What you describe is true, and it can also be counterproductive vecause to be competitive you need the best and cheapest services, and raising the prices doesn't often result in a healthier tech ecosystem. Typical Eurocrat thinking.

But EU citizens genuinely care about privacy, in part because of decades of totalitarian and near-totalitarian regimes.

There is another risk underpinning this, I'm not familiar with this so it's mostly hearsay on my part, but foreign firms in the US routinely get completely screwed in US courts, and fear the seizing of their data in discovery processes or other ways. The data sharing agreement was made to provide some degree of clarity or assurances in this regard.

I've met managers who are convinced that if they're not careful, their IP and business data will get stolen by their US competitors through various legal or less-legal means. EU executives have been detained for days at the border on suspicions of terrorism to coerce them into selling US assets. I can't judge if this is paranoia, and maybe those companies could make use of better protection against Chinese hackers but there's certainly some truth to that.