The EU’s Semiconductor Strategic Autonomy: Revitalising Partnerships in Northeast Asia

In September 2021, EU Commissioner for the internal market, Thierry Breton, visited Japan and South Korea to corral international support for the ‘EU Chips Act’, a strategy aimed at enhancing European production capacity and research in the field.

In September 2021, EU Commissioner for the internal market, Thierry Breton, visited Japan and South Korea to corral international support for the ‘EU Chips Act’, a strategy aimed at enhancing European production capacity and research in the field. During his trip, Breton held meetings to secure cooperation on supplies of critical components for semiconductors, investment in onshore chip production, and research and development.

The EU is not alone in this endeavour. Due to the ongoing shortage of semiconductors, otherwise known as ‘chips’, states are scrambling to secure their supplies and prevent similar events from occurring in the future by re-shoring production. Moreover, the intensifying US-China rivalry has evoked fears of technological decoupling. While Washington is trying to undercut China’s access to advanced chip-manufacturing technology; Beijing is stockpiling available assets and funnelling financial resources to cut dependencies. To safeguard itself against these shocks, the EU is aiming to achieve a significant level of self-sufficiency. Breton’s tour is an indication that the bloc cannot afford to stand idly by. Doing so would undermine its aspirations of strategic autonomy. Revitalising partnership with like-minded chip powerhouses is hence imperative to enhance EU capabilities. 

This EIAS Op-ed analyses the EU’s attempts to achieve semiconductor strategic autonomy. First, it will provide an overview of the causes and extent of the current semiconductor shortage. It will elaborate on how events such as the Covid-19 pandemic and great-power competitions pose challenges that are too big for the EU to ignore. Next, this article will examine the state of affairs of the EU semiconductor policy. Although a latecomer to the game, the bloc is now also taking strategic measures to address its deficiencies by cooperating with like-minded partners. Finally, it will assess the EU policies’ prospects of success. Only with far-sightedness and like-minded cooperation can the EU increase its chances of acquiring the degree of autonomy necessary to safeguard its prosperity and security.

Navigating the Shoals

Hardly any commodity is as sought after as semiconductors. Chips are omnipresent in virtually all advanced technologies, from smartphones to fighter jets and quantum computers. The strategic incentives to ensure semiconductor supply-chain security and dominate manufacturing cannot be overstated. 

At present, chip production is predominantly located in northeast Asia, with a small circle of companies holding the lion’s share. Chief among these is the Taiwan Semiconductor Manufacturing Company (TSMC). The Taiwanese juggernaut constitutes around 55% of the global semiconductor market share, followed by another northeast Asian giant – South Korea’s Samsung, which captures 17% of the world’s market. This geographic concentration of production heightens the risk of bottlenecks. For instance, rising tensions across the Taiwan strait highlight the risk of over-relying on Taipei for semiconductor manufacturing. Likewise, the supply-chain disruptions wrought by the Covid-19 pandemic confirmed the fragility of global chip supply chains. Due to a pandemic-induced fall in demand for vehicles, the automotive industry slashed orders of semiconductors. Infotainment manufacturers swiftly took advantage of this situation. Electronics producers then hoarded chips to meet a growing demand for appliances driven by social distancing measures. However, when demand for cars bounced back, the chip drought impacted both carmakers and electronics industries, generating a global supply crisis.

Another factor spurring states to re-shore chip production is the looming US-China rivalry. Given Beijing’s dependence on foreign companies for chip-manufacturing machinery and advanced chips – i.e. smaller than 10 nm – the Trump administration identified semiconductors as China’s Achilles heel. In December 2020, Washington added Beijing’s biggest semiconductor manufacturer, SMIC, to its “entity list”, banning all transactions between the company, its affiliates and US entities. The current Biden administration has kept the Trump-era restrictions in place, doubling down on enhancing US production capacity. The US Congress is currently discussing the “US Innovation and Competition Act”, which foresees the allocation of 52 billion USD to shore up semiconductor production and 190 billion USD to reinforce US research in technology, with the aim to outcompete China.

For its part, China is aiming to become impermeable to sanctions. With its latest five-year plan (2021-2025), Beijing has set out to finance “indigenous innovation” to sustain the process of transition towards a high-tech economy launched in 2015 by the “Made in China 2025” plan. Crucially, the policy establishes the goal of near chip self-sufficiency – i.e. producing 70% of China’s semiconductor needs domestically by 2025. More recently, Beijing introduced a whitelist of trusted technology suppliers for sensitive sectors, effectively excluding all companies that are more than 25% foreign-owned from supplying the Chinese government, its military, financial and state-owned enterprises. 

Scarred by the ongoing crunch and faced with an increasingly patchy regulatory environment, South Korea unveiled a project in May 2021 to build a 450 billion USD onshore chipmaking industrial base, the largest in the world. Similarly, in November 2021, Japan set the goal of tripling semiconductor production by 2030 by investing 114 billion USD.

Where is The EU?

The EU is not immune to these challenges. In 2019, the EU merely held 10% of the semiconductor market share, leaving the bloc vulnerable to supply chain disruptions. Indeed, the chip shortage has particularly impacted European carmakers such as Volkswagen. Moreover, the EU is highly dependent on foreign-made semiconductors and overseas markets. This makes the EU susceptible to external pressure. For instance, Washington has been pushing the EU to keep US and European technology away from China, damaging companies trading and/or producing in the PRC. The most prominent example is the ASML case. The Dutch company is producing the world’s only machine with the required technology to manufacture leading-edge chips – i.e. smaller than 10 nanometres. In 2018, then US Secretary of State Mike Pompeo lobbied the Dutch government to restrict the export of such technology to China – denying ASML 15% of its total sales.

The European commission has hence put forward the “European Chips Act”, aiming to enhance its domestic semiconductor production capacity, strengthen research, and improve international cooperation in these fields. Indeed, cognisant of its shrinking market power across the entire chip value chain, European Commission President Ursula Von der Leyen unveiled the Commission’s plans to achieve chip sovereignty. In order to make the EU’s supply chains less dependent on US technology and northeast Asian manufacturing, the Commission rolled out the “Alliance for Processors and Semiconductors”. Its goal is to “identify and address current bottlenecks, needs and dependencies across the industry”. Most importantly, the EU aims at producing 20% of the world’s semiconductors. However, chip manufacturing is an incredibly expensive and lengthy task, requiring more resources than the 160 billion EUR allocated by the Recovery and Resilience Facility to the tech sector. 

Therefore, in September 2021, with the launch of its Indo-Pacific strategy, the EU set out to cooperate with like-minded partners to develop sustainable and resilient chip supply chains. As the EU acknowledges, Northeast Asia is at the heart of the semiconductor industry. Therefore, any attempt at making the supply chains more resilient and less prone to shocks requires regional cooperation. The aforementioned strategic goals of increasing chip production capacity declared by South Korea and Japan have opened the space for synergies, which the EU seems keen to exploit in advancing its own interests. Hence EU Commissioner for the Internal Market Thierry Breton’s visit to South Korea and Japan also fostered a strategic component. In Tokyo, Breton sat down with officials and industry representatives to discuss the state of affairs, gain support for the EU Chips Act, and deepen the EU-Japan digital partnership – i.e. attract Japanese investment. Soon after, Breton met with South Korean chip giants Samsung and SK Hynix to explore opportunities to expand their manufacturing presence in Europe.

Towards a Semiconductor Strategic Autonomy

While  onshoring can help the EU weather the risks of overconcentration of chip production abroad, the problems emanating from the US-China great-power competition are likely to persist. The EU is thus faced with a conundrum. The more it pushes for strategic autonomy in semiconductors, the more it will need to rely on international partners in its implementation. Attaining strategic autonomy has become Europe’s priority. As it became evident with the rollout of its Indo-Pacific strategy, the EU is aiming at forging a third way amid the rising US-China competition. Addressing global challenges such as the current chip crunch, the EU is pushing for increased dialogue, inclusivity and engagement, in line with its European values. 

To avoid diplomatic fallouts generated by the US-China tech competition, the US and the EU set up the “Trade and Technology Council” in 2021 to coordinate trade policies and standard-setting in technology and trade across the Atlantic. Additionally, this initiative provides a platform for discussing trade issues in sensitive sectors and coordinating European and American approaches towards China. For instance, both the EU and the US have similar understandings of the use of emerging technologies (for which chips are an essential component), the respect of human rights, and democratic values. Conversely, China uses such technologies to in a way incompatible to European and American rules. Should China gain an edge over the ability to set emerging technologies’ standards, the EU and the US would hence be worse-off. European and American firms would indeed lose their edge, since they would have to operate in a regulatory environment that puts Chinese firms in advantage. Outcompeting Beijing on chip development and production alongside the US would thus give the EU a decisive advantage in this race.

Europe might be faced with a Sisyphean task, for the semiconductor supply chain is incredibly complex and globally integrated. Chip manufacturing relies on the use of rare earths, whose processing is dominated by China. Beijing churns out 85% of the world’s rare earths and hosts almost two-thirds of the global supply of scarce minerals. This asymmetry makes the EU’s strategic autonomy goals partly dependent on keeping good relations with China. However, as the China-US rivalry intensifies, the EU increasingly risks getting caught up in between, especially with transatlantic coordination and engagement on the rise.  Previously, China had already restricted rare-earth trade with Japan in 2010 in the context of territorial disputes in the East China Sea. More recently, China ‘s relations with Australia took a turn for the worse following a call for inquiry into the Covid-19 outbreak, resulting in a number of trade restrictions. 

It is against this background that the European Commission has been extending its engagement with South Korea and Japan. Increased cooperation with Seoul and Tokyo further strengthens the EU’s hedging capacity, while  reducing its dependence on the US, yet allowing for coordination and a degree of synchronisation on China-related issues. The deepening partnerships with South Korea and Japan also represents an attempt to counterweight the EU’s overreliance on Taiwan’s semiconductor industrial base.  

Timely investment, dialogue, and like-minded cooperation are hence vital to the EU’s strategic autonomy aspirations. The Chips Act and cooperation with allies and partners are necessary stepping stones towards enhancing the EU’s domestic capabilities to achieve strategic autonomy. In turn, this could enable the EU to escape great-power pressure and shield itself from supply-chain disruptions.

Author: Walter Brenno Colnaghi, EIAS Junior Researcher

Photo Credits: Mapping Ignorance