Digital, Industrial policy & trade, Latest news, subsidies

Semiconductors: Von der Leyen promises “diversification among like-minded partners”

Plans towards a European Chips Act are maturing. European Commission president Ursula von der Leyen announced a new regulation mirroring similarly named recent United States legislation will be tabled as soon as early February.

Brussels’ move in the semiconductor sector heralds a much more politically controlled approach to supply chain trade in Europe – which one can call “ally-shoring”, currently a popular idea in Washington. Von der Leyen’s move also paves the way for a more permissive subsidies policy in the EU that might impact the global rule-book on trade and subsidies in the longer term.

The EU move further feeds into the ongoing preparations of the next EU US Trade and Technology Council which is to be held in March or April, as well as into ongoing preliminary conversations with Singapore, Japan and Korea on digital industrial issues.

“We will promote diversification among like-minded partners,” said president von der Leyen. “We will create more balanced interdependencies and we will build supply chains we can trust by avoiding single points of failure”.

Speaking at the annual – this year virtually-held – Davos forum, the EU leader explained that the new policy will have five pillars.

The first three pillars involve strengthening the EU’s research and innovation capacity, “ensuring European leadership in design and manufacturing” and support for “small and innovative companies in accessing advanced skills, industrial partners and equity finance”.

For international EU trading and investment partners it is the new remaining developments that might be of particular note.

“We will further adapt our state aid rules – of course under strict conditions,” said president von der Leyen. “But this will allow public support for the very first time for European first-of-a-kind production facilities.”

The EU has already unlocked about € 160 billion of its emergency COVID-19 recovery fund to boost its digital and semiconductor innovation capacities, but the permissive new rules would help unlock national government financing.

The Chips Act will also foresee a crisis-management mechanism should there be shortages or supply bottlenecks.

“We will improve our toolbox to respond to shortages and crises in this sector, to shore up our security of supply to be better prepared,” said von der Leyen. It is not clear whether and how far this will be integrated into broader Commission plans for an EU single market resiliency mechanism which is currently under development.

End of ‘pure’ free trade and investment in European semiconductors 

“Europe will always work to keep global markets open and connected,” said von der Leyen. “This is in the world’s interest and this is in our own interest. But we also need to tackle the bottlenecks that slow down our own growth because this will help us become a stronger player not just in some niche but throughout the whole value chain. And it is important to for us.”

The EU’s subsidies plans comes as it seeks to compete with the US own pledges to subsidies semiconductor production sites. The US is doing so as part of its own pandemic recovery and supply chain resiliency plans.

Washington wants the US territory to be the place where 30% of global production of semiconductor takes place by the end of this decade. The EU aims for 20% of global production share.

A race to attract the very few Asian and US manufacturers that can roll out large-scale manufacturing is already on.

Observers and business stakeholders hope that the formal launch of a cooperation mechanism dedicated specifically to semiconductors under the recently established EU-US Trade and Technology Council this spring may avert zero-sum approaches in subsidising companies or global overcapacities that risk causing future trade frictions.

There are indications that the EU’s Chips Act could involve potential restrictions to trade and investment in the sector, at least as part of the crisis management mechanism.

Speaking last October, internal market commissioner Thierry Breton criticised Chinese “activist” Chinese investments in the semiconductor sector and hinted that restrictions in this area could apply as part of the Chips Act.

Speaking one week ago in Paris Breton praised the EU’s vaccine export control mechanism rolled out for the first time ever at the height of the pandemic in 2020 as a tool leveraged by the EU to negotiate with third countries that had blocked exports of critical medical products or components and indicated it should be part of the EU’s supply chain crisis management toolbox.

What is not clear is how far such measures would be part of the Chips Act or the act would tap into broader EU state aid legislation reforms or the future general EU post-pandemic single market resiliency mechanism.

Towards “ally-shoring”?

The new US and EU plans are destabilising a semiconductor industry that had gotten used to being totally globalised, not least on the back of the duty-free trade regime foreseen by the WTO’s Information Technology Agreement.

The US-China tech rivalry is however throwing spanners in this industry as China itself is seeking to develop its own semiconductor capacity after having been hit by the Trump administration’s export restrictions in this sector a part of efforts to curb the development of Chinese tech giants. The Biden administration is continuing this policy.

Albeit amidst great reticence, some business stakeholders involved in the transatlantic Trade and Tech Council process appear to have come to terms with the idea that open supply chain trade in critical sectors such as semiconductors might in future be conditional on ‘political compatibility’ of the countries that host their various production sites.

AmChamEU for instance, “supports ally-shoring efforts as a component of collaboration between the EU and the US, as well as with third-country partners that share common values.”

That might not please current EU-based semiconductor supply chain actors which might precisely be concerned about their exports to China drying out. But given that China itself is trying to become self-sufficient in the semiconductor area, European industry might well have to play along.

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