EU's strategic approach to rebuilding manufacturing industries
The European Union (EU) is embarking on a journey towards reindustrialization, but this is shaping up to be a distinctly European approach. Unlike the more aggressive strategies seen in other parts of the world, the EU's approach is more cautious, focused on climate, and guided by regulations.
The EU is striving to establish new trade agreements with key partners such as India and China, aiming to enhance market access. However, rising populism and concerns about deindustrialization may push for a more protectionist approach to trade and a stronger effort towards reindustrialization.
One of the key drivers of this change is the Critical Raw Materials Act (CRMA), which aims to reduce the EU's reliance on China, currently supplying 98 percent of the EU's rare earth imports, and other non-EU countries. The CRMA is part of a broader strategy to secure access to minerals essential for green and digital transitions.
By 2030, the CRMA mandates that the EU extracts at least 10 percent of its annual consumption of critical raw materials, processes 40 percent, and recycles 25 percent. This ambitious target is a testament to the EU's commitment to self-sufficiency and sustainability.
The European Green Deal acts as a de facto industrial strategy, directing investments towards sustainable technologies and reshoring production. The Green Deal serves dual purposes: advancing climate goals while strengthening the EU's industrial base through targeted subsidies, regulatory incentives, and trade protections.
Public procurement rules have increasingly favoured an "EU-first" approach in strategic sectors. The International Procurement Instrument of 2022 allows the European Commission to restrict third country access to EU member government contracts. This policy ensures that EU industries receive a fair share of public contracts, fostering growth and competitiveness.
The Carbon Border Adjustment Mechanism (CBAM) levies tariffs on imports of carbon-intensive goods such as steel, cement, and aluminum. CBAM shields EU industries from cheaper, high-emission foreign competitors while incentivizing low-carbon production within the eurozone.
The EU has also implemented stricter and more comprehensive trade defense policies, including anti-dumping and anti-subsidy measures, especially targeting Chinese imports in sectors such as electric vehicles and solar panels.
The success of the EU's piecemeal approach to reindustrialization depends on balancing open trade and strategic self-sufficiency. The EU may adopt a more radical U.S.-style of reindustrialization if the populist wave that contributed to President Trump's electoral victories across the Atlantic further penetrates EU member states.
To monitor trends and identify potential threats, the European Commission launched an automated "import surveillance" system in April. This system helps to monitor trends in volumes and prices and identify product surges, providing valuable insights for policymakers.
The EU's most prominent policy tool in this area is the Foreign Subsidies Regulation of 2023, which examines foreign state-backed companies that distort the EU market. This regulation ensures a level playing field for EU industries, promoting fair competition and fostering growth.
The latest iteration of an EU-first policy is the new Security Action for Europe, a 150-billion-euro defense fund with a strong "buy-European" requirement. This fund is a testament to the EU's commitment to supporting its industries and ensuring its strategic independence.
Key elements of the European Green Deal include the Net-Zero Industry Act of 2023, which aims to produce 40 percent of the bloc's renewable energy equipment locally by 2030. This ambitious target underscores the EU's commitment to a sustainable and self-sufficient future.
While Germany has one of the highest shares of total income generated by manufacturing, with the electrical and digital industry alone contributing about one-seventh of Germanyβs industrial value added, countries like Malta, Cyprus, and Estonia have lower total economic outputs and likely lower manufacturing shares proportionally, indicating Malta likely has one of the lowest shares of income from manufacturing among EU countries in 2024.
In conclusion, the EU's approach to reindustrialization is a carefully considered strategy that balances the need for economic growth with the imperative of sustainability. By focusing on climate, regulations, and strategic self-sufficiency, the EU is positioning itself for a sustainable and competitive future.
