Hello everyone.This week, if only I could turn my attention away from the clutter engulfed Probably the worst prime minister the UK has ever seen Lord North With the loss of the American colonies, I’m back to the most glaring example of supply chain/reflow issues: the global rush to build semiconductor production domestically.In a day or two, the EU will unveil its chip bill inspired by the overactive interventionist French Internal Market Commissioner Thierry Breton is enthusiastic Embrace Moderated by European Commission President Ursula von der Leyen.I stagger shamelessly Work My excellent colleague in Brussels for the exact details of the debate within the committee, and I recommend that you do the same. Today’s main takeaway is to consider the risks of oversupply and trade wars posed by the global semiconductor subsidy game. Chartered Waters Look at the reasons for optimism about global trade in 2022.

leave the EU

Amid a lot of strategic rhetoric and given the shortages of the past year, the European chip law would set a dubiously precise but arbitrary target to boost its share of the global semiconductor market from 10% by 2030 to 20%.

To this end, Von der Leyen want to The EU will more or less match the US government’s upcoming $52 billion investment in its chip industry. Will this happen?it looks ambitious. as I have said beforethe EU is more resilient than the US in forking out public cash due to its relative lack of centralized funding, and it has a history of being overly optimistic that public money will be leveraged in the private sector.

Brussels also has significant checks and balances on the policymaking of industrial policy interventionists compared to other countries. The main one is the Commission’s Competition Council. Competition commissioner and Danish heavyweight Margrethe Vestager is very vocal against free competition for state aid. Providing quieter support is the Trade Council, which rightly fears a slew of trade-distorting handouts will undercut its global campaign to reduce subsidies.

In an industry that has been marked by shortages and oversupply, the risk of a global oversupply of certain products is rising.In addition to China’s aggressive efforts to increase output, we have seen public funds begin to flow in from advanced economies such as Japan Establish domestic chip production with South Korea. There is no real sign of global coordination among governments: the EU’s Chip Act would require partnerships with its international allies, but there is no credible binding mechanism we can see.

The chips that have been in short supply for the past year or two are usually the less complex “traditional” chips used in cars. But this is a mature product.As Peterson Institute semiconductor guru Chad Bowen many times warn, if shortages of traditional chips start to diminish — at least in part linked to a one-time surge in demand for consumer durables — government subsidies for their production will end up leaving many obsolete facilities dependent on public funding indefinitely. Companies like Breton claim they just want to subsidize making more complex chips, but if the fire hose is opened, it’s hard to control it.

It’s easy to think that if governments are stupid enough to create a global semiconductor glut (as they have done for decades in steel, aluminum, shipbuilding, and other prestigious capital-intensive industries), then so be it. If you really want to, spend public money subsidizing everyone else’s auto industry and other downstream users. It’s not going to be efficient, but you’re wasting your money.

However, if you’re putting that much money into ramping up semiconductor production, you’ll want to get your first chips if the cycle fluctuates and there’s a global shortage. As such, these subsidy programs implicitly or implicitly contain the threat of general export restrictions that go beyond existing restrictions on the sale of sensitive technology to geopolitical competitors.This creates a classic Prisoner’s Dilemma For example, last year’s vaccine procurement issue. If everyone else is building chip factories and preparing to block exports, you better do the same.

This suboptimal result doesn’t even make sense on its own. Everyone who knows nothing about semiconductors seems to think that it is impossible to adopt such a dizzyingly complex supply chain entirely in-house at any reasonable price – Vestager estimates that self-sufficiency will cost the EU 240 billion to 3200 million. billion euros. You can imagine a world where all the big economies have chip production facilities, there is a global shortage of a particular product, everyone is bashing export controls, but still no one is actually self-sufficient.

The EU already has an excellent strategic position in the early stages of the supply chain, not least thanks to its research capabilities and companies such as the Dutch company ASML, which supplies chipmakers with extremely advanced lithography machines. Some very precise official support would enhance Europe’s dominance in this part of global industry, which would give it strategic strength. But that’s not just what the expanded Chip Act wants. It’s trying to bring most of the manufacturing supply chain into Europe, and wants to expand production to other EU member states, for example, I don’t know, to give a purely hypothetical example, maybe Brittany’s home country, France?

It is not yet 100% clear what will emerge from the EU’s final strategy. Like everyone else, we were watching the balls in the Brussels Policy Lottery click around the drum before the big draw. But beyond headline subsidy figures (which are almost certainly inflated), pay close attention to what people say or suggest about how to control exports.

Chartered Waters

Now there is some good news. ING Bank’s macroeconomic team released last week 2022 trade outlookforecasts that world trade will not only normalize but grow further this year, despite a challenging environment.

The chart, which shows the percent year-on-year change in global trade volumes, recorded a 4.1% increase in world merchandise trade this year, down from 10.6% in 2021, but still a healthy figure.

Co-authors Inga Fechner and Rico Luman acknowledge that the pandemic remains an uncertain factor affecting the outlook for 2022. But they pointed out that last year showed that supply chain problems and higher transport costs would not necessarily prevent the world from continuing to trade. “The economics of trade still make sense,” they said. “We are therefore optimistic, given the economic outlook, the hopefully subsiding pandemic, and clear evidence of ample orders, especially in the auto sector.”

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