Appreciate the quick response to my paper with Sander Tordoir from...
Brad Setser@Brad_Setser
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Jan 18, 2025
~5 min read
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Appreciate the quick response to my paper with Sander Tordoir from @lugaricano -- there does seem to be a real consensus that Germany is now facing a China shock, even if there is still a healthy debate on the right response.
A few reactions:
(1/many)
siliconcontinent.com/p/the-second-c…
A few reactions:
(1/many)
siliconcontinent.com/p/the-second-c…
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First, the solar example isn't an example of the failure of German industrial policy so much as an example of the failure of using demand side incentives alone -- Chinese producers ended up capturing the demand created by German PV subsidies.
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That to me is part of the case of de facto buy European requirements during the green transition even if they do raise costs a bit (there are trade offs) -- otherwise demand incentives only fuel China's effort to scale up and ride the cost curve down.
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Chinese success in solar (and in batteries and EVs) was itself the product of industrial subsidies (delivered through local governments, the banks, and cheap energy) and buy Chinese requirements (for access to grid contracts/ or EV subsidies)
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high-capacity.com/p/chinese-sola…
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high-capacity.com/p/chinese-sola…
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And solar provides a cautionary tale for those who argue that Europe can retreat from sectors that China now leads (thanks to its own industrial policy) and continue to focus on producing advanced machinery ...
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The equipment to make solar cells was once all German! now it is almost all Chinese ...
the same has happened in industrial robots. Keith Bradsher has reported that all but one of the industrial robots used in VW's new Chinese EV factory are made in China.
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the same has happened in industrial robots. Keith Bradsher has reported that all but one of the industrial robots used in VW's new Chinese EV factory are made in China.
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Second, while realism is needed (Sander and I argue for not throwing a ton of money at solar now for example) this is far too defeatist: "Europe has lost on wind, solar, and batteries."
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Europe has in no way lost in wind for example; European companies still make very good wind turbines even if they are having trouble making money (for a host of reasons -- including higher interest rates that reduced turbine demand)
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Vestas is not a technological laggard in wind -- and ultimately turbines generally do need to be at least assembled somewhat close to where they will be installed as the blades and the finished nacelle cannot be shipped globally.
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Europe should worry about relying a bit too much on some key components on China b/c Chinese production is low cost (the CNY is very cheap, China subsidizes capex) and losing its engineering skill set as a result over time
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and Europe (like the US) cannot imo rely entirely on China for rare earths and permanent magnets if it wants geopolitical autonomy because there are actually vital military uses of these magnets (read the work on the topic out of the US, they are used in military radars)
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Batteries are a bit harder tis true, but there is a growing European battery production industry (based on investment from Korean firms) and ultimately Europe should be competitive (chemical manufacturing tradition, cheap capital) if the energy cost issue can be solved
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nor can Europe maintain its geopolitical autonomy and military security without a battery industry -- Ukraine has shown that low end drones are vital to modern warfare, and those take batteries --
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China achieved its current position in batteries with subsidies (for CATL and BYD), with massive buy China preferences (batteries made in China by korean firms weren't qualified for China's domestic EV subsidies) and by starting early ...
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Europe is playing catchup true, but China was initially playing catch up to Korea -- and it succeeded, using the policies Sander and I advocate and that Silicon continent criticizes.
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And European EVs themselves aren't that uncompetitive -- the German manufacturers have been exporting a ton of them to the US! Tesla is now part of the European and German industrial base.
+ It isn't obvious to me either that startups are the key here -- Musk seems to have lost interest in EVs (not scaling up) as his interest in politics and using Greenland as a stepping stone to Mars increased
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+ It isn't obvious to me either that startups are the key here -- Musk seems to have lost interest in EVs (not scaling up) as his interest in politics and using Greenland as a stepping stone to Mars increased
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The regulatory proposals in our paper could be simplified as well -- I have no problem with a simple buy European (or buy Europe + European FTA partners) requirement for EU subsidies. Easier to administer ...
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But Sander has noted that existing EU regulation and policies provides a basis for harmonizing national industrial policies and preferences (and avoiding explicit buy European policies helps avoid a WTO challenge, which still matters to some in Europe)
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Finally I would argue that Luis Garicano has an excess of confidence that Europe can maintain its position in advanced machinery and speciality chemicals without more of an industrial policy
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China now produces an awful lot of active pharmaceutical ingredients (a dangerous dependence imo) -- and those are specialized chemicals! so to are the chemicals used in batteries ...
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and I would be very interested to know what specialized chemicals BASF now makes in Germany but doesn't also make in its factories in China?
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China has already turned its edge in manufacturing solar PVs and EVs into an edge in making a lot of advanced machines too -- the machines that make solar cells mentioned earlier, the industrial robots used to make EVs, and a lot of other machine tools ...
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Kyle Chan noted that China is quietly a big player in most high end engineering sectors ...
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German (and France) still lead in civil aviation -- the C919 isn't quite equal to the 320 (even if it looks like one) and there isn't a Chinese competitor (yet) for the 321 or the 350.
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But China has an industrial policy to catch up there too -- and the C919 will inevitably displace the A320 (in part) inside China as all the end demand comes from the state owned airlines who informally "buy Chinese"
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So I would argue that Dr. Garicano is both too optimistic (about Europe's ability to exit traditional industries like cars while keeping its edge in other advanced engineering sectors) and too pessimistic (about Europe's chances in wind and EVs) ...
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But I also very much welcome the constructive criticism and informed debate; this is a vital set of questions for Germany, for Europe, and I would argue for the US as well
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cer.eu/publications/a…
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