State could take advantage of flexibility in state-aid rules to contribute resources

The European Commission has just published its plan for wide-ranging investment in the production of microchips, and research and development in the sector. This ambitious proposal presents a very significant opportunity for all member states, especially Ireland.

The proposal for a European Chips Act reflects deep concerns that the European Union lacks its own secure supply of microchips.

In announcing the proposals on behalf of the commission, commissioner for competition Margrethe Vestager highlighted the importance of microchips for “objects in our daily lives, cars, phones, even coffee makers” but also for the technological innovations needed to achieve the vital objective of transitioning to a climate neutral economy by 2050.

This is threatened by a “serious and global shortage of chips” where the EU has only 10 per cent of global production capacity and a serious dependence on suppliers in countries outside the EU. This represents a severe vulnerability in circumstances where the EU depends heavily on supplies of microchips manufactured in east Asia, which come with the risk of interference or interruption by China. Such dependence is only likely to intensify, with the commission projecting that the demand in the EU for these chips will double over the next decade.

The proposal also echoes developments on the other side of the Atlantic. While a framework for subsidies in the United States was passed in the Chips for America Act in January 2021, there has been disagreement over precisely how to fund the incentives. The House of Representatives recently passed a Bill that will offer $52 billion in grants to subsidise semiconductor chip manufacturing if approved by the Senate.

Chips fund

Like the Bill currently passing through the US Congress, the commission’s proposal offers considerable support to expand production capacity and pursue research and development for microchips. The plan is to double the EU’s market share in the production of microchips by 2030 by mobilising €43 billion of public and private investment. This includes initiatives to attract and train skilled workers for the sector as well as establishing a virtual platform pooling information on chip design. A “chips fund” would provide finance to start-ups and small companies in the sector

The proposal also features measures that will ensure the security of the EU’s supply of microchips, by requiring member states to monitor fluctuations in supply and demand and report back to the commission. If there is a severe shortage, the commission will be able to boost supplies for essential products and critical sectors by requiring increased production of relevant microchips by production facilities that have received aid under the European Chips Act.

While the EU will provide subsidies, member states will also have greater freedom to use their own resources to support these objectives. The commission proposes to regard state aid to certain facilities engaged in the design and manufacture of microchips as serving an “important project of common European interest”, and therefore as capable of being exempt from the ordinary prohibition on state aid in the EU’s internal market.

While the proposal also strives to reduce the administrative burden for such projects and accelerate planning and licensing processes, the bulk of the legislation sees the EU move away from deregulation and towards a more interventionist industrial policy. The relaxing of the state-aid rules sees the commission actively encourage member states to do the same.

Ireland has great potential to benefit from these new rules. While the State has become widely known for social media and software multinationals, it also has some significant production capacity for microchips. It was reported last year that the State’s exports of microchips have increased by 500 per cent in five years. While a sizeable proportion of this is likely to be driven by production at the Intel plant in Leixlip to meet a spike in demand for microchips from car manufacturers, the sector also has other companies in the State.

Ireland has the opportunity to build on this not only by drawing on EU funds, but by taking advantage of the flexibility in the state-aid rules to contribute its own resources as well.

Ireland is, generally speaking, much less willing to grant state aid than other member states. Relative to its neighbours, the State’s policy prefers to either refrain from intervening in the market or offer support on sufficiently general terms that they do not engage the state-aid rules. This looks like an opportune time for an exception to this policy.

Intel factory

It was reported in December that Intel has likely chosen not to locate another chip factory in the State. Pressures on housing and public infrastructure are likely to have played some role in this. combined with Ireland’s diminished ability to compete using corporate tax following global moves towards a minimum corporate tax rate. A targeted and transparent subsidy policy could help Ireland compete effectively.

The immediate benefits to the Irish economy in terms of employment are obvious, but it is also an important opportunity for Ireland to make a meaningful contribution to common European objectives and the EU’s strategic autonomy. Such a contribution may also have a positive impact on how we are seen by our neighbours.

While there has been great sympathy for Ireland from other member states for the consequences it has suffered because of Brexit and continuing negotiations with a recalcitrant British government, Ireland’s appearances in headlines across the continent have not always been positive in recent years. The State was visibly reluctant to sign up to the OECD agreement on minimum corporate tax rates that will be part of EU proposals on tax harmonisation. There has also been disappointment at the perceived inability of the Data Protection Commissioner to deal effectively with the large tech companies that the Irish regulator polices on behalf of all member states. This is an important opportunity to engage in active industrial policy and contribute to the strategic autonomy of the EU.

Christopher McMahon is an adjunct assistant professor at the School of Law, Trinity College Dublin

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