ante and ex-post regimes. In Section III, we analyze the intersection between digital regula- tion and international trade, introducing the concept of Behind-the-bor- der Trade Barriers (BTBs), and exploring how digital rules can function as BTBs that distort market access and competition. In Section IV, we turn to the global regulatory contest, examining how the EU seeks to export its standards through the “Brussels Effect”, and how this ambition has fueled transatlantic tensions, particularly re- garding the DMA. We then focus on the broader economic implications of the global regulatory contest, situating the debate about competing digital regulations in the context of the US–China technological rivalry, and discussing, in particular, how the asymmetric impact of the DMA may disproportionately affect US and Chinese tech firms. In Section V, we explore how global regulatory disputes may es- calate into full-blown trade conflicts, analyzing the limitations of exist- ing trade agreements, the potential use of retaliatory tariffs, and the feedback loop between BTBs and such retaliatory measures, thus clos- ing the argument that digital regulation is increasingly a flashpoint of geopolitical contestation. In Section VI, we evaluate the economy-wide implications of trade wars in the technological domain, emphasizing that while strategic gains are possible, economic and institutional costs typically prevail. We consider the distributional effects of such economic confrontations across firms and nations, the global repercussions of technological de- coupling, and the associated risks to sustained growth and institutional balance; particularly the danger of many countries drifting from the narrow corridor of liberty and growth. In Section VII, we present the EU’s strategic dilemma amid inten- sifying geopolitical and technological rivalries between the US and China, where regulatory coexistence becomes unsustainable. While the EU aspires to maintain regulatory autonomy and avoid binary align- ment, its technological dependency weakens its influence and risks rel- egating it to a rule-taker role. As China and the US assert divergent economic governance models and seek global technological leadership, 3 Digital Markets, Competition and Consumers Act 2024 (c. 13), enacted by the Parliament of the United Kingdom and received Royal As- sent on 24 May 2024. -- 5 of 41 -- 5 the EU faces mounting pressure to define its strategic position. If forced to align with a dominant sphere, the EU may have to compromise, threatening its long-standing commitment to multilateralism, demo- cratic legitimacy, and autonomous rule-making in global affairs. Finally, in Section VIII, we offer some concluding remarks. II. AN OVERVIEW OF EXISTING R EGULATORY APPROACHES In her seminal book, Digital Empires: The Global Battle to Regu- late Technology,4 Anu Bradford (2023) offers a profound analysis of the geopolitical contest to shape the global digital order. Bradford dis- sects how three “digital empires” – China, the EU, and the US – ad- vance distinct regulatory models, each reflecting their unique political ideologies and societal values. These empires compete as normative actors, seeking to export their digital governance models. Regulatory interventions are minimal in the US, with a focus on antitrust enforcement rather than proactive regulation. The EU model instead prioritizes individual rights, data protection, contestability, and market fairness. Legislation, such as the General Data Protection Reg- ulation (GDPR) 5 and the DMA exemplify this approach. Finally, China’s model is characterized by centralized enforcement, integration with broader policies and dynamic adjustments. China’s digital govern- ance is increasingly influential, particularly among developing coun- tries seeking to emulate its unique model. We discuss these three models and a few others in this section. II.A. The EU Ex-Ante Approach: the DMA The DMA establishes a set of obligations for designated “gatekeep- ers”, defined as large online platforms serving as intermediaries be- tween businesses and consumers with a significant impact on the internal market. Several companies have been identified as gatekeep- ers, including Alphabet, Amazon, Apple, Booking, ByteDance, Meta, and Microsoft, based on criteria such as annual turnover and user base within the EU. With the exception of Booking and ByteDance, all other gatekeepers are US companies. 4 Bradford, A. 2023. Digital Empires: The Global Battle to Reg- ulate Technology. Oxford University Press. 5 Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (General Data Protection Regulation). Official Journal: OJ L 119, 4.5.2016, pp. 1–88. -- 6 of 41 -- 6 Gatekeepers are required to, among other things, allow third parties to interoperate with their services, provide access to data generated by business users, and ensure transparency in advertising. Gatekeepers are also prohibited from practices, such as self-preferencing, restricting us- ers from uninstalling pre-installed software, and combining personal data from different services without user consent. Implementing the DMA poses several challenges, including defin- ing the scope of obligations, ensuring proportionality, and coordinating with existing legal frameworks. Continuous dialogue between regula- tors, stakeholders, and scholars is essential to address these challenges effectively. The European Commission (EC) is responsible for enforc- ing the DMA. Non-compliance can result in fines of up to 10% of a company’s total worldwide annual turnover, and up to 20% for repeated infringements. In severe cases, structural remedies, including divesti- tures, may be imposed. II.B. The US Ex-Post Approach Unlike the EU’s ex-ante approach to regulating digital platforms, the US approach primarily relies on ex-post antitrust enforcement. This strategy emphasizes addressing anti-competitive behaviours after they occur, focusing on maintaining market competition and consumer wel- fare. Key agencies involved include the Department of Justice (DOJ) and the Federal Trade Commission (FTC), which have initiated signif- icant legal actions against major tech companies. The DOJ has pursued multiple antitrust cases against Google. In 2024, a federal court ruled that Google illegally maintained a monopoly in the search engine market, primarily through exclusive agreements that made its search engine the default on various devices. Also in 2024, the DOJ filed a lawsuit against Apple, alleging that the company main- tained an illegal monopoly in the smartphone market. The suit focuses on practices such as restricting third-party app stores and limiting in- teroperability, which allegedly stifle competition and consumer choice. In 2025, the DOJ secured a victory in a case alleging that Google mo- nopolized digital advertising markets, harming publishers and advertis- ers. Remedies under consideration include divesting parts of its ad tech business. The FTC on its part has challenged Meta’s dominance in the social networking space. The FTC argues that these acquisitions were strategic moves to neutralize competition, consolidating Meta’s market power. The agency seeks to unwind these deals to restore competitive balance. While the US continues to navigate the complexities of regulating digital platforms through antitrust enforcement, debates persist about its efficacy in addressing the unique challenges of digital markets. Leg- islative efforts aiming to bolster enforcement capabilities include the -- 7 of 41 -- 7 proposed American Innovation and Choice Online Act (AICOA),6 and the Advertising Middlemen Endangering Rigorous Internet Competi- tion Accountability (AMERICA) Act.7 Introduced in 2021, AICOA aims to prevent dominant platforms from favouring their own products over competitors’. Key provisions include prohibiting self-preferencing in search results and app stores; restricting the use of non-public data from business users to advantage the platform’s own products; preventing actions that impede interoper- ability or limit user choice. The bill targets platforms with significant market power, defined by user base and market capitalization thresh- olds. AICOA was introduced in the US Senate by Senator Amy Klobuchar (D-MN) and Senator Chuck Grassley (R-IA) during the 117th Congress. Despite bipartisan support, the bill did not pass before the end of the congressional session. It was reintroduced in Congress on June 2023, and referred to the Senate Judiciary Committee, but it has not advanced further as of now. The AMERICA Act in turn seeks to address conflicts of interest in digital advertising. It proposes forcing dominant platforms to divest parts of their advertising businesses; enhancing transparency in ad auc- tions and pricing; preventing platforms from operating multiple roles in the digital ad supply chain. This legislation responds to concerns about platforms like Google controlling both the buy and sell sides of digital advertising markets. The AMERICA Act was introduced in the Senate by Senator Mike Lee (R-UT) in March 2023. It was referred to the Senate Judiciary Committee but has not progressed further. AICOA, the AMERICA Act, and the DMA all seek to promote fair competition and address the market power of dominant digital plat- forms. They share concerns about practices like self-preferencing and the use of non-public data to disadvantage competitors. However, while the DMA establishes a comprehensive regulatory framework with pre- defined obligations for “gatekeepers”, applying ex-ante rules to prevent anti-competitive behaviors, AICOA and the AMERICA Act are more targeted, focusing on specific anti-competitive practices and applying ex-post enforcement mechanisms. Indeed, enforcement of AICOA and the AMERICA Act would fall under the purview of the FTC and DOJ, relying on existing antitrust enforcement mechanisms. 6 The American Innovation and Choice Online Act (AICOA) is a proposed US antitrust bill designed to prevent dominant online platforms from favoring their own products and services over those of competitors. It aims to promote competition and fairness in the digital marketplace. 7 The AMERICA Act is a bipartisan US antitrust proposal intro- duced in the Senate. It aims to prevent conflicts of interest and promote competition in the digital advertising market by targeting dominant players and ensuring transparency. -- 8 of 41 -- 8 II.C. The Chinese Integrated Approach China has implemented a multifaceted regulatory framework to oversee and regulate digital platforms, reflecting its unique political and economic context. This framework encompasses antitrust enforce- ment, data governance, labour protections, and broader economic poli- cies aimed at ensuring the healthy development of the platform economy.8 The State Administration for Market Regulation (SAMR) serves as China’s primary antitrust authority, overseeing market competition and enforcing regulations against monopolistic practices. In 2021, SAMR imposed a record $2.75 billion fine on Alibaba for abusing its market dominance by forcing merchants into exclusivity agreements.9 This ac- tion marked a significant escalation in China’s efforts to regulate its tech giants. Also in 2021 SAMR released guidelines addressing anti-competi- tive behaviors specific to digital platforms, such as self-preferencing and predatory pricing.10 Major platforms, like Alibaba and Meituan, underwent multi-year “rectification” periods to align their operations with regulatory expectations. SAMR continues to monitor and guide platform companies to ensure compliance and fair competition in the digital market. While some China’s regulatory measures share the same goal as the DMA in addressing the dominance of digital platforms, China’s ap- proach is characterized by (a) centralized enforcement (regulatory ac- tions are often driven by top-down directives from central authorities); (b) integration with broader policies (regulations are closely tied to na- tional strategies, such as “common prosperity” and technological self- reliance); and (c) dynamic adjustments (policies are frequently updated to respond to emerging challenges and align with economic objectives). 8 Huang, Y., Yin, N., Zhang, V.Y., and Zhao, S. (2023). “The Im- pact of Antitrust Regulations on Firm Market Value-Evidence from Chi- nese and US Internet Platforms”, forthcoming at Review of Industrial Organization. 9 SAMR, “State Administration of Market Regulation Issues Deci- sion on Administrative Penalty and Administrative Guidance for Alibaba Group Holding Limited Monopolistic Conduct in The Online Retail Plat- form Services Market in China,” April 10, 2021, https://www.samr.gov.cn/zt/qhfldzf/art/2021/art_74b2593fd32a432baf3d cbd163935167.html. 10 SAMR, “Anti-Monopoly Guidelines of the Anti-Monopoly Com- mittee of the State Council on the Platform Economy” (State Anti-monop- oly Development [2021] No. 1), February 7, 2021, https://www.gov.cn/xinwen/2021-02/07/content_5585758.htm. -- 9 of 41 -- 9 This approach reflects China’s unique political and economic system, where regulatory frameworks both ensure healthy development of the market economy and balance state governance priorities. II.D. The UK Case by Case Approach: the DMCC Like the DMA, the UK’s Digital Markets, Competition and Con- sumers Act 2024 (DMCC Act) aims to regulate dominant digital plat- forms to foster fair competition and protect consumers. While they share similar objectives, their approaches and implementation mecha- nisms differ in several key aspects. The DMCC Act empowers the Competition and Markets Authority (CMA), specifically its Digital Markets Unit (DMU), to designate cer- tain firms as having Strategic Market Status (SMS). Firms with SMS are subject to tailored conduct requirements and pro-competitive inter- ventions to address specific competition concerns. A firm may be des- ignated with SMS if it has substantial and entrenched market power in a digital activity linked to the UK and a position of strategic signifi- cance. This includes firms with global turnover exceeding £25 billion or UK turnover over £1 billion. The CMA can impose specific obliga- tions on SMS firms to ensure fair dealing, open choices, and trust and transparency. For example, the CMA has the authority to implement structural remedies, such as requiring interoperability or data portabil- ity, to promote competition. The Act also strengthens consumer rights by banning practices like fake reviews and “drip pricing”, where man- datory fees are added late in the purchasing process. As of January 2025, the CMA has initiated investigations under the DMCC Act to assess whether companies like Google and Apple hold SMS in specific digital activities, such as search and mobile ecosys- tems. These investigations are expected to conclude within a nine- month statutory timeframe. While both the DMCC Act and the DMA aim to curb the domi- nance of large digital platforms, their methodologies differ. They share common goals, but their differing approaches reflect distinct regulatory philosophies and legal traditions. The DMA applies a uniform set of obligations to all designated gatekeepers, focusing on ex-ante regula- tion to prevent anti-competitive behavior. Instead, the DMCC Act adopts a more flexible, case-by-case approach, allowing the CMA to tailor obligations based on specific market dynamics. The DMCC Act’s flexible, tailored framework may offer advantages in addressing spe- cific market dynamics within the UK, whereas the DMA’s uniform ob- ligations provide clarity and consistency across the EU. Ongoing implementation and enforcement will reveal the efficacy and impact of each regime in the evolving digital landscape. -- 10 of 41 -- 10 II.E. Other Countries: Ex-Ante v Ex-Post Approaches Countries such as Brazil, Japan, South Korea, and Taiwan, have shown varying degrees of alignment with the EU’s regulatory policies concerning digital platforms. While some have adopted measures in- spired by the DMA (and Digital Services Act, DSA11), others have taken more cautious or divergent approaches, influenced by domestic considerations and geopolitical pressures. Brazil has shown a notable inclination towards adopting regulatory measures inspired by the EU’s digital policies. In 2022, Brazil intro- duced a draft bill establishing a digital markets regulatory regime that mirrors the EU’s DMA, targeting specific companies with significant market power. Further, in 2024, Brazil’s government proposed reforms to its competition law to better address the dominance of big tech firms, suggesting legislation that would allow antitrust authorities to identify certain digital platforms as systemically relevant and impose new obli- gations on them. These initiatives reflect Brazil’s effort to balance fos- tering competition with encouraging innovation, drawing inspiration from the EU’s regulatory framework, while tailoring it to the Brazilian context. Japan has also actively engaged in developing regulations that align with the EU’s digital platform policies. In 2024, Japan enacted the Act on Promotion of Competition for Specified Smartphone Soft- ware, also known as the Smartphone Software Competition Promotion Act (SSCPA),12 which aims to enhance third-party competition in the smartphone market. This legislation, while inspired by the EU’s DMA, has been tailored to Japan’s specific market conditions. Additionally, Japan has sought to increase transparency and fairness in its digital mar- kets through the Act on Improving Transparency and Fairness of Digi- tal Platforms (TFDPA),13 targeting online e-commerce operators and 11 The Digital Services Act (DSA) is a landmark regulation enacted by the European Union to create a safer and more transparent digital envi- ronment. Adopted on October 19, 2022, as Regulation (EU) 2022/2065, the DSA updates the EU’s legal framework for digital services. Its provi- sions became fully applicable on February 17, 2024, for most platforms, with earlier compliance required for designated Very Large Online Plat- forms (VLOPs) and Very Large Online Search Engines (VLOSEs). 12 Enacted in June 2024, the SSCPA is Japan’s legislation aimed at promoting competition in the smartphone software market. It prohibits practices that prevent alternative app stores, in-app payment systems, and browser engines, ensuring fair competition. 13 The TFDPA, effective from February 2021, is Japan’s regulation to improve transparency and fairness among specified digital platform -- 11 of 41 -- 11 app store providers. These efforts demonstrate Japan’s commitment to fostering a competitive digital environment, drawing from international best practices while considering domestic needs. South Korea initially considered implementing regulations akin to the EU’s DMA, aiming to impose ex-ante obligations on dominant dig- ital platforms. However, in 2024, the Korea Fair Trade Commission (KFTC) decided to abandon plans for a comprehensive platform regu- lation modeled after the EU’s approach. This decision was influenced by concerns over potential trade conflicts, particularly with the US, and the desire to avoid disadvantaging domestic tech firms. Instead, South Korea has pursued a self-regulatory framework, establishing a legal ba- sis for digital platforms to engage in self-regulation with government support and oversight. Taiwan has been monitoring the EU’s digital regulatory develop- ments, but has yet to implement comprehensive legislation similar to the DMA (or DSA). The Taiwanese Fair Trade Commission (TFTC) has expressed intentions to strengthen existing competition rules to ad- dress challenges posed by large digital platforms, favouring enhance- ments to current laws over the adoption of new, broad regulations. Additionally, Taiwan has proposed the Digital Intermediary Services Act (DISA),14 which emphasizes a participatory approach involving public-private collaboration to oversee platform conduct, unlike the EU’s more prescriptive regulatory model. In summary, while countries like Brazil and Japan have taken sig- nificant steps to align their digital platform regulations with EU poli- cies, adapting them to their national contexts, others like South Korea and Taiwan have opted for more cautious or alternative approaches. These decisions are influenced by a combination of domestic priorities, economic considerations, and international relations, particularly with major global players, such as China and the US. III. DIGITAL R EGULATION AND TRADE Digital regulations have extra-territorial implications for, at least, two reasons. First, because they can modify trade flows. Regulations providers. It requires designated platforms to disclose terms and conditions and undergo evaluations to ensure fair practices. 14 Proposed in June 2022, the DISA is Taiwan’s draft legislation fo- cusing on regulating platform accountability, illegal content, transparency, and the disclosure of business information and service terms to protect us- ers’ rights. The draft was released for public consultation by the National Communications Commission. -- 12 of 41 -- 12 may act as “Behind-the-border Trade Barriers” (BTBs),15 protecting domestic firms at the expense of their foreign competitors. Second, reg- ulatory models, like those described above, especially those of the three “digital empires”, compete for global dominance, influencing interna- tional norms and standards. This competition shapes the global struc- ture of the digital world and can have significant geopolitical implications. We discuss digital regulation as a BTB in this section. We then consider the global aspirations of different regulatory regimes and, in particular, of the EU approach. The liberalization of international trade since the mid-20th century has brought unprecedented gains in efficiency, innovation, and eco- nomic growth. Yet, even as average tariff rates have declined sharply across both developed and developing economies, global trade has be- come no less contentious. As the global economy has evolved, the tra- ditional levers of trade policy – tariffs, quotas, and subsidies – have been progressively supplemented and often overshadowed by BTBs. These measures – ranging from technical standards and customs proce- dures to domestic regulatory frameworks – are now among the most significant determinants of trade outcomes. BTBs are embedded in domestic regulatory environments, influ- encing trade flows not through direct cost increases “at the border”, but through the design, implementation, and enforcement of domestic laws “behind the border”. Unlike traditional tariffs or quotas, BTBs do not operate at the point of entry. Instead, they act indirectly by influencing how goods and services are produced, certified, distributed, and con- sumed within a country. BTBs are deeply political instruments whose effects are contingent on the institutional frameworks in which they are embedded. An effective trade policy must address not only cross-bor- der barriers, but also domestic regulatory coherence and political con- straints. While some BTBs are justified by legitimate policy objectives – such as consumer protection or environmental sustainability – others may serve as disguised protectionism or rent-seeking tools. In some in- stances, BTBs may prompt retaliation, as when opaque regulatory 15 Behind-the-border Trade Barriers refer to domestic regulations, standards, and policies that, while not explicitly discriminatory, can im- pede trade by increasing the cost or complexity of market entry for foreign firms. These barriers differ from at-the-border barriers, such as tariffs or quotas, because they operate within the internal regulatory framework of a country. See Baldwin, R. E. 1970. Nontariff Distortions of International Trade. Washington, DC: Brookings Institution Press; and Deardorff, A.V., and Stern, R.M. 1998. “Measurement of Non-Tariff Barriers”. OECD Eco- nomics Department Working Papers, no. 179. -- 13 of 41 -- 13 standards are perceived as de facto discrimination. In others, retaliation may take the form of new BTBs, especially where direct tariff retalia- tion is constrained by international law or economic feasibility. Several structural transformations in the global economy have con- tributed to the rise of BTBs. Firstly, the emergence of Global Value Chains (GVCs)16 and the ensuing fragmentation of production across borders means that a regulation in one country can affect the cost struc- ture of an entire international supply chain. In an influential survey,17 Paul Antràs (2020) highlights how the increasing fragmentation of pro- duction has elevated the importance of domestic institutions and be- hind-the-border conditions in shaping the geography and structure of international trade. In this view, BTBs are endogenous features of trade patterns, not exogenous constraints. Secondly, the changing composi- tion of trade: as economies become more service-oriented and reliant on digital flows, domestic rules on data privacy, financial regulation, and intellectual property become pivotal to trade. Thirdly, the rising demand for regulation: as societies become wealthier and more envi- ronmentally aware, the demand for tighter regulations grows. Data localization requirements, differential privacy regulations, and cybersecurity laws now represent some of the most salient trade frictions. These BTBs affect sectors that were previously considered borderless, demonstrating that domestic regulation continues to shape global commerce even in the digital age. IV. THE GEOPOLITICS OF DIGITAL R EGULATION As explained above, regulatory regimes compete for global domi- nance to influence international norms and standards. The goal of shap- ing the global regulatory structure of the digital world is particularly salient in the case of the EU. This is the so-called “Brussels Effect”,18 whereby EU regulations extend beyond its borders due to the bloc’s 16 Global Value Chains (GVCs) refer to the full range of activities that firms and workers perform to bring a product from its conception to end use and beyond. These activities, such as design, production, market- ing, distribution, and support, are often distributed across different coun- tries. GVCs reflect the increasing fragmentation of production across borders, with different stages of the process located in regions that offer comparative advantages in costs, skills, or technologies. See Baldwin, R.E. 2016. The Great Convergence: Information Technology and the New Globalization. Belknap Press of Harvard University Press. 17 Antràs, P. 2020. “Conceptual Aspects of Global Value Chains”. The World Bank Economic Review 34, no. 3: 551–574. 18 Bradford, A. 2020. The Brussels Effect: How the European Union Rules the World. Oxford University Press. -- 14 of 41 -- 14 market size and regulatory rigour. In this section we explain this effect and discuss the controversy surrounding the extra-territorial implica- tions of EU digital regulation – in particular the DMA. IV.A. The Brussels Effect The influence of the DMA on the regulations adopted by other countries exemplifies the Brussels Effect. The Brussels Effect, a term coined by Anu Bradford (2020), describes the EU’s capacity to unilat- erally shape global regulations through its internal market standards. This phenomenon has allowed the EU to project its regulatory prefer- ences beyond its borders, influencing global norms in areas such as data protection, environmental standards, and consumer safety. The Brussels Effect operates through two primary mechanisms: de facto and de jure. De facto influence occurs when multinational com- panies adopt EU standards globally to maintain access to the EU mar- ket, thereby extending these standards beyond EU borders. De jure influence involves other jurisdictions formally adopting EU regulations into their legal frameworks. This legislative influence reflects what Gal and Padilla (2010)19 denote as the “follower phenomenon”, according to which jurisdictions adopt regulations from other countries, often without tailoring them to local economic and institutional contexts. This emulation is often driven by factors such as (a) international pressure (countries may face pressure from international organizations or trade partners to align their antitrust laws with global standards); (b) the desire for legal harmoni- zation (adopting established rules can facilitate cross-border trade and investment by reducing legal uncertainty); and (c) the perceived legiti- macy of established rules (rules from jurisdictions like the EU or the US are often seen as tried and tested, lending them an aura of legiti- macy). This practice can lead to suboptimal enforcement and unintended consequences in the global economy. First, differences in market struc- tures, firm sizes, and levels of economic development can render im- ported rules ineffective or even harmful. Second, variations in legal traditions, enforcement capabilities, and judicial independence can im- pede the effective implementation of foreign rules. Third, societal atti- tudes towards competition and regulation can influence the reception and effectiveness of antitrust laws. To mitigate the risks associated with the follower phenomenon, Gal and Padilla recommend that jurisdictions assess their unique 19 Gal, M. S., and Padilla, J. 2010. “The Follower Phenomenon: Im- plications for the Design of Monopolization Rules in a Global Economy”. Antitrust Law Journal 76, no. 3: 899–928. -- 15 of 41 -- 15 economic, institutional, and cultural contexts before adopting foreign rules; invest in local expertise and institutions to enhance the effective- ness of antitrust enforcement; implement foreign rules gradually, with necessary modifications, to allow for better integration into the local legal framework; and engage in dialogue with other jurisdictions and international bodies to facilitate the sharing of best practices and expe- riences. The practical relevance of the Brussels Effect appears to be declin- ing. The limited adoption of the DMA approach internationally is con- sistent with this observation. This is for at least three reasons. First, EU regulations, including the DMA, face competition from alternative reg- ulatory frameworks, particularly from the US and China. As discussed above, the US adopts a more laissez-faire approach, emphasizing inno- vation and market freedom, while China employs a state-centric model to regulate and promote healthy development of digital platforms. These divergent models offer competing paradigms that are diminish- ing the EU’s unilateral regulatory influence. Second, the rapid pace of technological innovation, especially in areas like artificial intelligence (AI) and digital services, poses difficulties for the EU’s ex-ante regula- tory apparatus, which appears unlikely to be able to swiftly address emerging technologies, potentially reducing its regulatory relevance in fast-evolving sectors. Finally, the EU’s relative economic stagnation and internal political challenges, including differing Member state pri- orities and regulatory fatigue, may impact its capacity to maintain the Brussels Effect. A declining share of global GDP and the complexities of achieving consensus among diverse Member states is bound to weaken the EU’s position as a global regulatory leader. IV.B. The Transatlantic Controversy Against a background of diminished regulatory influence, the DMA, by setting stringent standards for digital platforms, effectively compels global companies to adapt their practices to comply with the EU rules, influencing regulatory approaches worldwide. This extra-ter- ritorial impact has prompted discussions about the balance between na- tional sovereignty in regulation and the need for harmonized international standards in the digital economy. In addition, to the extent other countries adopt measures inspired by the DMA, though not nec- essarily identical, the result may be a patchwork of digital regulations complicating compliance for multinational companies. Such prolifera- tion of, possibly diverse, regulatory regimes poses challenges for inter- national trade, potentially hindering the seamless flow of digital services, and creating barriers for smaller firms lacking resources to navigate diverse regulatory landscapes. -- 16 of 41 -- 16 Not surprisingly, the DMA has been met with criticism from the US, where policymakers and industry stakeholders perceive it as dis- proportionately targeting American tech giants. The perception of dis- crimination has been exacerbated by recent enforcement actions, including the substantial fines imposed on Apple and Meta for non- compliance with the DMA provisions. The affected companies have voiced strong objections to the DMA’s enforcement. Apple criticized the fines as unjustified and detrimental to user privacy and innovation, arguing that the DMA’s requirements undermine its business model. Meta similarly contended that the imposed changes to its operations resemble a tariff and harm both its services and European businesses. Both companies have indicated plans to appeal the fines and challenge the DMA’s provisions through legal avenues, potentially leading to protracted litigation and further straining EU-US relations. The US administration has expressed concerns that the DMA could act as a BTB, potentially violating World Trade Organization (WTO) commitments by discriminating against foreign companies. This raises concerns about the potential for retaliatory trade measures. Indeed, President Donald Trump has threatened to impose tariffs on countries that penalize American companies, and the current administration’s strong rhetoric suggests a willingness to implement such retaliatory ac- tions. Such measures could lead to a broader trade conflict, affecting not only the digital sector but also other areas of transatlantic com- merce. The US administration has characterized the fines recently im- posed on Apple and Meta as economic extortion, arguing that they un- fairly penalize American firms and could set a precedent for protectionist digital regulations. At the 2025 International Competition Network (ICN) Annual Conference in Edinburgh,20 FTC Chair Andrew Ferguson delivered a keynote address, where he described the DMA as a “sledgehammer” approach, lacking nuance and potentially stifling in- novation in the digital economy. He expressed concern that the EU’s regulatory impulses, particularly regarding AI, could lead to knee-jerk reactions that hinder technological advancement. In particular, Fergu- son objected to the DMA’s enforcement mechanisms, suggesting that the substantial fines imposed under the Act resemble a form of taxation on American companies. He argued that such measures would dispro- portionately affect US tech firms and advantage their Chinese counter- parts. 20 Competition in the 21st Century: Heeding The Rallying Cry for Deregulation. Prepared Remarks of Chairman Andrew N. Ferguson. U.S. Federal Trade Commission. International Competition Network Annual Conference 2025, Edinburgh, United Kingdom, May 7, 2025. -- 17 of 41 -- 17 In response, the EU has maintained that the DMA applies equally to all companies operating within its market, regardless of origin. At the same ICN Annual Conference,21 European Commission Executive Vice-President Teresa Ribera addressed Ferguson’s criticisms of the DMA emphasizing that the DMA is not designed to target specific countries or companies. Instead, she asserted that the legislation aims to protect users and ensure that digital markets remain open to innova- tion and new entrants, preventing monopolistic dominance by incum- bent tech giants. In her remarks, Ribera maintained that the DMA is a forward-looking framework intended to foster a competitive and fair digital economy, rather than a punitive measure against foreign tech- nology firms. She reiterated the EU’s commitment to working collabo- ratively with global partners to address the challenges posed by rapidly evolving digital markets. Ribera also highlighted the EC’s willingness to engage in dialogue with the US authorities to clarify any misunder- standings about the DMA. She underscored the importance of interna- tional cooperation in regulating digital markets, especially in the face of potential trade tensions and the imposition of tariffs. The EU response misses the point. From a US perspective, whether the DMA is targeted to large companies rather than to American com- panies is irrelevant; because most of the large companies under scrutiny are American. For the US, the DMA is a BTB that risks undermining the competitive position of American companies in the global arena. Whether the ultimate goal is to disadvantage US companies against their European rivals or to protect European consumers is also irrele- vant from a US viewpoint. Indeed, it is quite unlikely that the DMA and other EU digital regulations facilitate the emergence of European champions. From the viewpoint of the current US administration, the “real race” is between the US companies and those of China, and the outcome of that technological contest is existential, as we proceed to explain next. IV.C. The US-China Technology Race The geopolitical confrontation between China and the US has evolved into a systemic rivalry with global implications, encompassing ideological, economic, military, and technological dimensions. The technological dimension of this rivalry is arguably its most significant and enduring aspect. Both countries view technological leadership as central to national security, economic power, and global influence. Technological leadership is a fundamental pillar of modern state power. It underpins military capabilities, economic productivity, and 21 Transatlantic antitrust ties fray as US and EU regulators squabble, Financial Times, 10 May 2025. -- 18 of 41 -- 18 the ability to set global standards. For the US, maintaining dominance in critical technologies has long been essential to its geopolitical strat- egy. For China, technological modernization is central to its ambitions for national rejuvenation and to escape the so-called “middle-income trap.”22 The US perceives China’s rapid technological advancement, fueled by state-led industrial policy and strategic acquisitions, as a direct chal- lenge to its global supremacy. Conversely, China sees American efforts to restrict its technological development as a form of containment aimed at thwarting its rise. This mutual suspicion intensifies the zero- sum nature of the rivalry and motivates both countries to pursue in- creasingly aggressive policies to secure strategic advantage. Telecommunications, particularly the global rollout of 5G net- works, has become one of the most contentious arenas of US–China technological rivalry. Huawei, China’s flagship telecommunications company, embodies this struggle. The US has accused Huawei of espi- onage, intellectual property theft, and links to the Chinese military, and it has imposed strict export controls and lobbied allies to exclude Huawei from their 5G networks.23 From Washington’s perspective, al- lowing Chinese firms to build critical infrastructure poses unacceptable national security risks. For Beijing, however, the targeting of Huawei is perceived as an effort to stifle the growth of China’s tech champions. The 5G dispute reflects broader concerns about the security of supply chains, data sovereignty, and the balance of power in the global digital economy. Semiconductors – microchips that power everything from smartphones to missiles – are at the heart of the technological 22 The middle-income trap refers to the economic stagnation that countries often experience after reaching a certain income level, typically between $1,000 and $12,000 per capita (in constant 2011 US dollars, PPP), but before achieving high-income status. Initially, low-income countries can grow rapidly by mobilizing cheap labor and adopting existing technol- ogies. However, as wages rise and demographic dividends diminish, these advantages erode. To sustain growth, countries must transition toward in- novation-driven economies, characterized by higher productivity, ad- vanced human capital, and robust institutions. Many middle-income countries fail to make this transition due to structural constraints. These include weak governance, underinvestment in education and research, in- efficient financial systems, and inadequate infrastructure. Furthermore, po- litical economy factors—such as vested interests resisting reform or inequality stifling broad-based human capital development—can impede the shift toward more complex and high-value-added production. 23 Congressional Research Service, “US Restrictions on Huawei Technologies: National Security, Foreign Policy, and Economic Interests”, January 5, 2022, https://www.congress.gov/crs-product/R47012. -- 19 of 41 -- 19 confrontation. The US has imposed a series of export controls to cut off Chinese access to advanced chips, chipmaking equipment, and design software. In response, China has accelerated its efforts to achieve sem- iconductor self-sufficiency through massive state investment and pol- icy initiatives like “Made in China 2025” 24 and the “Dual Circulation Strategy”.25 However, China remains dependent on foreign technology in advanced node manufacturing, especially from companies such as ASML (Netherlands), and Nvidia (US), etc.. AI is another frontier in the US–China technological rivalry. Both countries view AI as a transformative general-purpose technology with enormous commercial and military implications. In the US, AI devel- opment is driven primarily by the private sector, with firms like Google, OpenAI, and Microsoft leading innovation. In China, the state plays a significant role, directing capital and setting national strategies to pro- mote AI through initiatives like the “Next Generation AI Development Plan” (2017).26 Private sector also plays an important role. DeepSeek is a successful example of China’s AI innovation efforts, representing an effective rival of its US peers.27 Quantum technologies are another emerging domain of strategic competition. Quantum computing promises exponential gains in pro- cessing power, with potential applications in cryptography, logistics, and materials science. Both the US and China have recognized its 24 Made in China (MIC) 2025 is an industrial policy aimed at up- grading China’s manufacturing sector from low-cost, labor-intensive pro- duction to high-value, innovation-driven industries. MIC 2025 focuses on ten strategic industries: 1. New-generation information technology 2. High-end numerical control machinery and robotics 3. Aerospace and avi- ation equipment 4. Maritime engineering equipment and high-tech ships 5. Advanced rail transportation equipment 6. Energy-saving and new energy vehicles 7. Electrical equipment 8. Agricultural machinery and equipment 9. New materials 10. Biopharmaceuticals and high-performance medical devices. 25 Introduced in 2020, the Dual Circulation Strategy aims to create a more resilient and self-sustaining economy by balancing domestic and international economic activities. One of its key goals is to promote indig- enous innovation to achieve self-sufficiency in critical technologies. The strategy has led to increased efforts in localizing supply chains and pro- moting domestic innovation. 26 Translation available at https://digichina.stanford.edu/work/full- translation-chinas-new-generation-artificial-intelligence-development- plan-2017/. 27 Eduardo Baptista, “What is DeepSeek and why is it disrupting the AI sector?”, Reuters, January 29, 2025, https://www.reuters.com/technol- ogy/artificial-intelligence/what-is-deepseek-why-is-it-disrupting-ai-sec- tor-2025-01-27/. -- 20 of 41 -- 20 geopolitical significance, with each investing billions in research and development. China’s National Laboratory for Quantum Information Science and its launch of the world’s first quantum satellite (Micius) have demonstrated notable progress. In the US, efforts are spearheaded by both the federal government (through the National Quantum Initia- tive Act28) and private firms such as IBM and Google. The fear of a “quantum leap” in strategic capabilities has led to growing secrecy and export control regimes, with implications for international scientific collaboration. The intensification of technological competition has led both coun- tries to adopt a range of “techno-nationalist” tools. The US has ex- panded the use of export controls under the Export Control Reform Act (ECRA29) and the Foreign Investment Risk Review Modernization Act (FIRRMA30), targeting not only Chinese firms but also foreign entities doing business with them. Investment screening by the Committee on Foreign Investment in the United States (CFIUS) has also become more stringent, especially for transactions involving sensitive technologies. China, for its part, has responded with its own export control law and a new Unreliable Entity List, aimed at retaliating against foreign 28 The US National Quantum Initiative Act (NQIA), enacted on De- cember 21, 2018, under Public Law 115-368, establishes a comprehensive federal strategy to advance quantum information science (QIS) and tech- nology in the US. In May 2025, US lawmakers introduced the bipartisan Quantum Sandbox for Near-Term Applications Act (S.1344), aiming to amend the NQIA. This proposed legislation seeks to establish public-pri- vate partnerships to accelerate the development of near-term quantum ap- plications by creating testbeds—referred to as “quantum sandboxes”—for innovators to test quantum technologies in real-world environments. 29 The Export Control Reform Act of 2018 (ECRA) is a pivotal US federal law that modernizes and strengthens the country’s export control system, particularly concerning dual-use technologies—items with both ci- vilian and military applications. ECRA has significant international rami- fications, particularly in the context of US-China relations. The Act has been instrumental in imposing export controls on Chinese technology firms, such as Huawei, to prevent the transfer of sensitive technologies that could enhance China’s military capabilities or surveillance apparatus. The Act is codified in Title 50, Chapter 58 of the US Code. 30 The Foreign Investment Risk Review Modernization Act (FIRRMA) of 2018 significantly expanded the authority of the Committee on Foreign Investment in the United States (CFIUS) to review foreign in- vestments for national security concerns. FIRRMA broadened the scope of transactions subject to CFIUS review, including certain non-controlling in- vestments and real estate transactions near sensitive sites. -- 21 of 41 -- 21 companies that comply with US sanctions.31 This increasingly inter- ventionist approach by both sides risks fragmenting global technology markets and undermining multilateral trade and investment frame- works. The long-term implications of this rivalry are profound. On the one hand, it may accelerate innovation through competition, incentivize strategic investment, and reshape global supply chains. On the other hand, it threatens to fragment the global economy, weaken international cooperation, and impose efficiency losses through duplication and re- duced knowledge diffusion. For third countries, including developing countries (like Brazil) and developed countries (like the EU, Japan and the UK), the bifurcation of global technology presents a dilemma: whether to align with the US-led ecosystem or the Chinese model of development. The future will likely be characterized by selective de- coupling, intensified geoeconomic maneuvering, and attempts to form techno-blocs among like-minded nations. IV.D. Implications of the DMA for the US-China Technology Race The US concern with the DMA is that it may, intentionally or in- advertently, weaken US tech firms in global markets by imposing asymmetric compliance costs, undermining business models, limiting innovation incentives, while ignoring the competitive nature of many Chinese competitors. Such a concern is grounded on the following ob- servations. Firstly, while US tech firms operate globally and generate significant revenue in the EU, making them easy regulatory targets, Chinese firms often have limited exposure to the EU, due to data sov- ereignty concerns, cultural barriers, or geopolitical frictions. Secondly, the DMA may undermine the integrated business models of US tech firms, since it targets a number of practices that have been central to their success: (a) self-preferencing; (b) data aggregation across ser- vices; and (c) tight control over app distribution to ensure security, brand consistency, and revenue capture. By restricting these strategies, the DMA may reduce the economic viability of vertically integrated platforms, whose global strength is built on scalability, user data inte- gration, and cross-subsidization between services. In contrast, Tencent and Alibaba, while integrated, operate primarily within domestic mar- kets or regions with less regulatory friction. As such, they are less vul- nerable to the compliance constraints imposed by the DMA. Not all the effects of the DMA are adverse for the US giants oper- ating within the EU. The DMA also introduces positive externalities 31 Ministry of Commerce of PRC, Provisions on List of Unreliable Entities (Ministry of Commerce Order No. 4 of 2020), September 19, 2020, https://m.mofcom.gov.cn/article/b/fwzl/202009/20200903002593.shtml. -- 22 of 41 -- 22 that could benefit those US firms in the long run. By imposing con- straints on dominant firms, it may lower entry barriers for smaller US competitors, fostering more dynamic innovation ecosystems. Moreo- ver, firms that successfully adapt to the DMA may gain a first-mover advantage in complying with stringent data and platform standards, en- hancing their global legitimacy. Still, these benefits are speculative and, in any event, the DMA does not operate in a geopolitical vacuum. While it reflects the EU’s aspiration to be a norm-setting power in dig- ital governance, this ambition may create strategic vulnerabilities for its allies. The resulting regulatory asymmetry thus carries significant strategic implications, as we discuss next. V. FROM R EGULATORY D ISPUTES TO TRADE WARS Countries often use regulations strategically to protect their domes- tic industries through regulation – a phenomenon known as “regulatory protectionism”.32 Governments may implement ostensibly legitimate regulations that disproportionately burden foreign firms, thus acting as BTBs. As we have seen, these measures often escape scrutiny under traditional trade agreements. Furthermore, dispute settlement systems, including the WTO, do struggle to adjudicate complex regulatory is- sues where scientific evidence, risk perception, and societal preferences diverge. When formal dispute mechanisms fail to resolve these tensions satisfactorily, due to ambiguity in rules, slow processes, or non-com- pliance with rulings, countries may resort to unilateral retaliation. This is evident in cases like the US-EU beef hormone dispute,33 where con- flicting regulatory philosophies (precautionary principle vs. scientific 32 Baldwin, R.E. 2000. “Regulatory Protectionism, Developing Na- tions and a Two-Tier World Trade System”. Brookings Trade Forum 2000 (1): 237–293. See also Fajgelbaum, P.D., Goldberg, P.K. Kennedy, P.J., and Khandelwal, A.K. 2020. “The Return to Protectionism”. Quarterly Journal of Economics 135 (1): 1–55. 33 The US–EU beef hormone dispute is a long-running trade conflict that began in the 1980s when the EU banned imports of beef treated with growth hormones, citing health concerns. The US challenged the ban at the WTO, arguing it was not based on scientific evidence and violated trade rules. The WTO ruled in favor of the US, but the EU maintained its ban, leading to authorized US retaliatory tariffs and a prolonged standoff that highlights tensions between trade liberalization and public health regula- tion. As of 2025, the dispute remains a partially unresolved trade conflict. Although a 2009 Memorandum of Understanding allowed for limited im- ports of hormone-free US beef into the EU, the fundamental disagreement over hormone-treated beef persists, reflecting ongoing tensions between differing regulatory approaches to food safety and trade. -- 23 of 41 -- 23 risk assessment) led to persistent sanctions and counter-sanctions de- spite WTO rulings. From a domestic politics perspective, trade wars rooted in regula- tory disputes are often shaped by interest group pressures and political incentives. In democracies, political leaders may be particularly re- sponsive to protectionist demands when regulations are perceived to harm employment or strategically important industries. The US–EU dispute over digital services taxes or the US–China technological war illustrate how domestic political narratives, such as national security, digital sovereignty, or unfair treatment, mobilize support for trade re- taliation against regulatory measures.34 Trade wars stemming from regulatory disputes are not irrational or ad hoc phenomena; rather, they emerge from a complex interplay of strategic, institutional, and domestic political factors. Regulatory measures, though often responding to legitimate public policy goals, can provoke international tensions when perceived as protectionist or politically motivated. As trade becomes increasingly entangled with regulatory, technological, and geopolitical concerns, the risk of conflict and retaliation grows, particularly in the absence of strong multilateral governance mechanisms. V.A. The Limits of Trade Agreements Addressing BTBs through trade agreements is inherently complex due to their embeddedness in domestic regulatory autonomy, the diffi- culty in distinguishing protectionism from legitimate regulation, and the institutional limitations of trade negotiation frameworks. Firstly, dealing with BTBs through negotiation is complicated because of the “incompleteness” of trade agreements – that is, because their inability to specify in advance how all future contingencies will be handled. This incompleteness is rational, given the uncertainty about future prefer- ences or political shocks. But as Henrik Horn et al. (2010)35 show the fact that trade agreements often leave domestic regulatory measures un- der-specified, allows countries discretion in implementing BTBs, and creates space for post-agreement lobbying and regulatory drift. 34 Krugman, P.R. 1986. Strategic Trade Policy and the New Inter- national Economics. MIT Press. See also Putnam, R.D. 1988. “Diplomacy and Domestic Politics: The Logic of Two-Level Games”. International Or- ganization 42 (3): 427–460. 35 Horn, H., Maggi, G., and Staiger, R.W. 2010. “Trade Agreements as Endogenously Incomplete Contracts”. American Economic Review 100 (1): 394–419. See also Bagwell, K., and Staiger, R.W. 2005. “Enforcing Trade Agreements in the Presence of Renegotiation”. Review of Economic Studies 72 (4): 1007–1038. -- 24 of 41 -- 24 Secondly, BTB barriers are intrinsically linked to a country’s reg- ulatory sovereignty. Governments implement domestic regulations to achieve a variety of public policy objectives, such as consumer protec- tion, environmental conservation, and public health. As such, these measures often reflect different social preferences and legal traditions, making them politically sensitive. Efforts to liberalize or harmonize such regulations through trade agreements are commonly met with re- sistance, particularly when they are perceived as infringing upon na- tional sovereignty. This creates a tension between the objectives of market access and the preservation of domestic policy space. In turn, it complicates the process of rule-making in trade agreements, as govern- ments are hesitant to commit to disciplines that could constrain their ability to regulate in the public interest. Thirdly, identifying and addressing BTB barriers requires distin- guishing between legitimate regulatory objectives and disguised pro- tectionism. This is a fundamentally subjective task. Measures that appear trade-restrictive from one perspective may be essential for achieving legitimate non-trade goals from another. For example, food safety regulations that impose stringent testing requirements might be seen by foreign exporters as excessive and discriminatory, while do- mestic regulators may view them as necessary to protect public health. This ambiguity allows room for opportunistic behaviour by govern- ments seeking to protect domestic industries while maintaining the ap- pearance of regulatory legitimacy. The difficulty of establishing clear benchmarks for assessing the trade-restrictiveness of such measures limits the effectiveness of trade agreements in addressing them. Finally, the negotiation and enforcement of disciplines on BTBs are institutionally constrained within trade agreements. Multilateral trade negotiations, such as those under the WTO, have historically fo- cused on reducing “at the border” measures, such as tariffs and subsi- dies, and have struggled to reach consensus on deeper regulatory issues. The WTO’s Agreements on Technical Barriers to Trade (TBT) and Sanitary and Phytosanitary Measures (SPS)36 offer some guidance, but they rely on principles, such as non-discrimination and scientific justi- fication, which are open to interpretation and difficult to enforce con- sistently. Moreover, enforcement mechanisms in trade agreements 36 The WTO Agreement on Technical Barriers to Trade (TBT) en- sures that technical regulations, standards, and conformity assessment pro- cedures do not create unnecessary obstacles to international trade. The WTO Agreement on Sanitary and Phytosanitary Measures (SPS) governs the use of food safety and animal/plant health regulations. It allows coun- tries to set their own standards but requires that these measures be based on scientific evidence, not arbitrarily discriminatory, and not more trade- restrictive than necessary. -- 25 of 41 -- 25 often lack the institutional capacity to scrutinize complex regulatory regimes and assess their compliance with international obligations, es- pecially when such assessments require specialized technical or sector- specific knowledge. As the WTO has struggled to adapt to regulatory and digital econ- omy issues, and with its Appellate Body paralyzed, countries increas- ingly bypass multilateral rules and act unilaterally. This vacuum enables “tit-for-tat” retaliation when regulatory disputes arise, espe- cially in areas where global standards are lacking or contested (e.g., digital taxation, data governance, environmental labeling). V.B. Retaliatory Tariffs In the absence of trade agreements, or to encourage others to nego- tiate more complete agreements, countries may, and sometimes do, rely on “retaliatory tariffs” – namely, a distinct class of trade measures im- posed in response to, and to condition, the actions of trading partners. Unlike conventional tariffs intended to protect domestic industries or raise fiscal revenue, retaliatory tariffs serve a strategic function: they are meant to punish or deter unfavourable trade practices by other coun- tries. They are often justified by invoking the principles of “reciprocity” and “fairness”. However, their use is embedded in the logic of strategic trade policy, which acknowledges the interdependence and asymmetry of global trade relationships. Countries with large trade deficits, struc- tural surpluses, or unbalanced regulatory capacities may have differing incentives to engage in retaliation.37 Retaliatory tariffs are usually temporary, although they can have long-lasting economic and political consequences. They tend to target politically sensitive sectors – such as agriculture or manufacturing in “swing regions” – in order to maximize domestic pressure on foreign governments. Their effectiveness depends on institutional factors; e.g. whether (i) the domestic political system tolerates short-term economic pain, and (ii) the country has sufficient economic size or geopolitical leverage. Countries may retaliate in unrelated unregulated sectors to exert pressure over regulatory disputes. This reflects a strategic logic where countries exploit their bargaining leverage across sectors. For instance, if a country cannot retaliate directly against a regulatory measure due to legal or reputational constraints, it may impose tariffs on politically sensitive exports from the offending country to induce policy change. 37 Miran, S. 2024. “A User’s Guide to Restructuring the Global Trading System”. Hudson Bay Capital. Available at https://www.hudson- baycapital.com/documents/FG/hudsonbay/research/638199_A_Us- ers_Guide_to_Restructuring_the_Global_Trading_System.pdf. -- 26 of 41 -- 26 This dynamic increases the likelihood of trade wars escalating across sectors not initially implicated in the dispute, making regulatory con- flicts a broader threat to stable trading relations. In contexts of great power competition, particularly the US–China rivalry, regulatory dis- putes are increasingly framed in geoeconomic terms. Countries weaponize interdependence by leveraging control over standards, data, and technology. Regulatory conflicts become proxies for strategic com- petition, and trade wars emerge as tools to defend national autonomy or reshape global value chains.38 V.C. The Interplay between BTBs and Retaliatory Tariffs Though distinct in form and function, BTBs and retaliatory tariffs are related. BTBs may prompt retaliation. Retaliation may take the form of new BTBs, especially where direct tariff retaliation is con- strained by international law or economic feasibility. Conversely, retal- iatory tariffs may provoke responses in the form of tighter domestic regulation or non-cooperation in regulatory harmonization efforts. The duality between overt, strategic retaliation and covert, institutional pro- tectionism is at the heart of modern trade politics. Pau Pujolas and Jack Rossbach (2024),39 show that, under certain conditions, a country with a large trade deficit – such as the US – may derive relative advantage in a trade war. This is the case if the deficit country can leverage its large domestic market to extract better terms from its trading partners. They also show that retaliatory tariffs are more effective when wielded by large economies against smaller, open ones, and less so in symmetric relationships. While this model provides theoretical conditions under which trade wars may yield net gains for certain countries, the authors are careful to warn against simplistic pol- icy applications of these results. Their model assumes optimal tariff de- sign and retaliation, which is rarely achieved in practice; long-run political, diplomatic, and supply-chain costs of trade wars are not cap- tured; and the strategic use of tariffs may be misused for domestic po- litical purposes, leading to overreach or economic backlash. Their contribution highlight the important interactions between BTBs and retaliatory tariffs. When tariffs are politically constrained, governments may resort to BTBs to achieve the same protective goals. BTBs may provoke retaliatory tariffs if perceived as unfair or discrim- inatory. In contrast, tariff wars may prompt the deployment of new 38 Farrell, H., and Newman, A.L. 2019. “Weaponized Interdepend- ence: How Global Economic Networks Shape State Coercion”. Interna- tional Security 44 (1): 42–79. 39 Pujolas, P. and Rossbach, J. 2024. “Trade Wars with Trade Defi- cits”. SSRN: https://ssrn.com/abstract=5008591. -- 27 of 41 -- 27 BTBs. Interest groups that benefit from BTBs or retaliatory tariffs may support political actors who favour economic nationalism, reinforcing these policies. Indeed, as explained by Giovanni Maggi and Ralph Ossa (2020),40 these measures are often the product of political bargaining, influenced by interest groups, rent-seeking behavior, and institutional design. The authors show that when producer interests are aligned across countries, lobbying can push for mutual deregulation, which benefits firms, but may harm overall social welfare. Instead, when producer interests con- flict internationally, trade agreements may instead discipline lobbying pressures, resulting in more balanced regulations that improve con- sumer welfare. In Maggi, Mrázová and Neary (2022),41 the authors focus on non- tariff barriers that are intentionally inefficient, such as excessive docu- mentation requirements, inspection delays, or duplicative testing. Termed Red-Tape Barriers (RTBs), these barriers are not designed to raise revenue or confer rents but to impose deadweight costs on foreign firms. RTBs emerge when traditional tariffs are constrained (e.g., by WTO rules or trade agreements). Politicians use RTBs as “second-best” instruments of protection, especially under conditions of political un- certainty or when seeking to appease domestic interest groups. In sum, the abovementioned work shows that modern trade fric- tions are endogenous, path-dependent, and institutionally embedded. They cannot be addressed purely through economic liberalization; they require deeper engagement with regulatory reform, governance, and political incentives. VI. THE EFFECT OF TRADE WARS IN TECHNOLOGY R ACES Trade wars emerge when governments perceive that unilateral or reciprocal protectionism can serve national objectives better than con- tinued liberalization. Yet, the empirical evidence overwhelmingly shows that trade wars impose significant economic costs, particularly on consumers, exporters, and supply chain-intensive firms. 40 Maggi, G. and Ossa, R. 2020. “Are Trade Agreements Good for You?”. NBER Working Paper No. w27252, SSRN: https://ssrn.com/ab- stract=3615448. 41 Maggi, G., Mrázová, M., Neary, J.P.. 2022. “Choked by Red Tape? The Political Economy of Wasteful Trade Barriers”. International Economic Review 63(1): 161-188. -- 28 of 41 -- 28 VI.A. Economic Effects of Trade Wars By raising tariffs, governments shield domestic firms from foreign competition. This can boost output, preserve employment, and create temporary pricing power. Tariffs can also serve as negotiation tools to secure intellectual property protection, reduce subsidies, or open for- eign markets. For example, the US applied tariffs on China to elicit changes in forced technology transfers and state owned enterprise (SOE) practices. Moreover, trade wars can catalyze the diversification of supply chains, especially when national security or strategic resili- ence becomes a concern. For example, US efforts to reduce dependence on Chinese suppliers in critical sectors – such as semiconductors and rare earths – encouraged re-shoring and near-shoring. These shifts are viewed by some policymakers as investments in long-term sovereignty and risk reduction. However, tariffs raise the cost of imported goods, and those costs are largely passed on to consumers. Amiti, Redding, and Weinstein (2019)42 estimate that the 2018 US tariffs cost the average American household roughly $414 annually through increased prices. Further- more, when countries retaliate with counter-tariffs, key export sectors suffer. US soybean exports to China fell dramatically after Beijing im- posed tariffs, triggering a wave of farm bankruptcies and $28 billion in federal aid. Since global production networks depend on the seamless movement of intermediate goods, tariffs create bottlenecks and force firms to adjust suppliers, often at higher costs. Finally, trade conflicts introduce uncertainty, discouraging capital expenditure. Financial mar- kets responded to trade war escalations with spikes in volatility, and firm-level investment fell in sectors exposed to tariffs or retaliation. In short, trade wars typically lead to prisoners’ dilemma-type out- comes, where mutual retaliation reduces welfare for all involved. The more economically interconnected the world becomes, the higher the costs of such conflict. VI.B. Winners and Losers Despite their overall cost, trade wars occur because they are rarely zero-sum propositions: consumers and many firms lose, but some firms and industries, located in some countries, may benefit.43 How firms are 42 Amiti, M., Redding, S.J., and Weinstein, D.E. 2019. “The Impact of the 2018 Trade War on U.S. Prices and Welfare”. Journal of Economic Perspectives 33 (4): 187–210. 43 Cen, Y., Flaaen, A., Pierce, J., and Schott, P.K. 2023. “Who Ben- efits from Trade Wars? Evidence from the US-China Trade Dispute.” -- 29 of 41 -- 29 affected depends less on the tariffs imposed and more on their structural capacity to absorb trade shocks. For example, during the 2018 trade US-China war, smaller, less capitalized firms, and those reliant on a single export market, experienced larger drops in profitability. In con- trast, diversified firms with multiple export destinations and broad product lines were more resilient. More generally, firms with signifi- cant market power managed to pass on tariff-induced cost increases to consumers, maintaining or even growing profit margins during the trade war. In contrast, firms in competitive industries lacked this flexi- bility and suffered greater profit losses. Firms with alternative sourcing options or diversified customer bases fared better. In addition, trade wars can yield tactical benefits, especially for governments seeking strategic or political leverage. Politicians often deploy trade wars to appeal to specific voter blocs or influential interest groups. Such decisions may make short-term electoral sense even if they generate long-term economic inefficiencies.44 Finally, as we dis- cussed in the previous sections, trade wars are as much about geopolit- ical signaling as they are about economic protection. Governments may use trade restrictions to protect technological sovereignty and national defense. VI.C. Worldwide Implications of US-China Decoupling The technological and economic rivalry between the US and China has escalated into a process of strategic decoupling, affecting trade, in- vestment, supply chains, and digital infrastructure.45 While the focus of this decoupling is bilateral, its repercussions are global. Liberal demo- cratic countries, particularly those in the EU, are under growing pres- sure to reconfigure their economic strategies, industrial policies, and regulatory frameworks in response to external polarization. These ad- justments, if not carefully managed, may destabilize the internal equi- librium necessary for liberal democracy to function effectively. Technological decoupling refers to the deliberate dismantling or reconfiguration of interdependent technological and digital ecosys- tems. This includes the restriction of cross-border investment, export controls on key technologies (e.g., semiconductors, AI, quantum NBER Working Paper No. 31693. See also Chen, L., Cui, W. and Wang, Z. 2023. “The Impact of the 2018–2019 Trade War on Chinese Firms”. NBER Working Paper No. 31508. 44 Grossman, G.M., and Helpman, E. 1994. “Protection for Sale”. American Economic Review 84 (4): 833–850. 45 Bown, C.P. 2019. The 2018 US-China Trade Conflict After Forty Years of Special Protection. Peterson Institute for International Econom- ics. -- 30 of 41 -- 30 computing), the imposition of divergent standards, and limits on aca- demic and industrial collaboration. There is no question that the US and China are engaged in techno- logical decoupling. The US has led this effort through measures, such as the Entity List46 (targeting Huawei, SMIC, and others), the CHIPS and Science Act,47 and expanded export controls on advanced chip technologies. China, in turn, has accelerated its push for technological self-sufficiency under its “dual circulation” strategy and retaliatory ex- port control laws. This trend not only reflects economic competition but also a deepening geostrategic rivalry, as both states seek to limit technological dependence on the other while shaping global norms and standards in their favour. For the EU and the rest of the world, this dynamic presents chal- lenges and choices that impact economic structure, strategic alliances, and regulatory sovereignty. The first and most immediate implication is the disruption of global supply chains. Sectors, such as semiconduc- tors, automotive, telecommunications, and pharmaceuticals rely on in- puts, markets, and capital from both countries. As US and Chinese firms reconfigure supply chains to avoid geopolitical risks – relocating manufacturing, sourcing alternative suppliers, or localizing R&D – third-country companies face cost increases, supply instability, and the need to realign strategic partnerships. For instance, the Netherlands- based ASML, a world leader in photolithography machines critical to advanced chip production, has been pressured by the US to restrict ex- ports to Chinese customers. Similarly, German automakers – heavily invested in the Chinese market – must navigate increasingly sensitive dual-use technology regulations and geopolitical scrutiny. The UK’s decision to exclude Huawei from its 5G network, influenced by US se- curity concerns, has already disrupted telecom infrastructure planning and incurred transition costs. Investment flows are also affected. Chi- nese foreign direct investment (FDI) into e.g. the EU and UK has de- clined sharply, particularly in high-tech sectors, due to increased scrutiny under foreign investment regimes. The EU’s FDI Screening 46 The Entity List is maintained by the U.S. Department of Com- merce’s Bureau of Industry and Security (BIS). It includes foreign individ- uals, organizations, and companies that are deemed to pose a significant risk to U.S. national security or foreign policy interests. Entities on this list are subject to specific license requirements for the export, re-export, and transfer (in-country) of certain items. 47 The CHIPS and Science Act, signed into law on August 9, 2022, is a significant U.S. federal statute aimed at bolstering the nation’s semi- conductor industry and advancing scientific research. The act authorizes approximately $280 billion in funding to enhance domestic semiconductor manufacturing, research, and development. -- 31 of 41 -- 31 Regulation (2019)48 and the UK’s National Security and Investment Act (2021)49 reflect a growing concern about foreign acquisition of critical technology assets. While such controls aim to protect national security, they may also deter benign investment and innovation part- nerships. The second implication arises from the bifurcation of digital and technological standards. Both the US and China are promoting their own regulatory models globally – the former grounded in norms of openness and privacy, and the latter based on state-led governance and data sovereignty. As we have seen, the EU has attempted to chart a third course, asserting its regulatory autonomy through initiatives such as GDPR and the DMA. However, the US-China decoupling dynamic places pressure on this strategy. In a fragmented global landscape, where firms increasingly align with either the US or Chinese regulatory orbit, the EU, the UK and others, risk diminished leverage. US firms can and do resist EU regulatory impositions if they conflict with Amer- ican standards or export control regimes, while Chinese firms may re- treat from European markets entirely. Technological decoupling also affects the flow of knowledge and innovation, particularly in university-industry collaboration and inter- national research networks. The securitization of technology has led to greater scrutiny of academic partnerships, particularly with Chinese in- stitutions. Governments have issued guidelines and funding restrictions aimed at preventing technology leakage and espionage in critical fields such as AI, quantum computing, and biotech. This poses challenges for open science and international academic cooperation. The increasing weaponization of research partnerships may limit scientific progress and reduce opportunities for cross-border collaboration, particularly with researchers from China and affiliated countries. Not surprisingly, US and Chinese trading partners, including the EU, are debating the need for strategic autonomy and technological self-sufficiency. The EU has embraced this concept through its “Open Strategic Autonomy” framework,50 which seeks to reduce dependence 48 The EU FDI Screening Regulation aims to enhance the Union’s ability to identify and mitigate potential risks to security or public order arising from foreign direct investments into the EU. It establishes a frame- work for cooperation between Member States and the European Commis- sion. 49 The NSIA provides the UK government with powers to scrutinize and intervene in acquisitions that may pose risks to national security. It applies to both foreign and domestic investors. 50 The European Union’s Open Strategic Autonomy (OSA) frame- work is a comprehensive approach aimed at enhancing the EU’s capacity -- 32 of 41 -- 32 on external actors in key sectors – such as semiconductors, cloud com- puting, green technology, and pharmaceuticals. Flagship initiatives in- clude the European Chips Act,51 which allocates over €40 billion to bolster semiconductor production, and the Gaia-X project, 52 which aims to develop a sovereign European cloud infrastructure. The UK faces similar questions about its technological direction and global competitiveness. Post-Brexit industrial strategy emphasizes national resilience, research excellence, and alignment with likeminded partners (especially the U.S., Japan, and Australia) in emerging technologies. However, both the EU and UK struggle with scale, fragmentation, and funding constraints, which limit their ability to compete with the mas- sive industrial policies of the US (e.g., Inflation Reduction Act53) and China (e.g., Made in China 2025). Moreover, strategic autonomy ef- forts raise difficult trade-offs. For example, measures seeking to local- ize production or subsidize national champions can generate inefficiencies, provoke trade tensions, and conflict with internal market rules or WTO obligations. For example, the EC has to navigate tensions between state aid control and the need for industrial support in sensitive sectors. The geopolitical dimension of technological decoupling forces third-parties, such as the EU and UK, to reassess their strategic align- ment, particularly with the US. The Biden administration pursued closer coordination with allies on export controls, investment screen- ing, and technology standards, culminating in initiatives such as the to act independently in critical areas while maintaining openness to inter- national cooperation. This strategy seeks to balance economic openness with the need to reduce strategic dependencies, particularly in sectors vital to the EU’s security and economic resilience. 51 The European Chips Act aims to bolster Europe’s competitive- ness and resilience in semiconductor technologies and applications. It seeks to strengthen Europe’s technological leadership in the field. The reg- ulation entered into force on 21 September 2023. 52 Gaia-X is a European initiative that aims to develop a federated and secure data infrastructure, promoting data sovereignty and interopera- bility across Europe. It empowers businesses, individuals, and govern- ments with secure, transparent, and sovereign control over data through a decentralized cloud infrastructure. 53 The Inflation Reduction Act of 2022 (IRA) is a landmark U.S. federal law enacted on August 16, 2022, aimed at addressing climate change, healthcare affordability, and tax reform. It represents the most sig- nificant climate investment in U.S. history and introduces measures to re- duce the federal deficit. -- 33 of 41 -- 33 US–EU Trade and Technology Council (TTC) 54 and the AUKUS agreement. 55 Following President Trump’s “Liberation Day”, how- ever, the EU and other traditional US allies have taken a more cautious and autonomous approach. This raises the risk of intra-Western frag- mentation. Divergences over digital regulation, data transfers, and in- dustrial subsidies reflect different normative and policy priorities. For traditional US allies, the key challenge is to navigate this new landscape without becoming peripheral actors or passive rule-takers in a bifurcated world. This will require balancing openness with resili- ence, autonomy with alliance, and innovation with regulation. In doing so, both will need to invest not only in technological capabilities but also in the political and institutional capacity to shape the rules of the emerging digital order. VI.D. Risks for the Narrow Corridor of Growth In a seminal book, The Narrow Corridor: States, Societies, and the Fate of Liberty,56 Noble Prize Laureates Daron Acemoglu and James Robinson distinguish between two critical forces in any political order: the “Leviathan”, representing the state’s capacity to project authority, enforce laws, and provide public goods; and “Civil Society”, under- stood as the collective capacity of non-state actors to organize, resist, and demand accountability. Too weak a state, and society collapses into anarchy or local despotism; too strong a state relative to society, and the result is authoritarianism. Liberty and sustainable development are only feasible in the “narrow corridor”, a delicate equilibrium zone in 54 The US–EU Trade and Technology Council (TTC), launched in 2021, is a bilateral forum aimed at deepening transatlantic cooperation on trade, technology, and supply chains. It focuses on aligning regulatory ap- proaches in areas such as artificial intelligence, semiconductors, digital governance, and sustainability, while addressing shared concerns like non- market practices and economic coercion. The TTC serves as a platform to promote democratic values in tech governance and strengthen economic ties amid growing global geopolitical competition. 55 AUKUS is a trilateral security pact between Australia, the United Kingdom, and the United States, announced in 2021. Its primary goal is to enhance defense and technological cooperation in the Indo-Pacific, notably through support for Australia acquiring nuclear-powered submarines. Be- yond defense, AUKUS also covers collaboration in cybersecurity, artificial intelligence, quantum technologies, and undersea capabilities, and is widely seen as a strategic counterbalance to China’s growing influence in the region. 56 Acemoglu, D., and Robinson, J.A. 2019. The Narrow Corridor: States, Societies, and the Fate of Liberty. Penguin Press. -- 34 of 41 -- 34 which the state is strong enough to govern effectively but constrained enough not to become despotic. The authors distinguish between four different types of Leviathan. The “Absent Leviathan”, where the state is weak or non-existent. The result is a form of statelessness that leaves populations vulnerable to violence, predation, or warlordism. The “Paper Leviathan”, where the state appears strong on paper – possessing constitutions, ministries, and formal institutions – but lacks the practical capacity to implement its authority The state is unable to provide security, enforce contracts, or regulate the economy. Civil Society may be active, but without a func- tional state partner, liberty remains unattainable. The “Despotic Levia- than”, when the state becomes over-powerful relative to society. In this configuration, the state dominates civil society, suppresses dissent, and centralizes control. Such regimes may be effective in extracting taxes or organizing public works, but they do so without meaningful con- straints or public accountability. And, lastly, the “Shackled Leviathan”, when both the state and society are strong and mutually constrain. This is the only configuration conducive to liberty and sustainable develop- ment. Historical examples include the UK post-Glorious Revolution, the US post-Constitution, and contemporary liberal democracies with robust checks and balances. Liberal democracies, like the EU, face three principal risks as a result of the current geopolitical tension between the US and China: (a) the rise of technocratic overreach, (b) democratic fragmentation, and (c) the erosion of societal trust. Each of these dynamics threatens to displace the EU from Acemoglu and Robinson’s narrow corridor. Firstly, in response to geopolitical pressure, states may centralize au- thority in executive or technocratic bodies to accelerate strategic reori- entation. While this may enhance policy agility, it also risks bypassing democratic oversight, civil society engagement, and procedural legiti- macy. The result is a drift toward a “Despotic Leviathan”. Secondly, and conversely, internal fragmentation – whether due to national sovereignty concerns, populist resistance, or lack of consensus – can lead to political stalemate. This impairs the state’s ability to for- mulate coherent responses, producing regulatory deadlock and policy inaction. In the narrow corridor model, this is the risk of the “Absent Leviathan”, where state weakness leads to democratic dysfunction. Thirdly, technocratic policymaking, especially in domains like dig- ital regulation, defense, and industrial policy, can erode public trust if citizens are excluded from decision-making processes. This demobili- zation of society weakens the institutional feedback loop essential to balancing state power with societal contestation, thereby leading to a “Paper Leviathan” and undermining the narrow corridor’s stability. One way or the other the US-China confrontation can drive other countries, especially liberal democracies, out of the narrow corridor, -- 35 of 41 -- 35 which entails the risk of descending into anarchy or drifting toward au- thoritarianism. Both dynamics carry significant political, economic, and social costs. When a state becomes either too weak or too strong relative to society, political freedoms, civil liberties, and democratic accountability deteriorate. The collapse of the narrow corridor under- mines the impartial enforcement of laws, leading to arbitrary govern- ance, politicized judiciary systems, and erosion of property rights. Exiting the narrow corridor results in either state predation or market fragmentation, deterring investment, suppressing innovation, and caus- ing economic inefficiencies. The breakdown of the corridor also in- creases social polarization and entrenches inequality, as state failure or repression disproportionately affects marginalized groups. Falling out of the narrow corridor represents a systemic failure of the balance between coercion and consent, order and accountability. Whether through excessive centralization or structural weakness, soci- eties that exit this corridor face a cascade of consequences: repression, corruption, stagnation, inequality, and conflict. The corridor is not a destination but a process; one that must be continually defended through civic participation, institutional reform, and the containment of both state overreach and societal decay. In particular, we believe the risk of the EU falling out of the narrow corridor as a result of the current geopolitical tensions is significant enough to be concerned. What distinguishes the EU’s narrow corridor is its “hybrid legitimacy”: EU institutions possess enough autonomy to act decisively, particularly in market regulation and competition law, but are constrained by democratically elected national governments and an increasingly assertive European Parliament. Civil society, through NGOs, interest groups, and cross-border movements, helped to shape directives and challenge regulatory overreach. However, this equilib- rium has always been precarious. The EU lacks a unified demos, and its political authority is frequently challenged by Eurosceptic move- ments, national vetoes, and institutional complexity. The question to- day is whether the pressures of geopolitical rivalry and internal fragmentation will tip the balance toward authoritarian centralization or disintegration. The intensification of the US–China geopolitical rivalry places the European Union in a structurally ambiguous position. As a bloc of lib- eral democracies, the EU remains institutionally and ideologically aligned with the US. Yet it also seeks to preserve its strategic autonomy in the face of shifting global power dynamics. This dual imperative has given rise to a series of tensions that challenge the EU’s position within the narrow corridor. First, the EU’s reliance on American digital infra- structure and security guarantees threatens its ability to act as a sover- eign political entity. The dominance of US firms in cloud computing, digital advertising, and mobile operating systems has produced a form -- 36 of 41 -- 36 of technological dependency that constrains policy space. Attempts to regulate platform power reflect an effort to reassert control. Yet these measures often rely on enforcement through national authorities with uneven capacity, limiting their effectiveness. Second, economic expo- sure to China introduces a different form of vulnerability. European manufacturers, particularly in Germany, depend on Chinese markets, while Chinese investments in strategic infrastructure (e.g., ports, tele- communications) have triggered debates about national security and democratic values. The EU’s delayed and fragmented response to the Belt and Road Initiative and 5G rollout revealed deep divisions among member states. Third, Russia’s increasingly bellicose foreign policy – manifested through its 2022 invasion of Ukraine, hybrid warfare, cyberattacks, and energy coercion – poses a significant external shock that may destabilize this equilibrium. These external dependencies risk pushing the EU toward a path outside the corridor. Under pressure from security and economic im- peratives, the Union may centralize authority in Brussels without suffi- cient democratic mandate, or fracture along national lines as member states pursue divergent alignments. The EU risks becoming a “Despotic Leviathan” led by a few Member states, or an “Absent Leviathan”, if resistance from Member states produces institutional paralysis, pushing the EU toward the condition marked by ineffective governance and fragmentation. Either outcome would weaken the balance between state capacity and societal oversight that defines the corridor. The challenge is to build strategic autonomy without sacrificing contestability or plu- ralism. To remain within the narrow corridor under the mounting pres- sures of global competition and internal political fragmentation, the EU must engage in a dual strategy: strengthening state capacity to act deci- sively in key policy domains, while simultaneously reinforcing demo- cratic legitimacy, civic participation, and institutional contestability. The EU must find ways to manage its internal diversity without defaulting to lowest-common-denominator politics or rigid uniformity. Asymmetrical integration, allowing “coalitions of willing” Member states to advance common policies, can enable progress without coerc- ing reluctant members. For instance, deeper integration in defense pro- curement or cloud infrastructure could proceed through enhanced cooperation, while maintaining opt-out clauses for non-participants. Such flexibility reduces friction, preserves unity, and respects national democratic mandates. Rather than viewing geopolitical pressures as justification for technocratic acceleration or national retrenchment, the EU should treat them as opportunities to deepen its democratic founda- tions and institutional adaptability. Only by pursuing liberty through legitimacy can the EU remain within the narrow corridor in a multi- polar world. -- 37 of 41 -- 37 VII. THE T HREE B ODY P ROBLEM As we have seen above, companies around the world orbit around three competing regulatory powers – China, the EU, and the US. In the current geopolitical context, this is likely to be unsustainable. They face a “three body problem”, like Cixin Liu’s fictional planet Trisolaris.57 The planet’s orbits around three Suns and, therefore, its path is unpre- dictable. Civilization collapse is almost unavoidable. There is no solu- tion to the problem; there is one Sun too many. Given that China and the US are unlikely to change their respective courses, or coordinate their orbits, the question is whether the EU will have to abandon its regulatory autonomy and insert itself in one or an- other sphere of influence. If it does, it loses one of its raisons d’être. If it does not, its companies may crash under the weight of three Suns, while their Chinese and US counterparts choose to abandon its orbit anyways. The EU does not seem to have many cards to play. Its ambition to regulate and lead in digital norms is constrained by its technological dependency. Europe lacks indigenous firms of comparable scale to the US or Chinese cloud computing, social media, and AI champions. This limits EU’s leverage in enforcing compliance from foreign firms and exposes it to retaliatory pressures. Without technological and industrial weight, the EU is likely to become a “rule-taker”, rather than a “rule- maker”. The EU has long sought to avoid binary alignment in global geo- political rivalries, preferring a multi-lateral approach, based upon the defense of international law, market openness, and regulatory stand- ards. But this is untenable unless the EU manages to grow a high tech ecosystem of its own and achieve digital autonomy. While initiatives such as the European Chips Act, Gaia-X, the Strategic Compass,58 the Competitiveness Compass, 59 and proposals for a EuroStack 57 Liu, Cixin. 2014. The Three-Body Problem. Translated by Ken Liu. New York: Tor Books. 58 Adopted in March 2022, the Strategic Compass is the EU’s com- prehensive action plan to bolster its security and defense policy by 2030. It outlines a shared strategic vision among member states. The Compass aims to make the EU a more capable and autonomous security provider, com- plementing NATO and reinforcing the global rules-based order. 59 Announced in 2025, it provides a strategic framework to boost the EU’s global competitiveness, focusing on innovation, decarbonization, and economic security. The Competitiveness Compass aims to make Europe a leader in future technologies, services, and clean products, while ensuring economic resilience and reducing dependencies on external markets. -- 38 of 41 -- 38 architecture,60 represent early steps toward reducing external depend- encies, the EU’s capacity to compete in high-tech sectors remains un- certain and will require sustained investment, innovation, and public- private coordination. Even that may prove insufficient. Sustainable technological leadership depends on more than R&D spending or in- dustrial policy; it requires cohesive, legitimate, and accountable gov- ernance structures. Technological competition is not merely a race of innovation, but a test of political resilience. As both Washington and Beijing push for technological self-suffi- ciency and influence over global standards, the EU is under increasing pressure to define its own strategic posture.61 The choice of sphere is not trivial. Whatever its choice it will involve significant political and economic cost. Hitherto, the ideological, military, and economic align- ment of the EU and the US was undisputed. But populism is giving rise to tensions both within the EU and between the EU and the US. Mean- while, the degree of economic interdependency between China and the EU has increased constantly over time. Choosing between the US and Chinese spheres of influence is not a choice between different “civilizations”,62 their deep-seated cultural and ideological differences. The clash is between economic governance models, differing not only in institutional design but also in the norma- tive roles assigned to the market and the state. As Tooze (2020) ar- gues, 63 the post-Bretton Woods order was not designed to accommodate a state-capitalist superpower within its liberal frame- work. The friction arises not from irreconcilable cultural identities, but from deep disagreements about the role of the state in the economy, the legitimacy of industrial policy, and the architecture of global trade 60 EuroStack is a strategic initiative focused on achieving European digital sovereignty by developing a comprehensive, EU-led technology stack. It encompasses efforts to build and integrate European capabilities in areas such as cloud computing, semiconductors, artificial intelligence, and cybersecurity. The initiative seeks to reduce dependency on non-EU technologies and enhance the EU’s competitiveness in the global digital economy. 61 For instance, companies like Siemens, Bosch, and Ericsson face increasing pressure to align with Western restrictions on Chinese technol- ogies, even when such alignment threatens market access in China. Simi- larly, European universities and research institutions are being drawn into security-based screening of technological partnerships, especially in sen- sitive dual-use areas. 62 Huntington, S. P. (1996). The Clash of Civilizations and the Re- making of World Order. Simon & Schuster. 63 Tooze, A. 2020. Shutdown: How COVID Shook the World’s Economy. Viking. -- 39 of 41 -- 39 governance. In none of these regards the EU is perfectly aligned with either the US or China. Dealing with the three body problem may require addressing the so-called Rodrik’s “trilemma of the world economy” (Rodrik’s tri- lemma).64 This trilemma posits that economic globalization, national sovereignty, and democratic politics are mutually incompatible. A country can at most fully achieve two out of these three objectives, but not all three simultaneously. Attempts to push globalization beyond tra- ditional trade into areas like regulation clash with national democratic choices. When countries try to achieve all three goals at once, tensions inevitably emerge. The implications of the trilemma are depressing: if a country maintains national democracy and national sovereignty, it must limit globalization to protect domestic preferences; if it pursues globalization and democracy, it must cede sovereignty to supranational institutions, leading toward global governance; if it seeks sovereignty and globalization, it must suppress democratic responsiveness, favour- ing technocratic or authoritarian decision-making. Europe wants to achieve the three goals. This may be impossible in the current geopo- litical context. VIII. C ONCLUDING R EMARKS The international trading order has entered a new phase. On the one hand, this new phase is one in which traditional border measures are no longer seen as the principal determinants of trade flows, but where do- mestic regulations and strategic responses shape the political economy of globalization. BTBs and retaliatory tariffs are no longer side-issues; they are the main arenas in which trade conflicts are fought and re- solved. On the other hand, the new international trading (dis)order is characterized by the technological, economic , and military, rivalry be- tween the US and China, that has evolved into a process of strategic decoupling, with far-reaching consequences for trade, investment flows, global supply chains, and digital infrastructure. These geopolit- ical changes places the EU, and many other middle-powers, especially in the West, difficult position: institutionally and ideologically aligned with the US, but economically dependent on Chinese imports and ex- ports. In this new geopolitical context, asymmetries in digital regulation are interpreted as BTBs and trigger retaliation. As we discussed above, clear example is provided by the EU DMA. To mitigate these tensions the EU could consider dialing down DMA enforcement while 64 Rodrik, D. 2011. The Globalization Paradox: Democracy and the Future of the World Economy. W. W. Norton & Company. See also Ro- drik, Dani. 2018. Straight Talk on Trade: Ideas for a Sane World Economy. Princeton University Press. -- 40 of 41 -- 40 reinvigorating ex-post enforcement, aligning its digital regulatory framework with the US. This pragmatic response would reflect the fact that there is no chance that the EU regulatory model becomes globally predominant, influencing international norms and practices. Yet, we doubt such a change would make any difference. The Trump admin- istration is also likely to object to the ex-post enforcement of EU com- petition law if that is seen to affect US firms disproportionately. As former Chinese Premier Deng Xiaoping famously said, “it does not matter if a cat is black or white so long as it catches mice”.65 The Trump administration will likely oppose the black cat of ex-post antitrust en- forcement, as it does with the white cat of ex-ante regulation for as long as it targets (mainly) US firms. Thus, the choice confronting the EU goes beyond retaining the DMA and its other digital regulations or giv- ing them up. The choice it faces, like many other countries, is between strategic autonomy and dependency and, if it choses the latter, between the US’s and China’s spheres of influence. Unlike the inhabitants of Trisolaris, escaping to another planet is not an option. * * * Conflicts of Interest Declaration. This paper has not been commissioned or funded by any party, and no party had the right to review the paper prior to its circulation. Jorge Padilla and Vanessa Zhang are solely compensated by Compass Lexecon, an economic consultancy. As consultants, they have represented many companies over the years, on both the complainant and defendant side. They hold no paid or unpaid position as officer, director, or board member of non-profit organizations or profit-making entities whose policy positions, goals, or financial interests relate to the article. The list of their clients can be found at www.compasslexecon.com/profession- als. This paper does not necessarily represent the views of Compass Lex- econ or its clients. 65 In 1962, amidst China’s recovery from the Great Leap Forward, Deng Xiaoping invoked a Sichuan proverb: “It doesn’t matter if a cat is black or white; if it catches mice, it’s a good cat.” He used this analogy to advocate for practical solutions over rigid adherence to ideological doc- trines, emphasizing that policies should be judged by their outcomes rather than their alignment with a particular ideology. -- 41 of 41 --