Chips on the menu: How the EU can get its act together on semiconductors

In mid-April, Donald Trump gave electronics the all-caps treatment on social media. “We are taking a look at Semiconductors and the WHOLE ELECTRONICS SUPPLY CHAIN in the upcoming National Security Tariff Investigations,” he yelled, having initially excluded chips from his blanket 10% import tariff hikes earlier that month. The Biden-era US Chips and Science Act began what the new president aims to accelerate with his “much better Chips Act” and his potential tariffs: boosting America’s domestic semiconductor industry to compete with China’s, though supply chain disruptions seem more likely if he follows through with his hike.

In Europe, meanwhile, the EU’s court of auditors has warned the target in the bloc’s 2023 Chips Act to double its share in the world’s semiconductor supply from 10% in 2020 to 20% in 2030 is “essentially aspirational”. Industry groups have criticised the act as well for what they say is excessive red tape. These groups also argue that the act focuses too strongly on manufacturing, thereby neglecting other types of company along the supply chain.

Now, the EU is planning a new Chips Act fit for the Trumpian age. In so doing, it will be crucial for the bloc to focus on the cards it holds in the semiconductor game. Dutch company ASML, for example, has a monopoly on the production of extreme ultraviolet lithography machines necessary to print microchips. This means the firm is an indispensable equipment supplier for advanced manufacturing giants like the Taiwan Semiconductor Manufacturing Company. Moreover, German firm Zeiss makes optical systems without which ASML’s machines could not be produced.

A strategy that smartly uses these levers will help the EU navigate an increasingly transactional global order, dominated by the confrontation between the US and China—and likely especially intense in the semiconductor sector. European policymakers should look to Japan for inspiration on how to proceed.

Indispensable ingredients

The EU’s like-minded partner to the east is implementing an economic security strategy based on the notion of “maintaining, boosting and obtaining strategic indispensability” to resist attempts at economic coercion. This has sometimes led to bold action. In 2023, the Japan Investment Corporation—under the oversight of the trade ministry—bought and then delisted JSR Corp, the world’s largest photoresist maker (a key material in semiconductor manufacturing), to ensure this indispensable company remained in Japanese hands.

The EU’s like-minded partner to the east, Japan, is implementing an economic security strategy based on the notion of “maintaining, boosting and obtaining strategic indispensability” to resist attempts at economic coercion

Given the EU’s levers, European policymakers would do well to learn from Japan. This would be a vital departure from the pandemic-influenced defensiveness of the 2023 Chips Act, which focused strongly on supply chain vulnerability and risk. The act also lacked strategic depth: namely, a clear rationale as to why the EU needs to capitalise on its existing positions of strength; guidelines on where the bloc’s technological edge lies; how to nurture and defend that edge; and where the bloc might find new levers. What is more, financing for the EU’s semiconductor sector remains fragmented. While individual countries have pledged around €100bn since the Chips Act proposal, only €3.3bn comes from the EU budget. This setup pits EU countries against each other in a subsidy race.

To help address this fragmentation, in March a group of nine EU member states launched the “Semiconductor Coalition”. Through this initiative, Austria, Belgium, Finland, France, Germany, Italy, Poland, Spain and the Netherlands aim to work closely with the European Commission to strengthen European competitiveness and strategic autonomy in the semiconductor sector. As the name suggests, another goal of the initiative is to improve cooperation.

The Semiconductor Coalition members are European champions in R&D, equipment manufacturing, and materials and testing. This means they are best placed to inform a Chips Act 2.0 by creating avenues for frank exchanges with the private sector on their respective soil. The European Commission’s mapping of the semiconductor sector currently lacks the detail needed to guide policy, largely due to limited resources. In turn, EU policy lacks the insight needed to guide support for the sector. By focusing on building strong public-private partnerships—a cornerstone of Tokyo’s strategy—the coalition can help Brussels overcome this hurdle.

The coalition should then build on this with coordinated action. As former European bank president Mario Draghi outlined in his EU competitiveness report, an envelope for semiconductors under the EU budget would support the chips industry by enabling co-investment in high-impact projects. The EU already plans to streamline existing financing for critical technologies under its Competitiveness Fund in the next budget. But additional targeted support for chips that underpins a broader semiconductor strategy would help de-risk private investment (a longstanding struggle for Europe thanks to its fragmented capital markets) to ensure its firms remain indispensable and facilitate cross-border ventures.

In this context, the fact that the Semiconductor Coalition is made up of the biggest EU member states is one of its greatest strengths. They have the sway to help shape the bloc’s next seven year budget negotiations by highlighting the synergies between semiconductors and the defence, which could make such a budget allocation even more relevant (and palatable) as member states increase their defence spending

Staples of security

Japanese policymakers have referred to semiconductors as “the rice of industry”. As the US and China compete for technological dominance, Europeans cannot rely on defensive, aspirational strategies that mean they could get left behind when it comes to this staple of economic security. Like Tokyo, Brussels should make strategic indispensability the base of its new industrial recipe. This will help ensure the EU is at the semiconductor table and not on either Washington’s or Beijing’s menu.