Letter IEDI n. 1154—Industry and Geopolitical Disputes
For some years now, the IEDI has been closely following the new experiences of industrial policies, which have once more multiplied around the world. What can be concluded from this process is that, in different countries and different cultures, the industry has established itself as a prominent tool of response to contemporary social challenges (global warming and sustainability, population aging, urban mobility, etc.). There are chances that this will be an important 21st century consensus.
In recent years, initiatives have multiplied and objectives have been added together. At first, with support for the strengthening and modernization of the industry, many countries sought to avoid new episodes of weak economic recovery, as had occurred after the 2008–2009 crisis, which the IMF even classified as “too slow, too long.”
The digitalization of production processes and the diffusion of other technologies that enable the so-called industry 4.0 have become the focus of such strategies. This was especially the case of developed countries, in search of significant productivity jumps that could increase their competitiveness in the face of competition from emerging countries with lower production costs, stimulating the creation of the better quality jobs that the industry ensures. The most dynamic emerging nations, such as China, have already reacted and also embarked on a trajectory of digitalization.
Then, the urgency of climate challenges—in particular, the fact that limiting global warming up to 2 °C will require reaching the peak of worldwide greenhouse gas emissions by 2025 and reducing them by ¼ by 2030, according to the UN—has made environmental sustainability a north for companies and governments and, therefore, an important goal of industrial strategies.
More recently, two other themes have been associated with the previous ones. First, the COVID-19 pandemic made explicit the vulnerability of the organization of industrial production in global chains by generating disruptions in the supply of inputs. For this reason, the search for resilience has become a concern not only of the private sector, but also of the national States.
The scope and effects of this, although not clear, can reconfigure the design of these global chains, opening new opportunities for countries such as Brazil, as discussed in Letters IEDI n. 1104 “Risks and resilience of global value chains” and n. 1092 “Brazil in the face of multinational companies and Global Chains.”
Secondly, building up industrial competencies has been seen as a matter of national security (economic, sanitary, energy, food, etc.). This is because technological competition around digitalization and industry 4.0, changes in the use of natural resources, derived from the environmental agenda, and the search for resilience almost inevitably lead to changes in economic and geopolitical relations between countries, not always harmonious and peaceful.
Today's Letter IEDI seeks to analyze the effects of these recent issues, namely, resilience and national security, based on initiatives launched since the economic disorganization caused by the COVID-19 pandemic and, later, by the war in Ukraine. For this, three recent actions were chosen: in the US, the initiative for the semiconductor sector (although there are actions in many other sectors); in Europe, for the hydrogen chain; and in Brazil, for fertilizers.
All three are responses to the current international context, which has brought risks associated to the dependence on external sources of supply of certain strategic products and inputs, and involve, to a greater or lesser extent, the development and/or diffusion of new technologies.
The first example analyzed refers to the US strategy for the semiconductor industry, essential for the digitalization of the economy and a basic input for the operation of various industrial sectors, in particular, the automotive, microelectronics, energy, communications, aerospace and defense industries.
According to the Biden government's diagnosis, while investment in the US industrial base has decreased over the past few years, governments of allied countries, partners and competitors have adopted strategic programs to modernize and increase their industrial competitiveness in various sectors.
The objective of the US is explicit: to contain China's advance, keep US companies at the forefront of cutting-edge semiconductor technologies and bring back to the country the production of this strategic input that companies, focusing exclusively on cost-cutting and short-term return, transferred abroad.
The tension between the US and China, which during the Trump administration was primarily expressed in commercial terms, began to have its technological nature increasingly emphasized, with semiconductors being its clearest expression, as discussed in Letter IEDI n. 1088 “Industry 4.0 and the China-US Technology Warfare.”
The Biden administration has been designing and adopting a set of initiatives to leverage the role of the government as a buyer and investor in strategic products, such as semiconductors. Among their actions, we highlight:
• public investment in the necessary infrastructure to support the manufacture of semiconductors;
• fostering research, development and innovation (CHIPS for America) for next-generation chips;
• international cooperation actions to strengthen supply chains in allied countries;
• export controls of critical equipment and technologies for semiconductors;
• strengthen the federal requirements of Buy American (EO 14005 of 1/25/21).
The second example is the European Union's strategy for technological development and creation of a production chain for green hydrogen, which is fundamental to achieving a dual objective: to meet the targets of zero net carbon emissions by 2050 and to eliminate dependence on Russian energy sources.
This latter goal gained urgency following the invasion of Ukraine and the imposition by NATO countries of economic sanctions on Russia, which threatened to retaliate by cutting off the supply of natural gas. Therefore, green hydrogen, which was already included in the 2019 EU Green Deal, has become a prominent axis of the EU's energy sovereignty strategy launched in May'22 (REPowerEU).
Developed by the European Commission, the strategy for green hydrogen has set the following goals:
• installing at least 40 GW of renewable hydrogen electrolyzer capacity in the EU, producing about 5 Mt of renewable hydrogen by 2030;
• importing 5 Mt of green hydrogen by installing electrolyzers with a capacity of 40 GW in third countries with abundant sources of renewable energy, such as Brazil;
• creating the European hydrogen network from Spain to Sweden, with total length of almost 23,000 km by 2040.
One of the main instruments of this strategy is the European Clean Hydrogen Alliance, announced in 2020 as part of the new industrial policy for Europe. The projects for the implementation of hydrogen technologies carried out within the framework of the Alliance may receive direct financial aid from governments, as well as having resources from the European economic recovery plan Next Generation EU.
It is also worth mentioning that, in Europe, several countries have adopted their own national strategies for clean or low-carbon hydrogen, motivated by the desire to both take advantage of an important decarbonization opportunity and give domestic companies a potential competitive advantage in the future green hydrogen economy. These are the cases of Germany, France, the Netherlands and the United Kingdom.
The third example of reaction to the new international geopolitical context is the National Fertilizer Plan 2050 (PNF 2050), the Brazilian strategy recently launched to promote the expansion of domestic fertilizer production, which is a fundamental input for Brazilian agribusiness.
According to the federal government, PNF 2050 is a structural plan to reduce the country's current dependence on imported fertilizers, which today account for 85% of domestic demand; that is, the claim is that the program is not a response to the crisis of access to these products due to the war in Ukraine and sanctions on Russia.
Although Brazil has reserves of the raw materials necessary for the production of fertilizers, the country not only is not among the leaders in technological innovation in the sector but, according to the Secretariat for Strategic Affairs (SAE), there is waste in the use of fertilizers of about 40% in Brazil, due to the lack of new technologies for the production of appropriate fertilizers to the tropical climate and to the way the products are used.
The strategy launched intends to increase competitive local fertilizer production to about 50% of domestic consumption by 2050 and reduce external dependence on technology and supply, mitigating the impacts of possible future crises and increasing the competitiveness of Brazilian agribusiness in the international market.
The investments planned for the expansion of domestic production are in the order of R$120 billion by 2050, but despite its ambition, the PNF 2050 does not foresee effective contributions of funds or investments by the public sector, without which the Plan may not get off the ground.