The IAA Goes Astray: More Protectionism Is Not Always Better

The Industrial Accelerator Act conflates priorities, places excessive emphasis on protectionism, and overlooks the technologies that will determine Europe's future competitiveness, warns ZEW President Achim Wambach in a guest article for Table.Media. In his view, the German government should press for revisions before the act is adopted at the end of 2026.

The EU is determined to put teeth into its industrial policy. At the European Council summit in March, EU leaders backed the newly proposed Industrial Accelerator Act (IAA) and agreed to adopt final legislation by the end of 2026. The draft law is based on the recommendations of the influential Draghi report – with all of its advantages and drawbacks.  

Poorly defined objectives are the primary weakness. The draft law tries to do several things at once, conflating the objectives of technological sovereignty, decarbonisation, competitiveness, and job security. However, once the Pandora’s box of industrial policy has been opened, it will be difficult to restrain special-interest demands. This danger is readily apparent in the current version of the law.

Europe needs to become more resilient, but interventions should be limited to reducing critical dependencies. A strict “Buy European” clause or rules regarding joint ventures with foreign investors may help to bolster resilience. However, the solar industry – which the IAA wants to relocate to Europe – does not represent a critical dependency, for even if foreign suppliers were to stop all exports to Europe, installed solar systems would remain operational. Accordingly, there is no risk of economic coercion in this area. Aside from solar panels, Europe is largely dependent on imported mobile phones, laptops and televisions. Is action necessary to reshore these industries as well? This spotlights the need for a rigorous assessment of supply chain risk, potentially led by a new European Supply Security Office. In the absence of clear metrics, “resilience” is an ambiguous buzzword that all but invites lobbyist capture.  

The “infant industry” argument fails to withstand scrutiny. Draghi recommends shielding emerging industries and technologies from international competition until they achieve the critical mass necessary for global competitiveness. While this argument is frequently advanced in developing nations, it is less common in developed ones. All too often, protective measures can have negative effects: When firms become dependent on subsidies, they frequently grow complacent, leading governments to repeatedly postpone trade liberalisation. Now, of all sectors, electric vehicle manufacturing is to be protected as an infant industry. Yet Europe’s auto manufacturers should not receive special coddling, as the problems being faced by this industry lie elsewhere.  

The EU already has more effective tools to prevent unfair competition from subsidised companies. To be sure, Chinese state subsidies are distorting fair competition in the electric vehicle market. However, the EU can already impose countervailing duties on subsidised imports. Furthermore, subsidised production in Europe by foreign competitors already falls under the 2023 Foreign Subsidies Regulation, which also covers foreign direct investment.  

The IAA focuses on protection rather than underlying structural issues. The various interventions foreseen by the IAA – including subsidies for critical industries and public procurement rules with local content requirements – aim in part to mask structural competitive disadvantages that are persistent: fragmented energy markets, an incomplete capital markets union and limited labour mobility. A subsidy scheme hastily devised for political reasons is no substitute for the painstaking but necessary work required to create a functioning single market. Not enough attention is being paid to the broader structural transformation required to strengthen the industries that will underpin Europe’s future competitiveness. The IAA ignores the key technologies driving US and Chinese industrial policy – namely, AI, semiconductors, quantum computing and biotechnology. Ultimately, the Industrial Accelerator Act fails to live up to its name, as it will not promote acceleration in the Schumpeterian sense.

Additional protections must be classified as (poor) labour market policy. The task of economic policy is to ensure full employment, but not to safeguard jobs in individual sectors, or even firms. While protective measures support specific manufacturers, they do not help consumers, who are forced to bear the burden of higher prices. Furthermore, climate action will be undermined if protectionism leads consumers to switch to high-carbon alternatives.  

The IAA is at its best when it embraces openness. The IAA’s initial steps toward establishing green lead markets for steel and cement will help to scale up low-emission technologies. The proposed measures to accelerate permitting procedures are another laudable aspect of the draft law. Ultimately, the IAA does not follow an “EU only” approach, for it allows goods from “trusted partners” to satisfy its European preference and origin requirements. This provides incentives for new trade agreements with countries that are committed to a rules-based economic system. Many key trading partners, such as Japan and South Korea, have their own local content rules; the IAA can thus be a bargaining chip for reciprocal market access. Canada has already signalled its interest. In a world of erratic US and Chinese trade policies, the EU can play to its core strengths: openness and predictability. The IAA should remain committed to this approach in trade relations. 

This opinion piece first appeared in Table.Media.