The EU’s ‘Chips Act’: A Rent-Seekers Paradise or a Feasible Industrial Policy?

Microchip shortages are high on the agenda of governments and businesses feeling the pinch of ongoing supply shortages. Not least for this reason, there is a broad political consensus in Europe that strong support is needed for the European chip industry in order to be independent of Asian manufacturers in the future.

The European Commission wants to promote the industry with the Chips Act. In doing so, it also wants to ensure that Europe's share of the world market doubles by 2030 - from just under 10 percent at present to around 20 percent then, with an expected doubling of the total production of microchips. Why 20 percent market share in particular is so important remains their secret. In any case, it sounds quite mercantilist.

The European experience with promoting the microchip industry is rather bad. In the 1980s, the German government generously promoted the development of microchips in the Federal Republic; in total, many billions of deutschmarks were spent. As a result, the German semiconductor industry always developed exactly the generation of semiconductors that its competitors had just replaced in favor of a new generation. It can be seen that the world market leader changed with each generation; unfortunately despite government support a German company has not been among them.

Instead of learning from this experience, the European Commission is now planning a new chip production industrial policy. It is possible that the negative consequences will be even more severe this time. Because now, in addition to the promotion of technology, the promotion of the construction of factories is also to take place. For this case, the subsidy control is to be changed. Instead of lowering the thresholds only for 'unique state-of-the-art products', as was previously the case, this will now already happen if the goods produced with them are 'unique' in Europe.

In total, about 45 billion euros are to be spent from national and European budgets by 2030. The sum seems to have been chosen primarily because it roughly corresponds to the $52 billion that the U.S. government plans to spend to support the semiconductor industry - albeit by 2026. This sort of policy matching is a well-known phenomenon, by the way. Since the future is unknown, governments look at what other governments are doing.  The thinking in Brussels appears to be: “The U.S. is spending so much money on microchips, so they must be really important - so the Europeans should not lag behind”.

The Commission's primary concern here is not that European companies set up shop in Europe. Companies from Taiwan and the United States (US) are also to be supported. It is expected that investments will now be made quickly after the announcement - yet one can have doubts about this. After all, from the point of view of private firms, it would probably be wise to wait and drive up the price, i.e. the subsidy, before committing to large-scale investment. There will also be incentives to play European or even regional governments off against each other. The case of Nokia in Bochum more than 15 years ago shows that investment decisions in such a situation depend almost exclusively on the level of subsidies.

Now, one can argue that times are changing. Perhaps the state is better able to recognize the future today and is guided by more well-meaning actors than in the past, and perhaps companies are less rational today than they were in the 1980s and no longer try to receive the highest possible subsidies. So can we now expect Europe to be at the forefront of microchip production in 2030? Will Europeans be the technological leaders in this sector?

Probably not. Because it doesn't look like today's policymakers have a more comprehensive knowledge of the future than their predecessors. They are only reacting to a crisis; you can't blame them. And interest among industry has not changed, private firms still want free money. The incentive for them to be technologically ahead was reduced rather than stimulated by technology subsidies as early as the 1980s. This is by no means a surprising result, because if a lot of money is spent on catching up when technology is lagging behind, it is not worthwhile for companies to catch up.

If, in addition to research, production is subsidized, it is not worthwhile to make hasty investment decisions; this can be seen today with American semiconductor companies, which have been announcing their investment decision for a very long time. They are probably just waiting for the signal from the Commission. Whether they will then actually decide quickly, as announced, remains to be seen. It may make more sense to be coy and squeeze out a little more in subsidies.

In summary, one must have doubts about the effectiveness and efficiency of the Chips Act as it is planned today. It is unlikely that the EU will be a leader in the world market for microchips in less than 10 years. Companies are likely to invest in rent-seeking rather than profit-seeking, profit-oriented risky entrepreneurial projects. This type of funding also attracts large companies that have entire staffs dedicated to lobbying. Small, dynamic companies tend to receive considerably less in subsidies - relatively speaking. They are more likely to have to pay for the taxes that the large - globally active - companies absorb as subsidies. In other words, the promotion of a cutting-edge technology comes at the expense of structural change and technological progress in many other fields.

In conclusion, there is not much to be said in favor of the EU's Chips Act - economic successes are rarely the result of a centrally made political decision. The uncertainty is too great; moreover, the Chips Act only stimulates the global subsidy race. It would be wiser for European companies to be able to concentrate on their strengths and for Europeans to obtain the chips, made cheaper by U.S. subsidies, from where they are produced most cheaply; the dependencies that seem so unpleasant right now can be reduced by long-term contracts with many suppliers. Not all EU member states are convinced yet, and there is still some resistance from science and politics. Let's keep our fingers crossed that rationality will prevail.

Andreas Freytag, Professor and Chair of Economic Policy, Friedrich Schiller University, Jena and Visiting Professor with IIT

The views expressed here are the author’s alone, and do not represent the views of the Institute for International Trade.

Credit: Photo by Sahand Babali on Unsplash

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