Global Value Chains in a world of interventionist industrial policy - Are we moving to a new paradigm?
Louise Curran and Jappe Eckhardt argue that the EU is posed to intervene in the private sector at levels not seen for decades, but hurdles remain.
As the key world economies recover from the Covid pandemic, new terms are trending in political discourse. Globalisation and Integration are out. ‘Strategic Autonomy’, ‘Friendshoring’ and ‘Resilience’ are in. While these concepts are wooly and subject to interpretation, it is clear that governments around the world no longer trust business to make the right choices when structuring their global value chains (GVCs) and consider that they need to be nudged (or forced) to restructure them in more national, autonomous and/or friend-oriented ways. This trend is most obvious in the US, where the CHIPs Act and the Inflation Reduction Act (IRA) both provide extensive support for local production, while also make such support contingent on sourcing locally and/or not investing in China and ‘other countries of concern.’
Initially, the EU expressed disquiet with these measures, which it decries as discriminatory, but it is under pressure to support the ‘resilence’ of ‘strategic industries’ and, in spite of past industrial policy failures, has proposed its own Chips Act to encourage reshoring of micro-electronics production in Europe. In a world of increasingly lose public purse strings, there are calls, including from the president of the Council, for the EU to give member states more leeway under state aid rules, by making the latter ‘…fit for today’s economic and geopolitical realities.’ This proposal is not universally popular. Eleven member states, mainly small or medium-sized open economies, like Sweden and the Netherlands, have urged caution and warned about the threats to the EU single market from extensive subsidies. There are concerns, including within the European Commission itself, about the concentration of such aid in certain (richer) EU countries, especially Germany and France.
We have argued in a recent article in Global Policy that, in spite of pressures on governments to intervene more heavily in their economies to make GVCs more resilient, post-COVID (and the war in Ukraine), certain institutional guardrails should help to avoid widespread government intervention seeking to restructure EU industry. However, given the recent developments discussed above, we are no longer so sure that these guardrails are strong enough. State aid rules are under pressure and international commitments do not seem to be constraining government spending as they once did. While the IRA provisions, which only provide consumer subsidies to electric cars made in the US, are clearly contrary to WTO rules, the EU is under pressure, including from environmental NGOs, not to challenge them. Faced with the threat of EU companies moving to the US to benefit from subsidies, countering them with their own support systems is tempting, if potentially ineffective.
The other main point which we made in our article in Global Policy – that different GVCs have very different governance structures, such that public policy interventions will not have the same impact across the board – remains valid. Industrial policy has had mixed results, not only because of variations in local industrial capacity and institutions, but also because of intrinsic differences across sectors, linked to the manner in which lead firms direct and control their GVCs. That is, the way GVC are organized has major implications for supply chain flexibility, which in turn means that the ability and willingness of firms to ‘de-globalise’ their production processes vary widely across the economy. Research during the pandemic highlighted that public policy interventions have very different impacts across and even within sectors, like PPE. We highlight how two other ‘strategic’ sectors - agro-food and electronics - are also characterized by quite diverse GVC structures, such that seeking to change the geographical orientation of production through carrots (subsidies) or sticks (tariffs) will likely have quite different impacts within and across these sectors.
It is clear to observers of EU policy that we are moving towards a new paradigm, where openness will be tempered by concerns about the risks of reliance on far-away and potentially unreliable sources. The EU is posed to intervene in the private sector at levels not seen for decades. However, we argue that they need to do so with care. As we underline in the Global Policy article, there are strong arguments against widespread ‘reshoring’, including, not only higher costs, but also potentially lower resilience to shocks. Diversification is likely to increase such resilience more than autonomy, and as others have argued elsewhere, a focused approach based on sound data-driven analysis would be the best solution to addressing strategic vulnerabilities in EU GVCs. Whether governments will adopt such a targeted approach is still very much an open question and depends on how internal debates and discussions with key trade partners evolve.
Louise CURRAN is Professor of International Business in TBS Education in Toulouse in France. She received her PhD from Manchester Metropolitan University in the UK. Her research interests include the interactions between government policy and global value chains, EU trade policy, especially in relation to sustainability and EU-China trade relations. She is currently involved in an EU-funded research project on post-Covid GVCs - ‘TWIN SEEDS’ - coordinated by the Politecnico di Milano, which will explore the issues raised in this blog in more detail.
Jappe ECKHARDT is Senior Lecturer in International Political Economy at the University of York (UK). He holds a BSc in Political Science and MSc in International Relations from the University of Amsterdam, as well as a PhD from the University of Antwerp. His research interests include trade politics, with a particular emphasis on EU-China relations, global value chains, business-government relations and the role of emerging markets in the global economy.
Photo by Laura Meinhardt
