Global tech supply chains are fragile and withstand shock after shock. After the Covid-19 pandemic and the assault against Huawei, the Russian invasion of Ukraine underlines once more the importance of the geopolitics of technology for governments and companies. What can be done to reduce our vulnerabilities and cultivate our strengths? Technology interdependence is a double-edged sword. Europe can target Russian procurement of semiconductor technology in cooperation with the United States and G7 countries. But Russia can retaliate by cutting access to neon gases and palladium, causing severe damage to the value chain. The case is a telling example for a European problem that goes beyond the semiconductor industry. Europe faces a long-term resilience and competitiveness challenge, for which it has two main tools to act: industrial policies and controls over technology transfers. 

In this new situation of weaponization of tech supply chains, Europe is navigating the US-China rivalry. The European Union (EU) is fine-tuning its defensive toolbox to prevent unwanted transfers of European technology to China-but the scope of such instruments goes beyond this country of concern alone. Europe has most often adjusted to US decisions to cut China’s access to specific technologies on the basis of a shared transatlantic risk assessment. In some cases, however, especially in sectors such as aeronautics or cutting-edge electronics, the extraterritorial application of US measures is perceived in Europe as unfair US commercial practice. 

Overall, the EU’s approach to managing tech transfers has already undergone significant change. Like counterparts in the US and Japan, European policymakers and regulators constantly reinforce and expand the toolbox of defensive mechanisms. However, more effort is needed because keeping up with the fast-paced technological innovation in the private sector is a huge challenge. 

Placing trust in market-based mechanisms and openness is in the EU’s DNA. Everywhere else, export/investment controls and industrial policies are instruments to enhance international competitiveness. In parallel, Europe’s preference for multilateral diplomacy is challenged by the return of bipolar competition-building an efficient multilateral system for regulating technology transfers seems an overly ambitious task. For Europe, adjusting to these realities is a matter of strategic relevance in the international system.

Europe has offensive and defensive options to cultivate its technological power. On the offensive side, government intervention to support Europe’s industrial strengths is indispensable. On the defensive side, it requires government regulation to prevent forced or intangible technology transfers, especially to military end-users. Mathieu Duchâtel’s first policy paper covers Europe’s ongoing turn towards industrial policy, with a focus on the semiconductor sector. The second paper explores ongoing change in controls over technology transfers. The two publications build on an in-depth analysis of the policy tools recently adopted by the EU, research interviews conducted with key officials and industry executives, and a comparative study of the policy efforts undertaken by China, the Republic of Korea, Japan, Taiwan and the United States.

The EU’s moves are all "country-agnostic". Therefore, they are not meant to specifically target China and its efforts to acquire European technology. However, China’s practice of state capitalism, Xi Jinping’s ambitions for China’s global leadership status, the risk of war in East Asia and the US-China rivalry have been the main driving force behind Europe’s change of approach. 

The EU’s improved defensive toolbox and the relaxation of State aid restrictions in support of the semiconductor industry are welcome moves. It is worth noting how sharply they contrast with the EU’s long-standing belief in the guiding force of the market for innovation and investment. 

Europe’s toolbox of defensive measures is incomplete and still contains exploitable loopholes. The weaknesses of the European semiconductor sector are real. It is now time to take the new European logic further. The two policy papers put forward concrete recommendations to strengthen existing mechanisms, with the firm conviction that Europe would benefit from further learning from good practices elsewhere and engaging in deepened cooperation with allies and friends, where acting alone proves to be insufficient.

In January 2021, with the publication of The Weak Links in China’s Drive for Semiconductors, Institut Montaigne described the state of the Chinese chips industry, reviewed China’s industrial policies, and underlined the importance of this cutting-edge industry for Europe. In this new policy paper, Mathieu Duchâtel captures the developments in Europe since then. 

The semiconductor sector provides a window into how European industrial policy instruments need reform to meet supply chain risks and international challenges to Europe’s competitiveness. Europe’s industry faces two main threats. First, geopolitical shocks can disrupt supply chains, raising questions for Europe’s resilience. Secondly, the other countries well-positioned in the semiconductor value chain are all engaged in considerable multi-level State support, which is a source of challenges for the competitiveness of the European sector. Luckily, Europe has not stood still: the EU’s Important Projects of Common European Interest (IPCEI), the Chips Act and the public financial support earmarked for the sector within different EU vehicles (2021-2027 Long-Term Budget, Horizon Europe, Next Generation EU) all reflect a revival of industrial policy. 2022 will be a decisive year for the European semiconductor industry, shaping its future for the decade to come.

This policy paper puts Europe’s action in a comparative perspective. It highlights industrial policies conducted by China, Japan, the US, South Korea, and Taiwan, with a reference to data collected by the Boston Consulting Group. Mathieu Duchâtel makes nine recommendations addressing three objectives: financing Europe’s semiconductor ecosystem, nurturing the next generation of European human resources, and paving the way for a resolutely European approach to the debate, that would go beyond intra-European competition issues. 

Europe is now aware that the problem of forced or intangible technology transfers goes well beyond issues of unfair competition from China: this is about positioning Europe in a global environment defined by the US-China contest for global supremacy and by China’s global leadership ambitions. Moreover, it is clear and transparent that China has a specific appetite for technologies that might directly serve its military projects. 

The EU and EU Member States have significantly improved their defensive toolbox to better monitor transactions and address risks. This toolbox ranges from investment screening and export control to adjusting the rules governing international scientific cooperation. But limits and loopholes do persist. Building on the analysis, the author lays out eight recommendations to address existing gaps and advocates for a more balanced cooperation framework with the US and Japan for tech transfer controls.