Over the past twenty-five years, western economies have experienced what could be called a “great inertia” in assessing the risks to their economic and power supply security. Convinced that only price and the globalised market should be the compasses to guide their strategic choices, the major western countries, and Europe in particular, have underestimated the element of security in favour of that of profit maximisation and cost reduction.
The outbreak of the pandemic was the first jolt, which made clear the importance of having resilient production chains for critical products such as healthcare materials and pharmaceuticals. Based on these concerns, the European Commission recently identified some 137 products that are heavily dependent on imports, particularly from China. In the medium term, therefore, a new globalisation by blocks could emerge, with phenomena of re-shoring, near shoring and friend shoring.
The recent crisis in semiconductors - components that are critical to the operation of appliances such as computers, televisions, smartphones, cars and refrigerators - was the second alarm for supply chains. Indeed, the post-pandemic economic recovery has led to a strong demand for these components from 2021 onwards; a demand that has not been met by sufficient supply, due to bottlenecks and production problems in crucial areas for the manufacture of chips, such as Taiwan. To address this structural fragility, the European Commission, in February 2022, presented the EU Chips Act, a plan worth 43 billion euros, that aims to bring Europe a 20% market share of the world’s chips produced by 2030, up from today’s 10%. The US responded through the US Science and Chips Act, with a budget of approximately 50 billion dollars to increase domestic production throughout the chip supply chain. Moreover, to access federal subsidies, American semiconductor companies will also have to commit to not expanding their production capacity in China for the next 10 years.
In the field of energy and raw materials, a structural strategic dependence has been worsening over the years, especially on Russia, with Europe importing 45% of its gas and 30% of its oil from Moscow during 2021. The outbreak of war represented the great awakening and return to reality, with the watchword becoming diversification and security. At the beginning of 2022, with the start of the conflict in Ukraine, geopolitics took precedence over economics: economic interdependencies that seemed unbreakable were broken in less than a year. Europe has focused on new suppliers and new sources of gas supply, with an increasing role for Norway, Algeria, and liquefied natural gas LNG (the latter to account for up to 40% of gas imports by early 2023). In particular, Rome has increased its flows from Algeria (now the first supplier), Azerbaijan, but also from countries such as Egypt, Qatar, Mozambique and the United States, in the form of LNG.
Within this general framework, however, the race for renewables has not come to a halt, with solar registering a worldwide increase in installed capacity of +47% in 2022 compared to 2021 and +33% for wind power. The big question of networks also came up: the criticalness of hydrogen as a vector for the transition (particularly for sectors that are difficult to electrify) poses the need to adapt existing gas networks and build new H2-ready networks. Going in this direction is, for example, the H2Med project launched by Spain, Portugal and France with the subsequent entry of Germany, which foresees the transit of hydrogen produced on the Iberian peninsula and in France (via nuclear power) to central Europe: a project that alone, it is estimated, will be able to supply 20% of the European demand for hydrogen.
And it is precisely this set of steps, consistent with the goals set out in the RePower EU plan to facilitate the energy transition and become independent of Moscow’s supplies, that opens a second chapter: geopolitical and economic competition for leadership in the cleantech sector, in order to lead the industry of the future and set its reference standards. An area in which China is still in the lead, unchallenged: Indeed, Beijing produces more than 75% of the world’s photovoltaic panels, 60% of the world’s electric vehicles, 90% of electric buses and 95% of electric trucks, as well as 75% of electric batteries. Moreover, 50% of the world’s installed wind power capacity in 2022 was in China. Absolute prominence also facilitated by China’s wealth in the metals and rare earths that are crucial to the energy transition industry: Beijing produces about 58% of the world’s rare earths and holds 36% of their reserves.
In this game, the United States decided to accelerate plans to support its high-tech industry and the energy transition, through the US Inflation Reduction Act (IRA) of August 2022. A plan worth 390 billion dollars, in addition to the Bipartisan Infrastructure Bill of 2021, and includes major subsidies for the development of renewable energy, electric vehicles, related infrastructure, as well as for industrial decarbonisation processes.
The US decision has triggered a race for subsidies and technology competition even among its allies, with the EU preparing to respond with new measures, including the Commission’s proposal for a Green Deal Industrial Plan, which will include simplifications in tenders, faster access to funding with flexibility in granting State aid for green technologies, and more flexibility on the use of Next Generation EU funds. However, these measures, in particular State aid, risk fragmenting the European single market and favouring countries with more fiscal room for manoeuvre, such as Germany and France. This is why many other European countries, including Italy, are pushing instead for the creation of a European Sovereignty Fund or the use of Eurobonds for joint EU funding in green and high-tech industries. A solution that naturally finds Berlin and the frugal countries opposed.
Moreover, the resilience and security of European value chains are accompanied by infrastructure connected to the European market. This is why the Global Gateway, an investment plan launched by the EU at the end of 2021 that foresees up to 300 billion in investments by 2027 in developing country partners of the EU (with an important focus on Africa), will be crucial for countering Chinese investments and making European supply chains more resilient, also thanks to the planned adoption in mid-March of the European Critical Raw Materials Act. And on critical materials, even the recent discovery of a large deposit of rare earth oxides in Sweden, which will cover a significant portion of European demand, can be of help.
A new phase of globalisation is thus opening up, a reconfiguration of globalisation, with trade in critical products increasingly taking place on short, diversified supply chains, and possibly between like-minded countries. But this does not mean a structural crisis for international trade. It still enjoys good health, with trade increased by 25% in 2022 compared to 2019 (albeit with a slowdown expected in 2023). Strategic autonomy, a European objective but not only, need not mean a dangerous return to protectionism and closure in autarchy. It is therefore now up to the governments and industrial systems of the various countries to identify strategic priorities for their own economic security, well aware that a one-upmanship in subsidies is detrimental to the development of an efficient market and difficult for public finances to sustain in the long run.
By Alessandro Gili, Associate Research Fellow at the ISPI Centre on Business Scenarios (supported by Intesa Sanpaolo) and at the Centre on Infrastructure