Economy

Stopping the silicon chips falling where they may

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Hello and welcome to Trade Secrets. The horrors of the Ukraine war are mounting, and with them the spillover of security and foreign policy tensions to the whole of global governance. An EU-China summit took place on Friday where the sides disagreed frostily without resorting to actual fisticuffs, which is about the best you could hope for at this point. Official trade relations between the EU and China have been, it is safe to say, less than cordial. Any attempt to improve them is hostage to what attitude China takes to Ukraine and the sanctions on Russia. Speaking of national security and trade, today’s main piece is on one of the biggest test cases of the ability to build resilient supply chains between like-minded countries, the semiconductor industry. Charted waters is looking at food prices.

Get in touch. Email me at alan.beattie

Chips off the EU bloc

The Ukraine war and the worsening crunch in international trade have given a bit more oomph to a trend already building up steam (or whatever the appropriate high-tech metaphor is) — governments poking around in supply chains convinced that they can make things better. Semiconductors are famously the big deal here. As the academics Anthea Roberts and Nicolas Lamp cogently argue, chips have emerged as a precursor of a whole series of potential wider battles to secure vital supplies and build up domestic capacity.

Semiconductors are a tough test of the ability of industrial policy to target interventions precisely, given the blindingly complex globalised supply chain involving multiple stages of R&D, production and distribution. In the light of global semiconductor shortages (potentially worsened by the Ukraine war), the EU and US are each passing a Chips Act to secure supply.

Supposedly they and the other big rich-world semiconductor producers (Taiwan, South Korea, Japan) will try to co-ordinate their interventions so they don’t end up doing the same thing. I’m — guess what? — sceptical this will happen. The co-operation mechanisms in the EU’s and US’s plans are pretty feeble and the Trade and Technology Council that Washington and Brussels have just set up to talk to each other on these matters doesn’t really have enough power.

Whatever the intentions, Capitol Hill lobbies in particular are on hand as ever to turn a potentially constructive idea into a bad one. Midwestern lawmakers have already managed to reserve some of the money for less sophisticated “legacy” chips for the car industry, risking a future glut and companies indefinitely dependent on subsidies. In the EU, a big chunk of money is being spent getting Intel to invest: it’s vital to have more of the manufacturing part of the supply chain onshored in Europe because it is, so there. Even the European tech industry, which will benefit from funding, thinks it could be better focused.

One institution at the heart of all of this is Interuniversity Microelectronics Centre (Imec) in the Belgian university town of Leuven. The world’s most advanced R&D hub for chips and other digital and nanotech, with more than 12,000 square metres of clean rooms for manufacturing, it dominates a vital early stage in the semiconductor supply chain. To your author, a humanities and social sciences graduate, some of their activities (the Mission Lucidity project recreates the circuits of human brains on chips to try to detect and treat Parkinson’s disease and dementia) seem somewhere between science fiction and outright sorcery.

Founded in the 1980s with funding from the regional Flemish government, it has built up a dense worldwide ecosystem including 5,000 expert scientists and more than 600 industry partners. Its Chinese business has dropped off thanks to export controls from US and EU governments, but it’s active pretty much everywhere else. It’s a cluster that would be extremely hard to replicate.

Nonetheless, other governments want some of the action. In a Trade Secrets interview, Luc Van den hove, Imec’s chief executive, says it will be setting up a research facility in the US to connect with universities (and federal dollars) there. “We can’t be naive,” he says. “It’s not politically acceptable to have full separation of the supply chain, to do only one thing in one place and another in another.”

The ambition is “building bridges and connecting continents, having satellites across the world”. The danger is that governments will push for walled-off supply chains. “Doing nothing on US soil is probably not politically realistic, but duplicating makes no sense.”

In the EU context, Van den hove welcomes the Chips Act but also approvingly quotes Margrethe Vestager, the EU competition commissioner, about the need for a level playing field. Vestager is sceptical of large-scale government subsidies and is often at odds with internal market commissioner Thierry Breton, an instinctive interventionist and the driving force behind the Chips Act. Last year Breton made a point of visiting Imec with journalists in tow.

“Each region should take an important position in the global value chain, which does not mean everybody has to do everything,” Van den hove says. “We should not fall into protectionist rhetoric.” He adds: “I support having Intel coming over to Europe, but the centre of gravity of Intel will always be in the US. Moving Imec from Europe to the US makes no sense, but having a significant research activity in the US makes sense.”

Distance isn’t really the issue, he notes, pointing out it’s about the same distance from Europe to the US east coast as it is from the US east coast to the west. The point of dispersing is being able to build up different networks of skilled workers and university research.

One of the best ways for Europe to be part of a secure semiconductor supply chain is not to try to do everything but to make other economies dependent on what it does well. “We should also create reverse dependencies so that we stay connected,” Van den hove says. “Europe has unique assets which are nearly impossible to copy.”

So there’s the challenge: diversification without duplication. There’s a lot of public money being thrown at the chip problem, but the risks of poor co-ordination, special-interest lobbying and good old economic nationalism mean it’s going to be a challenge to make sure it lands in the right place.

Charted waters

The Ukrainian war is forcing the European farming sector to take some tough decisions as Russia’s invasion of its neighbour squeezes grain supplies and sends the cost of energy and other raw materials skyrocketing, as this excellent piece of on-the-ground reporting by FT colleagues from across the continent explains.

© Bloomberg Finance

The above chart shows how the problem reaches much further than Europe. It is also feeding through into the prices consumers see at the checkouts. German retailer Aldi has got tongues wagging at the tills after announcing that it is raising prices by up to 50 per cent today, blaming rising production costs caused by the Ukrainian conflict. If a discount retailer like Aldi cannot hold back the cost pressures, it seems highly probable that others will follow suit. (Jonathan Moules)

Soaring energy costs have caused bicycle manufacturers to slow the reshoring of production to Europe.

The US trade representative’s office has released its annual National Trade Estimate, a 500-page moan about everyone else’s trade policy.

Cutting off Russian gas supplies would savage German industry, executives are warning.

The Peterson Institute’s Russia sanctions tracker is updated to the end of last week — keep watching for the impact of new measures being discussed by the EU.

The Ukraine war has clobbered the EU’s farmers, with implications for global agricultural trade.

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