The EU - which is badly lagging the rest of the world when it comes to AI development - is preparing sweeping emergency powers to intervene in Europe’s semiconductor supply chains during shortages, including by forcing chipmakers to override existing contracts, the FT reported. So much for the sanctity of those "contract-backed" backlogs... 

The draft law also enables common purchasing to boost the bloc’s negotiating power, and would mark a clear expansion of the EU’s powers to intervene directly in industrial supply chains.

Amid tensions between Beijing and Washington, there are growing fears in Europe that semiconductors can become a tool of economic coercion, heightened by European reliance on Taiwan for high-performance chips.

The clearest example of Europe's heavy hand was laid bare last year when the Dutch government took control of chipmaker Nexperia from its Chinese owner over concerns that it was moving production and assets out of Europe. The flow of chips from Nexperia’s China arm slowed dramatically, forcing some European car companies to reduce production.

The draft law, which is still subject to change ahead of its expected publication next week, would allow the European Commission far-reaching powers in the event of semiconductor shortages that threaten supplies of weapons, medical devices, digital infrastructure and other key categories of goods. In such a crisis, the Commission could impose fines of up to €300,000 on companies that fail to provide requested information on their supply-chain capacity. It could also “force semiconductor manufacturers to prioritize orders for crisis-critical products, overriding existing contracts”, the draft reads.

Brussels could also enable common purchasing to “strengthen negotiating power and prevent competition between EU countries for limited supplies”. The Commission would then act as a central buyer for multiple EU countries, as it did to acquire vaccines during the pandemic.

According to the FT, the so-called Chips Act forms part of a wider push from the bloc to reduce its dependence on US technology by backing European alternatives in sectors from semiconductors and cloud computing to AI. In the document, Brussels acknowledges that the bloc is “almost entirely dependent on the US and Asia” for the most advanced chips.

Semiconductor supply chains are vast and complex, with a typical Nvidia system tapping thousands of suppliers in dozens of countries. And yet, the EU currently produces less than 10% of global semiconductors. Earlier plans to double the EU’s global market share in semiconductors by 2030 are far behind schedule.

The bloc, like the rest of the world, is overwhelmingly dependent on Taiwan for its supply of high-performance chips, with the home of semiconductor company TSMC accounting for more than 90 per cent of leading-edge chip manufacturing. China has made repeated threats to use force against Taiwan if Taipei continues to resist its sovereignty claims. Any conflict in the region could cause global shortages of components critical to electronics from smartphones and AI data centres to cars and medical gear. 

Separately, the Guardian reports that EU commissioners will meet on Friday for talks aimed at imposing new restrictions on imports from China amid growing concern that Beijing is fuelling conditions for US-style rust belt towns in Europe.

The surge in imports of everything from electric cars to key components in machines, medical devices and food stuffs - which many including us warned long ago would lead to collapsing European domestic production as Chinese exports are dumped in European markets and overwhelm local producers - has been dubbed China Shock 2.0, potentially mirroring the experience in the US 25 years ago when Beijing joined the World Trade Organization.

Ironically, it was the Trump administration which warned that Europe's attempts to offset US sanctions by overreliance on China, would lead to just this outcome. Well, Europe is now there. 

Commissioners representing each member state have been asked to bring examples of Chinese activities in all 27 portfolios, spanning trade to agriculture, defence, health and digital initiatives to the talks. While no decisions would be taken on Friday but the talks would help “align” the commission’s thinking and address overproduction in China, which is leading imports into the EU to be sometimes up to 40% cheaper than local products.

It will also feed into the next leaders summit on 18 June when China will be one of the handful of items on the agenda.

Ignacio García Bercero, a senior fellow at the Brussels thinktank Bruegel and a former official at the European Commission’s trade department, said the EU needed to formulate “a clearer strategy about how to deal with China”.

He said quotas and tariff rate quotas could be introduced on Chinese goods, as they were safeguards that were much faster to implement than tariffs and could focus on areas that China is targeting, such as hybrid cars and chemical components.

“I think that sometimes there’s a little bit of a tendency to sound very tough, but then not to act tough, and I don’t think that is a clever way to handle things.”

He said while showing it was prepared to act, the EU must also engage with China.

“The US has an engagement with China, Canada has an engagement with China. Everyone is having an engagement with China. I think in my view … we need to find a way to make sure that we are properly respected by China when we have that engagement.”

Earlier this month industry leaders told the Guardian of fears that EU factories would cannabilise themselves through their reliance on Chinese components, an issue which rarely makes the headlines.

Longer term, the EU could also look to a slew of laws: its never used anti-coercion instrument; legislation such as the cybersecurity act 2.0 that could stop procurement of certain Chinese products and the industrial accelerator act commonly known as the “made in EU” law.

Grzegorz Stec, the head of the Brussels office of the Mercator Institute for China Studies (Merics), said China has not set out to destroy European business but it is potentially the consequence of its steeling focus of the survival of its own industries now, and into a post-AI world future.