The European Union’s updated Industrial Strategy – and how it relies heavily on competition and trade instruments

The European Commission just published its updated EU Industrial Strategy Communication. Its original Industrial Strategy, from March 2020, did not get the attention the Commission felt it deserved, given that it emerged against the backdrop of the unfolding COVID crisis. Indeed, Commissioner Vestager publicly admitted today’s re-issuing was done partly “because nobody noticed” the first time. But there were also more significant reasons the Commission now wanted to reaffirm its commitment and show the world that it is serious about getting the European economy back on track.

The Strategy is ostensibly about “how Europe’s world-leading industry could lead the twin green and digital transitions”, but in an economic environment battered by COVID, there are other themes. Is economic resilience best achieved through international openness and interconnected supply chains, or through building up industry at home? There are also geopolitical challenges: how can the EU find a global role between the twin powers China and the US?

At first sight the Communication reads as a list of all the things the Commission has already initiated for industry across the board, from its SME policies to its separate Data Strategy, whilst noting the urgency of these actions. It makes a point of listing how it is working on reviewing EU competition rules, to maximise their benefits to the overall Industrial Strategy. Indeed, it is evaluating a significant number of instruments, showing again how vital these are for a functional EU Strategy:

• the environment and energy State aid rules
• the State aid broadband guidelines
• antitrust rules for horizontal agreements including guidance on ‘sustainability agreements’ and procompetitive data-sharing and data-pooling agreements
• the ongoing review of the Vertical Block Exemption Regulation and the Vertical Guidelines for trading online
• and the revision of the Notice on Market Definition, considering developments such as digitalisation and globalisation.

The accompanying documents chiefly provide additional analysis of “strategic technological and industrial dependencies” in areas such as semiconductors, pharma and the raw materials needed by EU industry. What is notable is how much the EU places its policies in these areas within the framework of its competition and trade instruments. And what is particularly prominent is how these two policy areas work together – perhaps not surprising, given that both competition and trade law are about the same idea, just at different levels.

Early on in the Communication the Commission stresses that “EU competition policy has a key role to play in maintaining a level playing field” and that “preserving competition in the Single Market contributes to the resilience and competitiveness of our companies on the global markets”. But it isn’t just interested in a level playing field between EU players (a competition law focus); it is interested in a legal playing field for EU players and foreign players (a trade law focus). One sees this synergy in one of the most concrete of the EU’s new initiatives: its long-awaited Foreign Subsidies Instrument, which seeks to extend EU-style State aid restrictions to foreign subsidies to EU companies, typically with close ties to the subsidising state. (for a detailed analysis, see our separate blog) Moving even further down the path of international economic policy to address the foreign subsidy problem at source, the Communication notes that the EU “will continue to address with our trading partners distortive industrial subsidies”, a project it is conducting together with the US and Japan in the broader context of WTO reform.

Given the vast amounts of recovery funds in the Member States which the EU will finance over the next few years, it will be no surprise that there is also an inward focus on State aid control in the Industrial Strategy. The Commission stresses that it will “continue to monitor the application of the State aid Temporary Framework (extended until end-2021) and the implementation of COVID-19 related State aid measures, with a review to progressively phasing out crisis support measures when the situation allows, while avoiding cliff-edge effects.”

EU State aid rules are particularly important in the context of Important Projects of Common European Interest (IPCEIs). These projects are not entirely uncontroversial: a group of 11 smaller Member States recently drafted a ‘non-paper’, arguing that IPCEIs should only be implemented in a “smart and selective” way, to try and ensure aid won’t be awarded too easily. They warn that “a proliferation of ICPEIs will lead to a less dynamic and less competitive economy in the EU” and they also worry that ICPEI-funds will benefit industry in some bigger countries more than in smaller ones. The Commission’s review of any State aid applications will be closely scrutinized, and hence the Commission itself stresses, in the Strategy, that ICPEI funding should be awarded “only where the positive effects of addressing a clear market failure outweighs the risk of market distortion in the Single Market.”

At the same time, however, the Communication points out that Member States and companies have shown interest in additional IPCEIs “such as next-generation cloud, hydrogen, low-carbon industry, pharmaceuticals and a second IPCEI on cutting-edge semi-conductors”. The implication is that the twin green and digital transitions will not be able to happen without state support. At one level, this is a debate about internal EU State aid rules. But at another level this affects the EU’s foreign trading partners. If this debate tilts in the direction of larger domestic subsidies, the EU’s trading partners may not react so positively. The Communication is alive to this. It announces that “as part of its focus on implementation of trade and investment agreements, the EU will use all in-built flexibilities in its existing trade agreements so that they are fit for purpose and respond to the new challenges relating to the green and digital transition.” How far these flexibilities extend in reality is another ongoing discussion.

All in all, this Communication is an update, but an interesting one. It reminds us of the EU’s long-term economic goals, at home and abroad, which need to keep pace with digital and environmental challenges. But the Communication also shows a keen awareness of broader shifts in the global political scene, the implications of which have come into sharp focus over the past year. When ordinary life resumes, nobody knows quite what the “new normal” will look like, but this Communication at least gives us an inkling of the Commission’s thinking on the matter.