The European Union‘s $47.5 billion legislation to jump-start semiconductor manufacturing capabilities has come into force as the bloc aims to compete with the United States and China for chip dominance.
The European Union’s Chips Act came into effect over a year after President Joe Biden signed the CHIPS and Science Act into law, which provides nearly $53 billion to subsidize domestic semiconductor manufacturing. The bipartisan law was meant in part to ensure that the U.S. is not reliant on countries under the sway of China.
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Now, Europe is engaging in a similar effort to ensure that it doesn’t get left behind. It is part of a broader trend toward greater state-led initiatives to claim a greater share of manufacturing.
Europe has historically been critical of using subsidies to promote trade development but shifted its approach in the last two years after all the bonuses the U.S. provided in its legislation.
“It’s like a declaration of war,” Robert Habeck, Germany’s vice-chancellor and economics minister, said at a June business conference about the growing number of tax breaks and subsidies the U.S. provides specific industries. “The [Americans] want to have the semiconductors, they want the solar industry, they want the hydrogen industry, they want the electrolyzers.”
The 28-state collective also approved $8.6 billion in state subsidies in June to improve Europe’s research efforts into chips.
Still, Europe’s efforts are not necessarily a threat to the U.S.
“I don’t think the U.S. has much to worry about involving [the European Chips Act] from a competitive standpoint,” Ryan Young, a senior economist at the libertarian Competitive Enterprise Institute, told the Washington Examiner. Young said the new European subsidies aren’t a better offer than what is available in the U.S.
The European Chips Act is made of three legislative pillars. The first is the Chips for Europe Initiative, a push by European lawmakers to promote the use and sale of chips made in the EU. The second pillar attempts to attract new investments worldwide by fast-tracking the permits required for “first-of-its-kind” factories. Finally, it established coordination between EU member states and the European Commission to enable the monitoring of semiconductor supplies and trigger an activation of a crisis intervention if needed. The Act will invest $3.6 billion of state funds and try to attract an additional $43.7 billion in private investment. The end goal of the Act will be to double the region’s share of chip manufacturing from 10% in 2022 to 20% in 2030.
Young is skeptical that such spending will lead to innovation. “When you spend that kind of money, you’re going to have a few success stories,” the economist said. “And we’ll probably be hearing all about those in the press. But the batting average is going to be very low. For every success story that you can hear about in the press, they’re going to be 10 boondoggles like Foxconn or the electric vehicle factories that are being built and then never occupied.”
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The European Chips Act could help American companies avoid reliance on Asia for chips. Spending federal dollars to get more factories in Europe would create alternatives to China and Taiwan for manufacturing, according to Nathan Lane, Associate Professor of Economics at the University of Oxford. While this legislation will not end the West’s reliance on Asian chips, Lane argues, it could help diminish it. Taiwan accounts for most of the chip exports.
Meanwhile, China has fallen behind due to its reliance on a state-run economic model, Young said. China’s latest recovery effort includes plans to invest $40 billion into new chip manufacturers. The country surprised market analysts when the China-based telecoms company Huawei released a mobile device with an advanced chip that the U.S. government did not believe the country could produce. The Commerce Department is currently investigating the product.
