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Digital society March 9, 2022

Does the European Chips Act herald a new protective policy era?

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We use them unconsciously every day: Semiconductors are a part of our daily lives, even though not visible. They are in nearly every electronic device, like laptops, smartphones, and tablets. They also became essential for many automobiles, home appliances, and medical instruments.

During the pandemic, the demand for semiconductors rose. At the same time, semiconductor manufacturers needed to slow down their production because of missing labor forces and extreme weather events. Because of the high dependency on non-EU suppliers, any disruption of the supply chain slows down or even halts European industries. In Germany, the automotive industry in particular suffered a drop in sales. The European Union wants to counter the resulting shortages with digital policies in to support and incentivize the economy. As the European Commission President Ursula von der Leyen said, while announcing the European Chips Act in her State of the Union address on September 15, 2021, “There is no digital without chips.” 

The European Chips Act – adopted by the European Commission on February 8, 2022 – aims to strengthen Europe’s semiconductor ecosystem by, among other targets, reducing external dependencies. The Chips Act applies lessons learned from the European Strategy for Micro- and Nanoelectronic Components and Systems, in which the research and development side was saturated. The Act not only supports R&D, it also includes active market intervention mechanisms. 

Currently, Europe has only a 10 percent global market share in semiconductors; the European Chips Act aims to increase this market share to 20 percent. Public funds, such as the new EU Chips Fund, should attract private investment from existing industry players as well as newcomers to the semiconductor field. By creating these market incentives, the funds should make the semiconductor industry grow in Europe. 

The Chips Act will herby aim to foster European digital sovereignty – its ability to act independently in the digital realm. Although the EU is rather reserved about using industrial policies, this Chips Act is a protective industrial policy measure. Has that been adopted from the Chinese approach? China has shown how governmental intervention can quickly upgrade value chains, especially in the electronics sector. Very significant in that upgrading were state economic incentives like infrastructure investments or attracting foreign capital. Besides that, China also was active in technology transfer – gaining knowledge about an industry through foreign investment and acquisition to build the same capacities domestically. The protective measure of keeping a favorable WTO status after China industrialized played a role during the last years.  

Classical liberal economists like Adam Smith frowned upon such market protection. They argued that the market itself finds its equilibrium between supply and demand. This liberal theory has dominated European and US American policy over the last decades – an approach that has contributed to problematic monopolistic and oligopolistic structures, as especially visible in the Tech Industry. 

Whether $49 billion in public and private funding via the Chips Act will really boost European’s commercial independence in the digital field is still unclear. Necessary would be to analyze those public market interventions. Possible could be a comparative approach of countries, like Brazil or China, which higher public market interventions during specific periods. An analysis of the data could even predict policy intervention outcomes and improve future measures. 

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