The View from Brussels: The EU embraces Industrial Policy

The post below was first published on our Competition notes blog:

In the past industrial policy was a matter for the EU Member States.  Indeed Article 6, of the Treaty on the Functioning of the European Union ("TFEU") lists industrial policy as an area where the Union may only "support, coordinate or supplement the actions of the Member States" in the same way as for health and education, for example.  The main operative provision, Article 173 TFEU, instructs the Member States to coordinate their industrial policy "in liaison with the Commission" and requires the Union to contribute to the achievement of such objectives through the policies and activities it pursues under other provisions of the Treaties.

The instruments by which the Member States traditionally conducted industrial policy were the grant State aid and the encouragement of collaboration amongst future national champions. The Commission's role was principally to control excesses through the two arms of its competition policy – antitrust and State aid control.

Indeed, industrial policy, or at least targeted industrial policy, was often considered misguided or unfair and contrary to cherished market economy principles – especially when conducted by foreign rivals such as China.

The economic success of China and the industrial dependencies it has created appears to have converted first the United States and now the European Union to the need or desirability of targeted industrial policy.  We describe below some of the recent initiatives of the European Union.

Overview of some recent initiatives

As described in other blogposts, the Commission has been very active in seeking new "tools" for its trade and competition tool boxes, including the revised EU Trade Enforcement Regulation, the Foreign Subsidies Regulation and the Economic Coercion Regulation. These, and also instruments such as the Carbon Border Adjustment Mechanism, have an industrial policy subtext to the extent that they aim at protecting EU competitiveness.  They are all based on non-industrial policy legal bases and thus follow the instruction in Article 173 TFEU for the Union to contribute to the achievement of industrial policy objectives through the policies and activities it pursues under other provisions of the Treaties.

The EU Is however now pursuing industrial policy objectives more directly. The first of its major industrial policy initiatives is the Chips Act which was proposed in February 2022 and adopted on 13 September 2023.  Encouraged by the reception received by its proposal for a Chips Act, the Commission came forward a year later with a Green Deal Industrial Plan.

The Commission is implementing this plan primarily through the provision of funding and through related legislative initiatives.  There is also an external, that is international, dimension.

The funding pillar comprises direct EU funding, using instruments such as the Horizon Europe programme,  REPowerEU, InvestEU and the Innovation Fund (and perhaps new mechanisms such as the European Sovereignty Fund) as well as the facilitation of Member State funding through the relaxing of State aid rules including by amending the Temporary State Aid Crisis and Transition Framework and the General Block Exemption Regulation.

The further legislative initiatives, that are still pending before the EU legislature, are the Net Zero Industry Act and the Critical Raw Materials Act.

It is the Critical Raw Materials Act that is the more advanced of these pending initiatives since the Council has adopted a common position for negotiations with the European Parliament. We highlight some key features of each of the legislative initiatives below.

Although these proposals all refer to Article 173(3) TFEU, the primary legal basis relied on is Article 114 TFEU on removing obstacles to the creation and functioning of the internal market.

The Chips Act

The Chips Act consists of three main pillars.

The first pillar – the Chips for Europe Initiative – provides for funding.  It will direct €3.3 billion of EU funds to support activities such as the setting up of advanced pilot production lines to accelerate innovation and technology development, the development of a cloud-based design platform, the establishment of competence centres, the development of quantum chips, as well as the creation of a Chips Fund to facilitate access to debt financing and equity.

The second pillar creates a framework to ensure security of supply by attracting investments and enhancing production capacities in semiconductor manufacturing. To this end, it allows for the identification and prioritisation of certain projects (called Integrated Production Facilities and Open EU Foundries).  These are required to be "first-of-a-kind" in the Union and contribute to the security of supply and to a resilient ecosystem in the EU interest. Such projects will be accorded fast-track approval and will be recognised as projects of common European interest for the purpose of State aid law.

The third pillar, establishes a coordination mechanism between the Member States and the Commission for strengthening collaboration with and across Member States, monitoring the supply of semiconductors, estimating demand, anticipating shortages, and, if necessary, triggering the activation of a crisis stage. As a first step, a semiconductor alert system has been set up on 18 April 2023 that allows any stakeholder to report semiconductor supply chain disruptions.

The Critical Raw Materials Act

The proposed Critical Raw Materials Regulation sets out two lists – of critical raw materials and strategic raw materials – which can be updated by the Commission over time. It then establishes quantitative benchmarks (or targets) for the extraction, processing, and recycling of CRMs in the EU and to guide diversification efforts.

The main mechanism for promoting the targeted industrial activities is to require the Member States to establish "one-stop shops" responsible for facilitating and coordinating the permit-granting process for critical raw material projects and setting time limits for this permitting.  For this reason, the CRMA would amend and derogate from a number of EU environmental regulations and directives.  In addition, there is an EU level procedure (involving an European Critical Raw Materials Board) for recognising Strategic Projects judged to be necessary to help achieve the targets.  Strategic Projects are to be granted priority and other advantages.

The Regulation contains a number of other provisions to improve EU preparedness and mitigate supply risks in critical raw materials.

The Net Zero Industry Act

The Net-Zero Industry Act aims at promoting industry related to the climate policy goal of "net zero" in 2050. As in the other industrial policy initiatives, the Commission divides its objectives into pillars:

The first pillar is described as facilitating investments.  The idea is to support large scale technological capacity building throughout the EU to enable the development and manufacturing of net-zero technologies, to foster the set-up of net-zero manufacturing projects, including strategic projects, by streamlining administrative and permit-granting processes.

The second pillar sets an annual target of 50Mt for CO2 injection capacity in the EU and provides for support.

The third pillar aims at accelerating investments in net-zero technologies that will serve the internal market, strengthen the whole ecosystem, and contribute to guarantee security of supply.

The fourth pillar seeks to coordinate efforts to ensure the availability of a skilled workforce for the EU net-zero industry supporting the setting up of specialised skills academies and through the establishment of a net-zero Europe platform.

The fifth pillar promotes innovation through the creation of what are called "regulatory sandboxes" with targeted exemptions from Union law where these are judged necessary.

The sixth pillar would set up a governance structure called the Net-Zero Europe Platform aimed at allowing the Commission to coordinate the other actions with the Member States to ensure a uniform application of the Regulation throughout the EU, as well as knowledge sharing.

The final pillar would comprise monitoring and intelligence gathering instruments to enable Member States and the Commission to anticipate and prevent shortages and put in place the necessary measures to strengthen Europe’s clean energy technologies manufacturing ecosystem in more effective ways than through a patchwork of national measures.

The external dimension

All of these recent initiatives from the Commission include mention of the external dimension – often the need for the EU to remain open and attached to multilateralism but also the dangers inherent in dependencies in an unstable geopolitical environment.

The most interesting feature is however the emergence of international "clubs" of like-minded countries.  This concept first emerged in the recitals to the EU CBAM Regulation where the recitals describe the "Climate Club" as a planned "forum of countries with carbon pricing instruments or other comparable instruments … to promote the implementation of ambitious climate policies in all countries".   It is emphasised that the Climate Club should be "open, voluntary and non-exclusive" and could function under the auspices of a multilateral international organisation.

A related initiative is the Global Arrangement for Sustainable Steel and Aluminium ("GASSA") that the EU is attempting to set up with the US.

Another nascent club is a critical raw materials club of all like-minded countries willing to strengthen global supply chains.  The limitation to "like-minded countries" suggests that the main source of critical raw materials – China – will not be a member.

Conclusion

The above in only a partial summary of what the Commission is working on in the area of industrial policy.

It illustrates the emerging principles and techniques used to promote favoured industrial projects both through funding and exemptions from regulatory requirements and State aid rules.

More initiatives can be expected that build on these techniques. A large part of Commission President von der Leyen's 2023 State of the Union address to the European Parliament related to the Commission's Industrial Strategy and she promised to do “whatever it takes” to keep the Union's competitive edge and announced the appointment of Mario Draghi, to prepare a report on the future of European competitiveness.