Eurasia Press & News
On 6 February, the European Union reached an agreement on the ‘Net Zero industry Act’, the bloc’s industrial policy that seeks to bolster domestic manufacturing of green tech. Amid intense geopolitical competition, the European Union is aiming to ‘derisk’ its green supply chains from China. The act sets ambitious goals — 40 per cent of demand for green tech will have to be sourced domestically by 2030.
But the European Union needs to balance economic security with its decarbonisation goals, as China remains a vital supplier of cheap green tech to the continent. Domestic political and economic determinants will shape how the EU navigates this conundrum.
When Ursula von der Leyen was appointed President of the EU Commission in 2019, she promised that her tenure would be defined by geopolitics. This raised eyebrows as national security was never a prerogative of EU institutions. But trade disruptions brought about by the COVID-19 pandemic and Russia’s invasion of Ukraine, as well as the mercantilist turn in the United States and China, pushed the European Union to take countermeasures.
The Net Zero Industry Act is aimed at securing the supply of green technology. Through subsidies and other incentives for domestic production, the EU seeks to bolster its manufacturing base, remain competitive in a critical tech domain and create jobs in a sector at risk of being hollowed out by competitors.
The primary obstacle to these goals is the lack of additional funding under the EU budget to meet the Net Zero Industry Act target. The nature and scale of subsidies are left to the discretion of member states, which lack the financial firepower to carry out the EU’s goals. This might create a kaleidoscope of competing national regulations, undermining the EU single market.
The promotion of domestic manufacturing is meant to mitigate dependencies and avoid the risk of an adversary — China — using their economic sway to influence or coerce Europe.
After China’s launch of its ‘Made in China 2025’ initiative, Beijing has been pouring subsidies into strategic industries, including green technologies. This is engendering a manufacturing overcapacity to fuel China’s economic growth, lately slowed down by a reeling property sector. This surplus has pushed global prices down — a welcome effect for consumers but one that threatens to wipe out European competitors. Chinese green technologies have made headway in the European market with prices that could not be matched by European companies. This risks making the continent dependent on Chinese supplies and exposed to political influence.
Two key green technologies illustrate the EU’s difficult balancing act between net zero and economic security — electric vehicles (EVs) and solar panels. The key for the European Union is to objectively assess the costs and benefits of reducing Chinese supplies by shoring up domestic industries.
In September last year, the EU Commission announced an anti-subsidy probe into Chinese EVs, claiming they are distorting the market. Shielding the EV industry from China comes with costs. Reducing imports of Chinese EVs would reduce cheap options for European consumers, slowing down the mass adoption needed to meet emission reduction targets. But the European Union’s automotive sector is large, contributing 10 per cent of manufacturing value added. Letting Chinese companies outcompete European carmakers would have destabilising effects on employment.
Chinese EVs represent only 8 per cent of EVs sold in Europe, suggesting EV price rises can be mitigated with EU domestic production incentives. Yet the lack of additional EU funding for domestic production makes such mitigation impossible in absence of a coordinated effort. This makes member states dependent on foreign investment to build the manufacturing capability needed to reach the EU Commission’s targets.
Foreign direct investment is already pouring in — from China. While such investments do not ostensibly threaten Europe’s economic security and create jobs and manufacturing capacity, they could open up member states to Chinese political influence through the establishment of ‘commercial fifth columns’.
The solar panel industry paints a different picture. Dependency on China is staggering — 95 per cent of photovoltaic modules in the European Union are imported from China. This dependency comes at the risk of being potentially subject to Chinese coercion and repeats the mistake of the European Union’s overreliance on Russia for energy.
Yet unlike hydrocarbons, solar panels provide a continuous source of energy. Even if Beijing restricts the supply of solar panels, those already installed will keep producing energy. The security risks are not as acute as in the case of Russian gas. In addition, producing solar panels would be extremely costly in the European Union. In 2022, German-produced solar panels were 40 times more expensive than those made in China.
Solar panel manufacturing only employs 49,000 people, a tiny fraction of the 195 million employees in the European Union and most jobs are in downstream sectors. Domestic production in this sector would be wasteful and undermine decarbonisation goals. But not acting could leave the European Union depending completely on Chinese exports for a key technology.
As Brussels navigates the trade-offs between an energy transition and economic security, the political economy of green tech manufacturing will play a decisive role. The lack of EU-level funding risks fracturing the single market and making Europe dependent on Chinese FDI in important sectors such as EVs and solar panels. Improved coordination and a larger EU fiscal wherewithal are key to ensuring economic security and meeting climate targets.
