Transatlantic turmoil

While the target for recent US legislation is China, the levels of State supports involved will have a serious impact on European competitors, writes

Shane Conneely, Director of Policy and Communications at Chambers Ireland.

Transatlantic trade is one of the important areas of focus for Chambers Ireland and the EU this year, with President Joe Biden’s Inflation Reduction Act and the Chips Act having created serious tensions across the two blocs. The US has implemented these new industrial policies as a result of a change in their national security stance.

The Chips Act relates to vulnerabilities that the US might experience as a result of a Chinese invasion of Taiwan (which produces 60% of the world’s semiconductors and over 90% of the most advanced ones). And the Inflation Reduction Act arises from the dominance that the Chinese have in the area of smelting the rare-earth metals that are so important to batteries and magnets.

These Acts see hundreds of billions of dollars being invested by the Federal Government in creating mining and smelting value chains within the US so that they have secure supply of the magnets that are fundamental to electric motors and turbines as well as the batteries that are vital to electricity storage.

On the semiconductor side, two thirds of the investment is in primary research to create local demand and the remainder is to build out capacity in terms of fabrication and lithography.

This shift is in part a result of the strategic weakness that Covid-19 – and the trade war that parallels Russia’s war on Ukraine – demonstrated within the long, concentrated supply chains that we have benefitted from since the 1990s.

For the US, rare earths and silicon have become critical military inputs and so we can expect those industries to receive the protectionist policies that it has demonstrated in steel and aluminium production.

Significant friction

This is causing significant friction at the EU-US Trade and Technology Council which had hoped to forge a shared approach to semiconductors and rare earths. Given the national security pay-offs involved, the US is likely to accept large friction costs in terms of trade tariffs and World Trade Organisation disputes, and so the EU is unlikely to dissuade it from this course of action.

This suggests that if EU companies are to have a level playing field, then they too will need supports that are at least equivalent to what the US is doing.

The EU response is branded as the ‘Green Deal Industrial Plan’ and will allow EU Member States to subsidise local industry. This is good, but it is also relying on Member States to have the capacity and the creativity to know how and where to invest.

There is a real risk, as we saw with the Covid-19 Recovery and Resilience Facility, that States with the capacity to spend such as Germany will further concentrate the industrial output of the EU. Whereas Irish institutions, as was demonstrated by last year’s White Paper on Enterprise, are unlikely to have the imagination to deliver such supports at a scale that will be effective.