The EU’s unlikely ambition for sovereignty in semiconductors

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Hello from Brussels. Yesterday was the EU’s annual “State of the Union” speech, in which Commission President Ursula von der Leyen articulates the subset of her desired policies that the Commission’s limited budget and powers might one day allow her to implement. Today’s main piece looks at one of them — an imprecise but determined statement of intent to pass a European “Chips Act” to make the EU if not self-sufficient in semiconductors, at least more reliably supplied in the light of recent global shortages.

In other news, a reshuffle of ministers in London means Britain has a new trade secretary, Anne-Marie Trevelyan, in place of the ebullient Liz Truss. Not clear if this makes any difference, given the unpredictability of UK trade policy. One big political decision (shaft the farmers) has apparently already been taken to get deals with Australia and New Zealand done, but whether Britain wants to do the same in a future bilateral with the US is unknown. The new US-UK-Australia nuclear technology deal suggests defence is a better bet than trade for extending the Transatlantic Relationship. With rather unfortunate timing, the EU is announcing its own Indo-Pacific strategy later today. Given its belief that the regulatory Brussels Effect makes it a geostrategic power, perhaps the EU can dispatch GDPR or the Reach chemicals regulatory regime to the South China Sea.

Charted waters looks at the impact on the China-Australia trade spat on coal.

We want to hear from you. Send any thoughts to trade.secrets@ft.com or email me at alan.beattie@ft.com

Sticking to specialisms in the chips supply chain

“Looking fwd to your newsletter on this European semiconductor autarky”, ran a mordant WhatsApp message we got from an EU official yesterday morning just as von der Leyen was speaking. We hate to disappoint our readers, including (perhaps especially) the cynical ones, so here goes.

First, we’ll need to see exactly what the Commission has in mind. Neither the speech itself nor a triumphalist blog post by Thierry Breton, the French internal market commissioner (and former telecoms/media CEO, instinctive state interventionist), were particularly long on detail.

But one assertion did stand out. In von der Leyen’s words, the EU should aim to create “a state of the art European chip ecosystem, including production [t]hat ensures our security of supply and will develop new markets for groundbreaking European tech.”

In other words, the EU isn’t just going to be content with the bits of the semiconductor supply chain it already does well — R&D and some very specialised high-tech manufacturing, such as the photolithography machines supplied to the world’s chip producers by the Dutch company ASML. It wants to get into large-scale production for the domestic (and export) market as well. 

You can see the logic from a political economy perspective. Offshoring any part of a value chain puts domestic supply at risk if production rests in the hands of potentially politically hostile (China) or protectionist (the US) trading partners. Washington and Beijing themselves are pouring tens and hundreds of billions of dollars respectively of public money into boosting domestic semiconductor production. European manufacturers are chuntering about how they need the same if they are ever going to scale up chip production in the EU.

While we’re in no way experts in the semiconductor industry, it doesn’t look to us like trying to build large-scale production capacity in the EU is feasible or sensible. For one, there are practical objections, namely the old problem that the single market may be EU-wide but the money for R&D and subsidies resides mainly with member states. The Commission doesn’t have tens of billions of euros to chuck around. True, the usual state aid rules constraining public subsidies at member state level are loosened in this case by semiconductors having been designated part of an “important project of common European interest” (IPCEI), but there’s still a big co-ordination problem. The amounts of money discussed so far are minuscule compared with those in China and the US.

Second, it’s not at all clear there is a big market failure that needs addressing. With long lags between doing the R&D and building the factories to actually producing chips, the global semiconductor industry is used to multiyear cycles of shortages and high prices followed by surges in output. Covid may have exacerbated the cycle by pushing up demand for consumer durables, as we noted yesterday, and hence the chips that go in them, but the problem is not new.

In particular, if the issue is a lack of the relatively unsophisticated chips used by industries such as cars (of particular interest in Europe), governments might well end up just subsidising production during a glut. The resulting collapse in prices will either mean bankrupting the companies they have lured into the sector or continuing to shell out money to keep them afloat. Chad Bown at the Peterson Institute in Washington, who has closely followed the semiconductor debate, says exactly this issue has arisen in the US: “The US Congress is realising that if they want to subsidise the production of legacy chips for the auto sector, they need to be prepared to do it in perpetuity.”

The more sophisticated think-tank and academic analysis we’ve seen on the EU semiconductor issue (like this from Bruegel, this from the London School of Economics and this from the Institut Montaigne) suggests that rather than trying to build an entire semiconductor supply chain inside Europe, still less to become a major exporter, the EU should focus on the high value-added stuff it does best and on which the US and China themselves rely. Europe’s best hope for security of semiconductor supply, the argument goes, is not to become autonomous of all other semiconductor producers but to ensure that other semiconductor producers are dependent on Europe.

These thoughts are all preliminary: we’ll come back to the issue when we have a clearer idea of what the European Commission is proposing and the EU member states might agree to. But even at this stage it looks a bit like the EU is trying to solve a long-term production issue that doesn’t necessarily exist while neglecting to develop the leverage that Europe already has.

Charted waters

Peter Sand, chief shipping analyst at Bimco, had a chart in his latest research note that has piqued our interest. It highlights the impact of the falling-out between Canberra and Beijing on trade.

Based on data from Oceanbolt, a shipping data provider, it shows that Chinese coal imports originating in Australia are down 98.6 per cent for the first seven months of this year compared with the first seven months of 2020. Indonesia has been the main beneficiary, with imports originating from the Asean member up 45.2 per cent.

Column chart of Chinese coal imports by source (millions of tonnes) showing China has stopped buying Australian coal, turning instead to Indonesia

In the first seven months of 2020, there were 697 shipping voyages carrying coal between Australia and China, while this year there have been just 14. “As disruption on the Australia-China coal trade enters its second year, new matches are being made between buyers and sellers as they all seek to fill the gaps left by restrictive trade policies,” says Sand. “These changes fit into the wider picture of a strong dry bulk market influenced by various congestions, particularly in Asia, soaking up tonnage and pushing freight rates upwards.” Claire Jones

Trade links

Here’s today’s FT round-up. Joe Biden should tell the UK to abide by the Northern Ireland deal it signed as part of Brexit, argues the FT’s Philip Stephens. America’s fledgling offshore wind power industry, meanwhile, risks being left “dead in the water” if US authorities clamp down on the use of foreign materials and equipment, according to the Spanish-owned company jointly building the country’s first big project. The EU again promised a global infrastructure spending programme to rival China’s Belt and Road Initiative (we’re not holding our breath), and said it would ban imports of products made with forced labour

Nikkei has an interesting piece ($) on South Korea’s $177m fine on Google by William Pesek, who says it (and new rules clamping down on proprietary billing systems) draws a road map for the global economy on how to rein in Big Tech. Overseas investors betting on sustained growth in the semiconductor industry are driving up the stock price (Nikkei, $) of Tokyo Electron, Japan’s largest producer of chipmaking equipment. Alan Beattie, Francesca Regalado and Claire Jones

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