Citation suggestion: Gerard Pogorel, GP (2023). 2023: Righting the ‘Three-Circle’ EU Industry Strategy. Future Europe, 3(1), 110–117.
Introduction
In the last three years, the European Union (EU) has entered an obstacle race, confronting continuous and additive crises such as the COVID-19 pandemic, the Russian invasion of Ukraine, and the readjustment of its industries to changing and exacting international circumstances. In a previous ELF publication (Pogorel, Nestoras § Cappelletti, 2022) we introduced the notion that the EU must provide a consistent definition of its policies within a ‘three-circle’ framework: the Union Circle (the 27); the ‘Friendship Circle’, which consists of the EU and its allies in Europe, the Americas, and Australasia; and the ‘Wisdom Circle’, which involves the political and economic intricacies of dealing with ‘rivals’ such as China, autocracies in various continents, or even on-the-fence democracies including India or Indonesia.
In this concluding article, we will focus on the contemporary challenges in straightening out EU policies within the ‘three circles’ as hopes of consistently defining shared policies, particularly between the EU and the United States, emerged against diverging views and categorical imperatives of internal politics.1
The EU–U.S. conundrum – back with a vengeance
After years of bickering on trade issues with the previous U.S. administration, the EU–US Trade and Technology Council (TTC), established during the EU–U.S. Summit on 15 June 2021 in Brussels, seemed to pave the way towards resuming a coordinated approach across the Atlantic to address trade and technology challenges. In the first phase, which took place in 2021 and early 2022, the 10 TTC working groups seemed poised to extensively review current and potential issues in the spirit of common understanding. Then, in August 2022, President Joe Biden signed into law the Inflation Reduction Act (IRA), a massive $369 billion industry support and climate bill. At a recent European Parliament event, a senior European industry executive emphasised that under the current European regulation, EU industries can receive 3%–8% support for investments in innovative production, whereas, in the United States, investment subsidies of 50% are now offered for the expansion of facilities that implement current manufacturing technologies. Under these circumstances, it is not surprising that European companies, which are being actively lobbied to shift their investments to the United States, are considering doing so.
The EU has criticised the IRA as restrictively favouring U.S. and U.S.-based products and firms. In response, ‘The U.S. Treasury Department signalled some imported cars will qualify for electric-vehicle tax credits in the IRA, a move that could assuage Asian and European allies’ concerns about the sweeping climate legislation’ (Coppola § Condon, 2022). Europe’s trade officials and their U.S. counterparts are actively negotiating EU exemptions to the law’s domestic content requirements for electric-vehicle batteries, among other issues. Although the planned provisions have been put on hold in January 2023, the wording of the law is stringent, and it remains unclear what can be done to mitigate the ‘make and buy in America’ effect.
At Davos 2023, European Commission (EC) President Ursula von der Leyen declared, ‘So, this is why we have been working with our United States friends to find solutions. For example, so that EU companies and EU-made electric cars can also benefit from the IRA. Our aim should be to avoid disruptions in transatlantic trade and investment. We should ensure that our respective incentive programmes are fair and mutually reinforced’ (Euronews, 2023).
No ‘decoupling’ with China
Policy initiatives must be considered against the deeply critical background of the war at the heart of Europe and the cooperation/rivalry with China. At the outset of 2023, the United States and the EU must make difficult decisions regarding the industries under their charge that are intricately intertwined with China. Far from a ‘decoupling’ with China being on track, the United States in 2023 achieved a record-high value in its trade with China.
The same is true for EU–China trade. In 2021, the total value of trade in goods between China and Europe hit €696 billion, up 24% from 2019 (Eurostat Statistics Explained, 2023).
In this context, frequently cited differences in the political discourse in approaches to China, the United States tougher and the EU softer, are largely window dressing at the moment, although a sharp decline of foreign direct investments in China being observed in Q3 and Q4 2022 (Nikkei, 2022) possibly announces a more drastic re-orientations of world trade and international division of labour.
Now should have been a good starting point for a coordinated response to a common problem. This did not happen. In a recent event hosted by the Washington-based Center for Strategic and International Studies, former U.S. Trade Representative Susan Schwab said, ‘We’ve left out a very important component of a China strategy, which is we have to do a better job of working with our allies’. She added, ‘You can’t be conducting a trade policy that systematically alienates all of your other trading partners and then think they’re warm and fuzzy about your China policy’ (Baschuk, 2022).
Should Europe emulate the United States?
Structuring a realistic EU ‘sovereignty’ strategy is daunting. Decades of globalisation, the urgency of reaping the shared benefits of comparative advantages, and open borders have created an intricate network of supply–demand dependencies, which have been analysed, for example, in a recent McKinsey report (Baschuk, 2023).
The report, which examined trade flows for some 6,000 products among 120 countries, found that no region is close to achieving economic self-sufficiency. The reason is that countries continue to rely on trade with others for more than 25% of at least one important type of good. Francoise Huang, senior economist for the Asia Pacific at Allianz Trade, said, ‘The EU is a key supplier for 300 critical goods to the U.S., but that represent only 4% of total U.S. imports, whereas with China it’s 10% . . . Given that we have these critical dependencies in place – there are good reasons for the U.S. and EU to work even closer’ (Baschuk, 2022).
IRA for Europe?
According to some analysts, the only opportunity in the current EU–U.S. context is for the EU to follow the path of the United States and emulate the IRA with a set of industrial policy initiatives. For Europe, however, matching the U.S. IRA is a costly path, engaging in fragmentation trade among allies.
As stated by The Economist (2023),
One problem is their extra economic costs. The Economist estimates that replicating the cumulative investments of firms in the global tech-hardware, green-energy and battery industries would cost $3.1trn–4.6trn (3.2–4.8% of global GDP). Reindustrialisation will raise prices, hurting the poor most. Duplicating green supply chains will make it costlier for America and the world to wean themselves off carbon. History suggests that vast amounts of public money could go to waste. . . . Nobody expects America to go back to the 1990s. It is right to seek to preserve its military pre-eminence and to avoid a dangerous dependence on China for crucial economic inputs. Yet this makes other forms of global integration all the more essential. It should seek the deepest cooperation between countries that is possible, given their respective values.
The Economist concluded, ‘The clock is ticking’.
Is there a choice? At Davos 2023, President von der Leyen explained the EU’s intention to navigate an ocean of reefs. Such an effort combines a net-zero industry act, a critical raw materials act (16 March 2023), a temporary adaptation of EU state aid rules to accelerate and simplify procedures, simple tax break models, targeted aid for production facilities, and strategic cleantech value chains. The EU would also mitigate the relocation risks of foreign subsidies by setting up a European sovereignty fund that ‘will provide a structural solution to boost resources available for extreme research innovation and strategic industrial projects, but as this will take time, we will look at a bridging solution that is the most needed to provide fast and targeted support’ (Euronews, 2023).
De-risking rather than decoupling?
At Davos 2023, President van der Leyen also defined the EU’s industry and trade policy as a ‘de-risking, rather than decoupling’ (Euronews, 2023), thus recognising the realities of hard industrial interdependence, the commitment to the benefits of preserving an open international economy as much as possible, and the call for an analysis and mitigation of industrial risks.
With the extent and complexity of necessary decisions, risk analysis and hedging bets are a reasonable approach for the EU, in which policy imperatives and industry realities are carefully integrated – which is not an easy task. Some natural resources, not easily substitutable, have a limited number of suppliers, some of them ‘risky’. Political risks also affect the Friendship Circle, within which the optimal approach should have been the preservation of the benefits of the open international economy and trade. However, because of the prevalence of U.S. internal political considerations, this has not happened in the past few months. The United States has been swept not only by rains, tornadoes, snowstorms, and floods but also by a super-wave of America-one-and-only policies. It remains preferable to coordinate among allies or at least not reintroduce the ‘beggar-my-neighbour’ policies of yore, setting aside arguably the most economically and politically efficient policy approach. Therefore, policies among allies in 2022 have gone awry. In early 2023, regardless of efforts from European diplomacy, the Biden administration seemed only moderately amenable to significantly reversing its policies, which were painfully enacted into law in Congress. In Europe, there are calls, particularly from the industry, to match tit-for-tat U.S. protectionist initiatives, not to mention similar protectionist policies in Asia (e.g. India and Indonesia). Regarding China, the only realistic path is for the Friendship Circle to optimise and hedge their bets. Risks to supply chains can be measured and their probabilities considered. They can be mitigated by first increasing inventories, multisourcing, and diversifying providers. Uncertainties, meanwhile, are more difficult to manage as they affect one-of-a-kind resources or markets, which are not substitutable. Uncertainties are also hardly predictable and measurable and might lead to major disruptive outcomes.
A McKinsey report stated that ‘[b]y having a clear-eyed view of concentration, decision-makers can decide when and where to double down, decouple, or diversify, and how to reimagine rather than retreat from their global footprints’ (White, Woetzel, Smit, et al., 2023). As a caveat, however, some risks are also involved when stacking industrial public funding policies. In electronic components (‘chips’), the much-heralded ‘chips acts’ were voted both in the EU in February 2022 and in the United States in July 2022. However, chips constitute a notoriously fickle and deeply cyclical industry. As soon as July 2022, Federico Rampini asked in the Corriere della Sera,
Is the semiconductor shortage already over? Background of an alarm (and, perhaps, of an error that weighs in our pockets)
The market was perhaps already solving the problem by itself, making the law of supply and demand work. That is, by adjusting production to consumption. The problem of scarcity would already be on its way out. South Korea, the world’s second largest producer, has already announced that its stock of microchips has grown by 50%. Intel and Nvidia, two of the largest American manufacturers, have suspended new hires in anticipation of a slowdown in activity.
The symmetrical trans-pond chips acts, far from boosting investments in 2023, would bring a significant windfall to the semiconductor industry, with public money substituting their own corporate funding investments.
What can be done to improve the EU’s industry and trade positions?
This article suggests some modest complementary actions alongside the EC president’s announcements at Davos 2023, presented here for comments and discussions.
Reinforcing the EU’s diplomatic position
Diplomacy is the backbone of the EU’s long-term efforts to reap the benefits of open economy and trade while conducting a rationally assessed hedging of the risks and uncertainties at the fringe of the Friendship Circle and beyond. EU diplomats have a field day for their talent. There are no clear-cut rationale principles to help them cope with Russia’s barbarian vagaries, China’s tight-rope walking, the multiple variables that shape U.S. policies, the always more real-politik behaviours in the Middle East and Africa, and, of course, steering the navigation of a 27-member union.
Our diplomacy must be reinforced by investing in reciprocal knowledge and understanding among allies. In an age where knowledge is universally and instantly available, the EU and the United States have faced reciprocal misunderstandings of their policies. For some time, the United States has characterised Europe as having a benign neglect of its own defence, not spending enough, and relying on American military expertise. Meanwhile, Europe, against all evidence, has believed in a multilateralist, free-trade America while ignoring the deep social and industrial roots of American protectionism. Europe is now progressively ramping up its military expenditures. The Biden administration, state, and treasury seem eager to mitigate the provisions of the bill passed in Congress. The EU is working with its trading partners such as Canada and the United Kingdom to resolve issues and Mexico, New Zealand, and Australia to finalise agreements. However, a long-term perspective would be as follows:
Recommendation: Strengthen reciprocal understanding among allies by engaging in more joint academic research and training programmes, which may include a trans-Atlantic and trans-Pacific module to the College d’Europe Pilot Programme of the European Diplomatic Academy managed by the European External Action Service.2
Innovative investments in competitiveness, R&D, and skills policies
The EU and, before that, the EC, have implemented ambitious policies in competitiveness, research and development (R&D), and skills policies for one or even two generations. This is the opportune time to experiment moving forward and beyond what has been done. European countries must now ‘jointly develop and measure progress on digital skills, digital infrastructure, and digitalisation of both private industry and public services’ (see European Commission). The EC’s new Digital Decade programme, which will be in effect until 2030, ‘makes “digital transformation” in four areas – skills, infrastructure, business, and government – a collaborative initiative, also with the EU parliament and its 27 member states. Nominally, and explicitly, infrastructure covers connectivity. The Digital Decade agreement observes the commission’s declaration on European Digital Rights and Principles, signed at the start of 2022’ (Blackman, 2023).
Recommendation: Complement the vision of the Digital Decade programme with radically single-market-minded tools for skills, R&D, and investments and instruments devoid of MS return provisions, whether formal or de facto.
Complement horizon R&D with less constrained instruments
The EU, in parallel with its already crucial research efforts, could experimentally promote R&D projects with a European single-market spirit, devoid of cooperative constraints. One example is the GAIA-X Programme, which ‘enables a federated and secure data infrastructure, whereby data are shared, with users retaining control over their data access and usage. It enables the creation of links between many cloud service providers in a wider, transparent, and fair ecosystem to drive the European Data economy of tomorrow’ (see Gaia-X).
Another example is the Joint European Disruptive Initiative’s (JEDI) suggestion of a ‘European advanced research projects agency, with a mission to bring Europe in a leadership position in emerging and breakthrough technologies. JEDI is launching Grand Challenges to push the frontiers of science and innovation, with a radical new method based on purpose-driven research, maximum speed, full focus on excellence, deep interdisciplinarity, and bold “moonshot” risk-taking’ (see JEDI).
Recommendation: Experimentally promote programmes similar to GAIA-X and R&D projects similar to JEDI’s Grand Challenges with a European single-market spirit but without cooperative restrictions.
Implement a market-compliant ICT investment instrument to overcome gaps in ICT investments and achieve productivity gains in the EU
The 50% gap in the EU’s investments in ICT systems as opposed to that of the United States is largely a product of the organisational transformation implications surrounding ICT investments, that is, structural changes in corporate and industry organisation management, job transformations, and losses. Organisational change in the EU is more difficult and more time-consuming than in the United States. In this respect, the function of the famed EU ‘social model’ can be both positive and negative. The EU’s protective social net facilitates organisational innovation in some EU countries but makes it slow or impossible in others.
Recommendation: Implement a cooperative instrument between the EC, the European Investment Bank, banks, and consultancies to promote investments in ICT systems in EU industries.
Endnotes
- The analyses, suggestions, and recommendations presented in this article are strictly those of the author and do not represent any official stance by the ELF.
- See ‘College of Europe Hosts and Runs Pilot the Programme of the European Diplomatic Academy’, College of Europe, https://www.coleurope.eu/college-europe-hosts-and-runs-pilot-programme-european-diplomatic-academy.
References
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Nikkei
https://asia.nikkei.com/Economy/Foreign-investment-in-China-slumps-to-18-year-low
Pogorel, G., Nestoras, A. § Cappelletti, F. (eds.) (2022). Decoding EU Digital Strategic Autonomy. Sectors, Issues, and Partners. ELF Techno-Politics Series 1 (Brussels: European Liberal Forum), https://liberalforum.eu/wp-content/uploads/2022/06/Decoding-EU-Digital-Strategic-Autonomy_ELF-Study_Techno-Politics_vol.1-2.pdf.
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Translation – courtesy of Google translate.
White, O., Woetzel, J., Smit, S. et al. (2023). ‘The Complication of Concentration in Global Trade’. McKinsey Global Institute, 12 January, https://www.mckinsey.com/mgi/our-research/the-complication-of-concentration-in-global-trade.
