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The Path to Digital Sovereignty: The European Chips Act and Beyond

On 21 September the European Chips Act came into force. The legislation introduces a comprehensive package of measures to ensure the EU’s security of supply, flexibility and technological leadership in the field of semiconductor technologies and applications.

With the newly enforced Chips Act, the European Union has taken a further step towards achieving the objectives mentioned above: “The European Chips Act will be a game changer for the global competitiveness of Europe’s single market. In the short term, it will increase our resilience to future crises, by enabling us to anticipate and avoid supply chain disruptions. And in the mid-term, it will help make Europe an industrial leader in this strategic branch.”said Commission President Ursula von der Leyen.

More and more countries are pursuing sovereign digital strategies, creating a complex system of cross-jurisdictional regulatory obligations, customs restrictions, import/export bans, country-specific technology protocols and local content requirements.

Digital sovereignty is the ability of a government to implement policy without the obstacles imposed directly on its citizens and businesses by the digital regulation of foreign governments, including regulation by digital giants under regulatory control. Emerging as a reaction to the dominance of American companies and Chinese technological advancement in the digital world, digital sovereignty has become a leitmotif in EU discourse. The notion of digital sovereignty emphasizes a closed ecosystem as the solution to the loss of control over data and technology.

An example of a step towards achieving digital sovereignty is the case of Chinese-backed apps banned by the Indian government. Indian policymakers have made it clear that the Chinese IT applications (and the companies behind them) on the ban list “pose a threat to India’s sovereignty and national security”. They justified this formulation by arguing that Chinese IT companies access and appropriate massive amounts of data generated by Indian users. This is a serious violation of India’s Information Technology Act, which sets out an important principle of the obligation to manage digital data locally, a kind of ‘data sovereignty’.

As the European Union forges ahead in its pursuit of digital sovereignty, which include the power to erect borders around incoming information; trade protectionism in the digital sector, and enhanced state power over the online accounts and data of its residents, the recently enacted European Chips Act stands as a pivotal milestone. This legislation, with its promise of bolstering the EU’s technological leadership and security in the semiconductor industry, raises significant legal and geopolitical questions that will define the region’s digital future.

The European Chips Act’s primary objective is to guarantee security and flexibility of supply for the EU’s semiconductor industry and strengthen the EU’s technological leadership in semiconductor technologies and applications. It is also intended to boost chip manufacturing in the EU by opening new factories, to stimulate the creation of a European design ecosystem and to trigger the growth of innovation in this sector, which could help more than double the EU’s current share of the global semiconductor market to 20% by 2030.

The first pillar of the legislation, the European chip initiative, will strengthen Europe’s technological leadership by facilitating knowledge transfer between laboratories and manufacturing facilities, bridging the gap between research and innovation and industrial activities, and promoting the industrial exploitation of innovative technologies for European businesses. The European Chips Initiative is implemented primarily by the Chips Joint Undertaking.

The initiative will be funded with 3.3 billion euro from the EU, which is also expected to be matched by similar amounts from Member States. In particular, this investment will support activities such as the creation of advanced pilot lines to accelerate innovation and technology development, the development of a cloud-based design platform, centers of excellence, the development of quantum chips and the creation of a chip finance fund to facilitate access to debt and equity finance.

The second pillar of the European lace legislation is to encourage public and private actors to invest in the production facilities of lace manufacturers and their suppliers. This pillar provides a framework to ensure security of supply for semiconductor manufacturing by attracting investment and increasing production capacity. It will create a system whereby manufacturing facilities pioneered in the EU can be classified as “integrated production facilities” or “open EU fabs”. These facilities will contribute to security of supply and ecosystem resilience for the benefit of the Union.

The third pillar of the legislation established a coordination mechanism between Member States and the Commission to strengthen cooperation with and between Member States, monitor semiconductor supply, assess demand, forecast shortages and, if necessary, activate the crisis phase.

The legislation is essential because the complexity and structural nature of the microchip supply chain makes it one of the most vulnerable sectors in the world today, as illustrated by the pandemic COVID-19 crisis. Semiconductors are the fundamental building blocks of digital and digitalized products. These products play a central role in the modern digital economy, from smartphones and cars to critical applications and infrastructures in healthcare, energy, defense, communications and industrial automation. In addition, they are at the heart of strong geostrategic interests and global technological competition. Many European sectors are at risk from supply disruptions, including automotive, energy, communications and healthcare, as well as strategic sectors such as defense, security and aviation. At the same time, counterfeit microchips are beginning to appear on the market, threatening the security of electronic devices and systems. In view of this, the legislator considered it essential to ensure Europe’s strategic autonomy in this area too.

The European Commission has embarked on an intensive strategic and legislative process to promote the creation of a European Digital Single Market. It does this under 3 broad headings: digital society, digital economy and advanced digital technologies.

The EU has chosen values-based regulation as one of the main tools to regain its digital sovereignty (in addition to encouraging and supporting technological investment).  Preparing the EU for the digital age, with a focus on technologies that serve people, fair competition and an open internet, is one of the priorities of the EU Commission’s 2019-2024 strategy. To ensure this, the Commission has listed a number of regulatory measures and tools that can help boost the EU’s digital sovereignty: cybersecurity, taxation, fighting the market dominance of tech giants, protecting and making data accessible, reducing host openness, developing artificial intelligence, ensuring the openness of the internet.

However, the EU’s ambitious plan (the Chips Act’s objectives above) could be undermined by a lack of skilled labour, so unless further measures are taken, the factories the law is designed to open will not be able to produce if they cannot find the workers.

Much of the disruption resulting from the growing number of digital sovereign strategies is affecting the operations of technology providers. Enhanced high-powered racing is also wreaking havoc in some technology sectors and for service providers, with restrictions on 5G providers such as Huawei and Nokia. This may be due to growing regulatory pressure, changes in national policy or responses to sudden geopolitical events.

Digital sovereignty messaging has a large effect on the EU because of the tension it raises between foreign companies and EU governments; this breakdown in cooperation is made more acute by the high levels of digital dependency in the EU. As organisations raise their ambitions and become digital businesses, they will have to face the same spectrum of digital free market frictions as technology service providers. This will put them at the centre of digital geopolitical competition, with consequences for business strategy. At a certain point, digital progress could conflict with democracy and the sovereignty of individual states to the extent that, over time, it could trigger irreversible processes in societies and the economic system as a whole.

Although the absolute strategic autonomy coveted by the European Union is unlikely to be achieved, as dependence on third countries for rare earths and other materials needed for advanced semiconductor manufacturing is difficult to eliminate, the countries producing these materials – most notably China – are likely to remain dependent on the US and the EU for design or production equipment. The resulting interdependence will need to be managed in a way that is more likely to improve the stability of the relationship.

The shortcoming of the Chips Act is that it does not mobilise all the policy instruments at its disposal. It lacks a public procurement plan, even though several of the promising markets are of strong public interest (security, defence, health). It does not address export controls, nor does it provide specific guidance on foreign direct investment screening or partnership.

The policy measures on skills and talent are underdeveloped and do not address the innovation environment and salaries in Europe.

It is clear, therefore, that Europe’s countries can achieve digital sovereignty not necessarily at national level, but at EU level. However, while the European Union must strive to achieve sovereignty, it must also take into account a number of other factors, such as geopolitical ones, and thus face a number of obstacles in achieving its goal and more importantly, to foster innovation in the digital sphere.

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