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121. Section 232 reloaded: the false promise of the transatlantic ‘climate club’ for steel and aluminium

Author:
David Kleimann
Publication Date:
07-2023
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
In using the removal of Section 232 ‘national security’ tariffs on steel and aluminium imports as a bargaining chip, the United States demands that the European Union engage in negotiations on “global steel and aluminium arrangements to restore market-oriented conditions and address carbon intensity”. The US demand has reportedly been inspired by a blueprint that would establish an international institutional arrangement – labelled a ‘climate club’ – which would externalise market-access restrictions afforded by US Section 232 tariffs to the customs borders of club members. While the declared objective is to incentivise non-members to adopt low-carbon steel (and aluminium) production methods the US blueprint suffers from various design flaws including inefficient incentives, WTO inconsistency and incompatibility with the EU Carbon Border Adjustment Mechanism. The effectiveness of the proposed US scheme is severely compromised by the plethora of policy objectives it pursues, which go far beyond the goal of incentivising industrial decarbonisation in third countries, including secondary (ie protectionism) and tertiary (ie global power competition with China) objectives. The initial negotiation proposal submitted by the United States Trade Representative (USTR) to European Commission trade negotiators incorporates many if not all the problematic elements of this blueprint, setting the US on a collision course with the negotiation proposal put forward by the European Commission. This paper concludes that the adoption of the scheme proposed by USTR would result in a step backwards for international climate and trade cooperation, whereas not adopting the EU proposal would make for a missed opportunity. Given the sharply diverging negotiation positions and associated respective domestic constraints on both sides, however, policymakers should start to engage stakeholders now to manage expectations towards a low-ambition negotiation result, if any.
Topic:
Security, Climate Change, Industrial Policy, Governance, European Union, Economy, Trade Policy, and Transatlantic Relations
Political Geography:
Global Focus

122. What should be done about Google’s quasi-monopoly in search? Mandatory data sharing versus AI-driven technological competition

Author:
Bertin Martens
Publication Date:
07-2023
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
The first part of this paper focuses on competition between search engines that match user queries with webpages. User welfare, as measured by click-through rates on top-ranked pages, increases when network effects attract more users and generate economies of scale in data aggregation. However, network effects trigger welfare concerns when a search engine reaches a dominant market position. The EU Digital Markets Act (DMA) imposes asymmetric data sharing obligations on very large search engines to facilitate competition from smaller competitors. We conclude from the available empirical literature on search-engine efficiency that asymmetric data sharing may increase competition but may also reduce scale and user welfare, depending on the slope of the search-data learning curve. We propose policy recommendations to reduce tension between competition and welfare, including (a) symmetric data sharing between all search engines irrespective of size, and (b) facilitate user real-time search history and profile-data portability to competing search engines. The second part of the paper focuses on the impact of recent generative AI models, such as Large Language Models (LLMs), chatbots and answer engines, on competition in search markets. LLMs are pre-trained on very large text datasets, prior to usage. They do not depend on user-driven network effects. That avoids winner-takes-all markets. However, high fixed algorithmic learning costs and input markets bottlenecks (webpage indexes, copyright-protected data and hyperscale cloud infrastructure) make entry more difficult. LLMs produce semantic responses (rather than web pages) in response to a query. That reduces cognitive processing costs for users but may also increase ex-post uncertainty about the quality of the output. User responses to this trade-off will determine the degree of substitution or complementarity between search and chatbots. We conclude that, under certain conditions, a competitive chatbot markets could crowd out a monopolistic search engine market and may make DMA-style regulatory intervention in search engines redundant.
Topic:
Science and Technology, Governance, European Union, Digital Economy, Innovation, Artificial Intelligence, and Competition
Political Geography:
Europe

123. What would Europeans want a European defence union to look like?

Author:
Francesco Nicoli, Brian Burgoon, and David Van der Duin
Publication Date:
06-2023
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
While the Russian invasion of Ukraine has created a new momentum for EU defence integration, the political feasibility of such integration remains disputed, as it may entail both additional financial costs and a loss of sovereignty. Furthermore, design of defence integration is inherently multidimensional, differing in terms of scope and level, governance and sources of financing, among other dimensions. To determine the extent of public support for European security cooperation, we conducted the first conjoint experiment ever fielded on public support for alternative defence union designs. We carried out a pre-registered, randomised conjoint experiment on a highly representative sample of the French, German, Italian, Dutch and Spanish populations in November 2022. This multidimensional conjoint experiment allows us to determine the causal link between policy features of potential defence pacts, and public support or opposition to such policy. Our results show that policy packages receiving the most support require joint EU-level governance, joint purchases of military equipment through joint procurement, and repurposing of existing national expenditure as the preferred form of financing. All in all, our results show not only that there is considerable cross-border support for defence integration in Western Europe, but also that citizens in different Western European countries have generally aligned preferences regarding the actual design of such policy, indicating that a compromise policy is feasible and publicly supported. Furthermore, our results support ongoing research on the nature of European solidarity at times of crisis, suggesting that European citizens are willing to support the creation of joint institutions and policies to face issues of common concern, and therefore indicating that major crises open important windows of opportunity to re-shape EU-level policies and institutions.
Topic:
Defense Policy, Governance, European Union, and Regional Security
Political Geography:
Europe

124. China’s quest for innovation: progress and bottlenecks

Author:
Alicia Garcia-Herrero and Robin Schindowski
Publication Date:
06-2023
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
As the Chinese economy continues to decelerate, the central government is investing heavily in innovation, doubling down on research and development (R&D) spending and STEM-oriented human capital. In this paper, we assess China’s progress so far, looking at the inputs to innovation (R&D and human capital) as well as intermediate targets, such as scientific research and patents. We then evaluate how China has fared with respect to the ultimate goal of commercialising this progress, by looking at the value-added of Chinese exports and the overall productivity of the economy. We identify three potential bottlenecks that might be hindering the translation of China’s innovation efforts into productivity growth.
Topic:
Industrial Policy, European Union, Economic Growth, Innovation, and COVID-19
Political Geography:
China, Europe, and Asia

125. Antitrust issues raised by answer engines

Author:
Christophe Carugati
Publication Date:
06-2023
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
Rapid development of generative artificial intelligence chatbots like ChatGPT is leading search engine providers to move from search to answer engines. Unlike search engines, which provide search results in the form of blue links to content creators, answer engines generate personalised answers through a conversation with end users. This revolution impacts the internet ecosystem of content creators and the digital advertising market. This paper outlines some early antitrust issues related to answer engines, from the transition from search to answer engines (sections 2 and 3) and the response competition authorities should adopt (section 4). It finds that search and answer engines complement and compete with each other. While the answer-engine market is still at an early stage of development, it already raises some competition issues in relation to data scraping, vertical integration and unfair terms and conditions. Intervention by competition authorities is more likely than not to prevent market power in this new market. In this regard, competition authorities should act to preserve dynamic competition and minimise adverse effects on content creators. Finally, the paper concludes with several research questions for future research (section 5).
Topic:
Science and Technology, Governance, European Union, Digital Economy, Innovation, Artificial Intelligence, and Competition
Political Geography:
Europe

126. A new measure of aggregate trade restrictions: cyclical drivers and macro effects

Author:
Julia Estefania-Flores, Davide Furceri, Swarnali A. Hannan, Jonathan Ostry, and Andrew K. Rose
Publication Date:
06-2023
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
This paper presents a new measure of aggregate trade restrictions (MATR) using data from the International Monetary Fund’s Annual Report on Exchange Arrangements and Exchange Restrictions. MATR is strongly correlated with existing measures of trade restrictiveness but is more comprehensive in terms of country and time coverage. It is available for an unbalanced sample of up to 157 countries during 1949-2019. We use MATR to re-examine how trade restrictiveness varies with the business cycle, and how the macroeconomy looks in the aftermath of changes in trade restrictiveness. For the sample as a whole, MATR is typically a-cyclical but this average finding is heterogeneous across income groups: aggregate trade restrictions are a-cyclical in advanced economies but are counter-cyclical in emerging market and developing economies, especially in response to increases in unemployment. As to macroeconomic effects, increases in MATR are robustly associated with declines in GDP and in labour productivity (as well as being adverse for a range of other macroeconomic indicators).
Topic:
Industrial Policy, Economy, Multilateralism, and Trade Policy
Political Geography:
Global Focus

127. Employer perspectives on employee work location: collaboration, culture and control

Author:
Diane Mulcahy and Tatiana Andreeva
Publication Date:
05-2023
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
This paper discusses employers’ experience of working fully remotely during the pandemic, and their approaches to returning to the office following the pandemic. We chose to focus on the point of view of the employer since it is relatively less explored; much more is available and written on the views and opinions of employees about remote work and return to office. To understand the employer’s perspective, we reviewed existing research evidence, and carried out eleven structured interviews with corporate leaders about their experiences with remote, in-office and hybrid work. Our literature review suggests that remote work does not have negative effects on performance. Similarly, the small sample of employers we interviewed experienced very strong company and employee performance while operating their businesses fully remotely. All employers we interviewed are implementing a hybrid return-to-office policy, although the specifics of the policies are different for each company. No employer was returning to full in-office work. We focused our literature review and interviews on the impact of remote work on employee collaboration, firm culture and manager control, which we call ‘the 3 Cs’. We found that leaders maintain a belief that employee collaboration is negatively impacted by remote work, but the evidence to support this assumption is mixed. Firm culture is often cited by employers as an important rationale for bringing employees back to the office, but the research evidence and our interviewees suggest that the notion of culture is vague and the idea that better culture is supported by in-office work is not supported by any data. Finally, the shift to remote work caused corporate leaders and front-line managers to worry about effectively managing employees they couldn’t see every day. We found that companies did not widely begin implementing employee monitoring systems in lieu of onsite management. Our interviews suggest that much learning remains to transition managers and leaders to effectively managing remote or hybrid employees and teams.
Topic:
Science and Technology, Employment, Innovation, Labor Market, and Remote Work
Political Geography:
Global Focus

128. Global trends in countries‘ perceptions of the Belt and Road Initiative

Author:
Alicia Garcia-Herrero and Robin Schindowski
Publication Date:
04-2023
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
Drawing on global media reports, we conduct a sentiment analysis of the image of China’s Belt and Road Initiative (BRI) and the evolution of its image over time. Our main finding is that perceptions of the initiative deteriorated significantly in many geographies from 2017 to 2022. The notable exception is in sub-Saharan Africa where the BRI’s image remains positive, even if slightly less so than in the past. This is notwithstanding increases in debt levels with China, much of which now face potential restructuring. Furthermore, we find significant inter- and intra-regional differences in the average sentiment towards China’s landmark project, as well as a much worse image of the initiative in countries which, until today, are not part of the BRI. Finally, we focus on the European Union, Africa and China’s immediate neighbourhood to better understand the complexities behind the perceived benefits and challenges associated with China’s Belt and Road Initiative.
Topic:
Bilateral Relations, European Union, Geopolitics, Economy, and Trade
Political Geography:
China, Europe, and Asia

129. Artificial intelligence adoption in the public sector: a case study

Author:
Laura Nurski
Publication Date:
03-2023
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
This case study illustrates the drivers of and barriers to artificial intelligence adoption by organisations, and acceptance of AI by workers in the public sector. Several factors were crucial in the successful adoption of a human-centred approach to AI, including a fast discovery phase that involved workers (or end users) in the development early on, and aligning human resources, information technology and business processes. Subsidy support mechanisms were also specifically targeted and acquired to support the adoption. However, making AI support available to workers proved insufficient to ensure its widespread usage throughout the organisation. The slow adaptation of existing work processes and legacy IT systems was a barrier to the optimal usage of the technology. Moreover, the usefulness of the technology depended on both the task routineness and worker experience, thereby necessitating a rethinking of the work division between technology and workers, and between junior and senior workers. Successful human-centred roll-out of AI in Europe will therefore depend on the availability of, or investments in, complementary intangible organisational capital. Very little is currently known about these investments.
Topic:
Digital Economy, Economic Growth, Public Sector, Innovation, Artificial Intelligence, Inclusion, and Work
Political Geography:
Global Focus

130. The hidden inequalities of digitalisation in the post-pandemic context

Author:
Cristiano Cadagnone and Maria Savona
Publication Date:
01-2023
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
Digitalisation has a ‘hidden’ impact on employment, particularly on the invisible conditions of some jobs, as perceived by workers, that are relatively less explored in the literature and that could represent a substantial social cost, particularly in the aftermath of the financial crisis and the COVID-19 pandemic. We start by summarising a few main challenges of digitalisation, with a focus on the additional challenges brought about by the pandemic, the rise of platforms and alternative work arrangements, and the current attempts to regulate these. We then discuss the hidden aspects of inequality linked to the unmeasured side effects of digitalisation. Mental health in particular should be taken into account, particularly in the post-pandemic context, which has led to a significant amount of working from home. Also, the reduction of tasks previously done in the workplace in favour of remote working might limit social interactions, creativity and innovation potential. We conclude by suggesting areas for policy interventions.
Topic:
Labor Issues, Economy, Automation, and COVID-19
Political Geography:
Europe and Global Focus