What are the pros and cons of the Made in Europe plan?

The Made in Europe policy, aimed at strengthening European industry, has sparked considerable debate, including outside the EU. According to the Dutch financial newspaper Het Financieele Dagblad, the UK’s Minister of State for Trade recently visited the Netherlands to argue against the policy. We take a step back and ask APG Chief Economist Thijs Knaap for his economic perspective on the Brussels initiative.

The Made in Europe plan aims to ensure that governments, when awarding subsidies or public contracts, more often choose products that are manufactured in Europe and largely consist of European-made components. The goal is to protect European industry. As an economist, how do you view this?
“The EU’s Industrial Accelerator Act, better known as the Made in Europe policy, exposes a tension that has existed for a very long time: the tension between free trade on the one hand and national sovereignty on the other. Economists have traditionally placed a strong emphasis on the benefits of free trade. The idea is simple: some things can be produced more cheaply elsewhere than at home. That may be due to economies of scale, a more favorable climate, or lower labor costs. You then trade those products for things that you are better at producing yourself. In the end, both sides benefit. If you study economics today, one of the main lessons is that free trade ultimately leads to greater prosperity.

What economists were somewhat slower to recognize is that their analysis often stops once the imported product has been consumed. You import French wine or cheese, consume it, and from an economic perspective the story ends there. But in doing so, you miss an important effect of free trade.”

What effect are you referring to?
“When you stop producing things yourself, you gradually lose the production capacity and expertise needed to make them, and those capabilities are not easily rebuilt. That may not be a problem until the moment you suddenly need them again. We saw that during the pandemic with face masks. They had been imported for years. When they suddenly became scarce, it became clear how dependent we had become.

In times of geopolitical tension, such as today, the issue is no longer a matter of saving a few cents through lower prices. It becomes a question of access to strategic goods. A century ago, during another period of geopolitical tension, we saw the same dynamic. In World War I, for example, the British Army faced a shortage of binoculars, while the leading manufacturer was a company in enemy Germany. That illustrates how trade relationships are not designed for situations in which countries find themselves on opposing sides.”

In other words, because dependency carries risks, sovereignty is receiving more attention again?
“Exactly. Countries want to avoid becoming dependent on a single supplier for critical goods. Tariffs are one way of achieving that. Another is to require a certain share of local production, as in the Made in Europe proposal. It is worth noting, however, that the United States has gone much further when it comes to protectionism.

At the same time, companies have spent decades organizing themselves around the idea that national borders were becoming less economically important. Supply chains now stretch across the globe. As a result, trade barriers can create immediate problems, especially between countries that trade heavily with one another. That also helps explain why the United Kingdom has reacted so critically to this EU proposal. For countries outside the EU that have close trade ties with Europe, these kinds of requirements can quickly become new obstacles. Brexit already demonstrated how much economic activity can be lost once additional paperwork, testing, and certification requirements are introduced.”

All things considered, is the Made in Europe plan sound policy?
“The economist in me sees both sides of the argument. We know that globalization and free trade have generated enormous prosperity by allowing countries to specialize in what they do best. If we reverse that process, we will probably become poorer. European products are likely to be more expensive than alternatives from countries such as China.

At the same time, new insights have emerged about the risks of fully outsourcing strategic industries. Complete dependence makes you vulnerable. That makes the objective behind Made in Europe understandable. We have seen how China has succeeded in attracting entire industries and how difficult it can be to rebuild that expertise and production capacity once it has disappeared. From that perspective, there is a case for keeping certain activities within Europe, even if doing so appears economically less efficient in the short term.

So, somewhat reluctantly, I am willing to acknowledge that this kind of policy can at times be defensible, but only if we proceed very carefully. Before you know it, civil servants are making all kinds of economic decisions, or businesses are lobbying for special exemptions and protective measures. Moreover, it remains difficult to draw a clear line between what is genuinely strategic and what can safely be left to the market. Greater sovereignty usually means less economic efficiency. That is precisely the dilemma.”