Editor's Note: This week, the European Parliament held a public hearing on the Net Zero Industry Act, and attending guests widely expressed concerns about the limited level of support, the need for improved efficiency, and the necessity to strengthen approaches along the value chain. This edition of the CCCEU Weekly Update keeps you informed of the hearing. Key indicators for EU business were also released, in which electronics and telecommunications, as well as pharmaceuticals, lead among the nine high-tech product categories in the EU. Enjoy reading and have a nice weekend!

▶︎ Focus

The Net Zero Industry Act is widely regarded as an important measure by the EU in response to the Inflation Reduction Act of US and will become one of the unilateral economic and trade tools for protecting and expanding local manufacturing in the EU. The Net Zero Industry Act was released by the European Commission on March 16th this year, and the CCCEU provided timely interpretation of the law. 

The majority of net-zero industries supported by this law are those in which Chinese companies have advantages or are at the forefront of industry-academia-research progress. Particularly controversial is the trade protectionism aspect of the law, which sets the threshold for restricting third-country products in the EU market to no more than 65% as a single source. The legislative process has attracted widespread attention from Chinese enterprises in Europe.

On May 23rd, the European Parliament held a public hearing on the Net Zero Industry Act in Brussels. The meeting was chaired by Cristian-Silviu Buşoi, Chair of the European Parliament's Committee on Industry, Research, and Energy (ITRE Committee), and five guests from various fields including chemistry, steel, nuclear energy, petroleum, and batteries were invited to speak. Some members of parliament attended the hearing and participated in on-site discussions. Throughout the speeches of the guests, three key words became the focus of attention from all parties.

1. Limited Support

For example, Marco Mensink, the Director General of CEFIC, pointed out that "Hydrogen will have negative cost in the US. COVID shown what happened to ammonia because of the cost difference with US, 70% of ammonia capacity closed and currently today, gas price in the US are still 3.7 times below what we have in Europe." Consequently, "what we're going to see is European technology made with Chinese steel and American chemicals." Therefore, he suggested to "add chemicals and materials and expand the scope to CCUS, mentioned as a technology but does not shown in the annex."

Miroslaw Motyka, the President of the Board of the Polish Steel Association, also mentioned the cost advantage of negative hydrogen prices in the US. He said that "hydrogen is one of the two major technologies to make steel carbon-free. The other is elasticity-based.". Furthermore, as for the old technology blast furnace. the US Inflation Reduction Act also provides support. "So the new steel and old steel have the bright future in the US", as he said.

As a representative of the battery sector, Olivier Dufour, the co-founder of Verkor, a French low-carbon battery development company, believes that although "it is the best text that I have ever seen on industrial policy", "We call for a more ambitious target into terms of a battery production." It is predicted that as electric vehicles fully replace fuel-powered cars in the EU, the demand for batteries in the EU will exceed 1000 GWh. However, even with the support of this law, the EU's domestic manufacturing capacity can only reach 550 GWh, which means that the remaining demand will have to be met through imports from countries outside the EU, especially from China.

Additionally, Julie Oddou, the Managing Director for European Affairs at CEA (French Alternative Energies and Atomic Energy Commission), pointed out that from a funding perspective, the Net Zero Industry Act does not set precise budget envelopes and only mentions some existing European funds. Moreover, although the nuclear industry is mentioned in the main text, it is not included in the strategic technology list in the annex, which raises concerns.

2. Urgent Need for Efficiency Improvement

Marco pointed out that the US Inflation Reduction Act is based on "a business case", while the EU's Net Zero Industry Act "sets a law". "You can fill in the IRA form in three days and get clarity on the amount of support you're going to get in 3 months from now. We are far from that in Europe, which means in that investments are moving to the US."

Miroslaw and Gabrielle Gauthey, the High Representative of the chairman and chief executive officer of TotalEnergies to the European Institutions and Senior Vice-President for European Public Affairs, respectively provided examples from Poland and Norway to illustrate that the EU's net-zero industrial projects generally take seven to eight years from concept to injection. "2030 is challenging, which needs a little flexibility." Additionally, Gabrielle specifically mentioned that "the first big thing is to incentivize demand" and "not to have too strict regulation on tariffs and the third party access.".

Dufour also mentioned the efficiency of financial support in his speech. He pointed out that "We are not asking for the same (financial support) in Europe (as the US), but for more clarity and efficiency. It is the net-zero Europe platform that we see appearing in the text would like to see a clear governance of this platform a clear decision body and also some limits. If we were asking for financing not only we would expect them to help us find the resources of this finance and complex environment that we have in the EU, but we would like to have that answer like in six months. Like it is possible in the US!"

3. Strengthening Value Chain Approaches

Dufour pointed out that EU battery companies are in "a race mostly dominated by China at the moment because it has been moving faster on those areas." Specifically, "the way China has captured the global market on batteries is mainly by capturing the refining of primary metals in order to sign the offtakes that we need. We need to be able to capture this material and to redirect the flow towards Europe. It is not only a matter of setting a target on the finished product. We need to careful for the way it is produced and we need to hold that we have at the entry and recycle it. So these valuation chain should be qualified as a strategic approach."

Regarding the value chain, the battery industry emphasizes upstream raw materials, while the chemical industry, as an energy-intensive sector, is highly sensitive to upstream energy costs. In his speech, Marco believed that the EU's Net Zero Industry Act is incomplete in terms of value chain approaches. He primarily explained the so-called value chain approaches from the perspective of energy costs, highlighting the cost differences between the US and the EU in areas such as natural gas, hydrogen, and oil. He proposed that "energy market design allows long-term agreements for PPAs and joint ventures, why not allow low tax rates for electricity supplies to these technologies." Miroslaw also believed that although "European hydrogen bank is a good example but it is too small for our purpose." "Available resources must be accessible quicker and easier."

Furthermore, Julie suggested to "include technology infrastructure development, a pillar aimed at accelerating them maturity and deployment of low-carbon technologies and de-risking scaling up to an industrial scale.", since "research development and innovation necessary to bring about competitive." Gabrielle also recommended giving sufficient attention to the transport – the missing link between carbon capture and storage, as they often occur in different regions.

It is understood that after this hearing, the Net Zero Industry Act is scheduled to consider the draft report on June 12, accept amendments until June 19, hold a vote in the ITRE Committee on October 12, and release an announcement in plenary on October 16-19. The CCCEU will continue to keep you informed of the legislative process of this Act.

▶︎ Hot Topics

>>Trade in electronics and telecoms highest among EU high-tech products in 2022

 According to eurostat,among the nine categories of high-tech products shown, by far the highest level of trade in 2022 was for electronics and telecommunications, with a combined value for exports and imports of €298 billion; pharmaceuticals (€205 billion) had the next highest level of total trade. Overall, the EU ran a small trade deficit for high-tech products in 2022. 

In turnover terms, the fastest growing distributive trades activity in the EU was wholesale trade; its turnover was 107 % higher in 2022 than it had been in 2000, an annual average increase of 3.4 %. Increases in turnover for the retail and motor trades were slightly more subdued, up 81 % and 69 % overall between 2000 and 2022. Developments in distributive trades turnover between 2000 and 2022 varied enormously between the EU Member States, reflecting differences in price changes as well as underlying real changes. Among these were three of the largest, namely Spain, Germany and Italy.

>>EU trade balance deficit returns to almost zero

Driven to a large extent by the decrease of energy prices, the EU trade balance displayed a deficit of just €2 billion in the first quarter of 2023,both exports (-1.4%) and imports (-11.5%) fell compared with the previous quarter, totalling €656 billion and €658 billion, respectively.

According to the data, in the first quarter of 2023, the EU trade balance for food, drinks and tobacco was €16 billion and almost €55 billion for chemicals, the highest values for these product groups between 2019 and the first quarter of 2023.

Although in the first quarter of 2023, the trade balance for machinery and vehicles (€47 billion) was still not close to the high value registered in the first quarter of 2019 (€60 billion), data show that the trade balance for these products almost doubled compared with the second and third quarter of 2022 (€25 billion in each quarter).

In the first three months of 2023, the EU trade balance for energy products was €-114 billion and €-9 billion in raw materials.

 >>German direct investment in China reaches $2.57 billion in 2022, up 52.8% year-on-year

German Institute for Economic Research recently analyzed data showing that German direct investment in China is increasing despite the tightening international environment.

According to the institute's estimates, the increase of German direct investment in China in 2022 is even greater than that in the years from 2016 to 2020.

Ministry of Commerce spokesperson Shu Jueting responded on May 25th: China and Germany are each other's important economic and trade partners, China has remained Germany's top trading partner for seven consecutive years, and Germany is China's top trading partner in the European region, the top source of foreign investment and an important investment destination. According to Chinese statistics, Germany invested US$2.57 billion in China in 2022, up 52.8% year-on-year. BMW's capital increase in the joint venture, BASF's Zhanjiang integrated production base, Audi Changchun new energy vehicles and many other major projects of German enterprises in China have landed, which fully illustrates that German enterprises are optimistic about the prospects of long-term development in China.

>>Nine EU states agree to work on Mediterranean green energy hub

Energy ministers from nine European Union (EU) countries agreed on Thursday to turn the Mediterranean region into a green energy hub.

At their meeting in Valletta, the capital of Malta, the ministers of the so-called MED9 alliance, including Croatia, Cyprus, France, Greece, Italy, Portugal, Slovenia and Spain, signed the Malta Statement, a joint declaration aimed at facilitating renewable energy investments in southern Europe.The alliance will prioritize the development of offshore renewable energy sources, solar PV systems, the production and transportation of renewable hydrogen, the creation of storage solutions and the construction of new energy interconnections between EU and non-EU Mediterranean countries.

▶︎ what are experts talking about？

The more autonomous Europe is, the stronger the China-Europe relationship will be

by: Cui Hongjian

from: CCG

According to Cui Hongjian, Europe faces two major constraints to achieving strategic autonomy:

(1) The influence of the United States on Europe;

(2) The divergence of views within Europe on the specific meaning of strategic autonomy.

Although the U.S. and Europe claim to be "allies," in reality their status is not equal, and the transatlantic relations between Europe and the U.S. are full of uncertainties:

(1) Changes in U.S. domestic politics, the future ruling party faction in the United States will influence U.S.-European relations;

(2) Changes in China-US relations, Europe's position on some China-US issues will affect US-EU relations; 

(3) Changes in Europe's internal politics. 

China hopes that Europe will strengthen its ability to resist external influence through strategic autonomy, and establish a "firewall" between China-Europe relations and those of other major powers to prevent China-Europe relations from being affected by changes in the relations of other major powers. 

There is an intrinsic link between Europe's strategic autonomy and the independence of China-Europe relations; the more autonomous Europe is, the more robust China-Europe relations will be and the less they will be affected by the relations of other powers.

Will Europe Be the World's Biggest Loser?

by: JOSCHKA FISCHER

from: Project Syndicate

This article argues that the Russia-Ukraine conflict, the U.S.-China rivalry, and the rise of new middle powers are spurring a profound restructuring of the international order, and that some of the biggest losers in this confrontation may be Japan and Europe. 

On the one hand, Chinese companies have built up massive production capacity in the automotive industry - especially in the electric vehicle (EV) sector - and are now poised to compete with European and Japanese automakers that have long dominated the world.

On the other hand, the U.S. strategy to compete with China is to pursue an industrial policy that comes at the expense of European and Japanese manufacturers.

The end result would be a complete restructuring of the global auto industry, with Japan and Europe (mainly Germany) losing competitiveness and market share. And this is only the beginning of a global confrontation and strategic restructuring.

During the restructuring of the global economy, Europe must do its utmost not only to preserve its economic model, but also to manage high energy costs, the widening digital technology gap with the two superpowers, and the urgent need to increase defense spending to counter the new threat from Russia.

END

Please note: the English version of this issue is slightly different from our Chinese one. The views and opinions expressed in this article do not necessarily reflect the official position of the CCCEU.