European industry must be supported as the EU seeks to de-risk its economy

European industry must be supported as the EU seeks to de-risk its economy

In early July, Beijing fired a warning shot at Brussels in response to the Netherlands’ announcement of additional restrictions on exporting microchip technology to China. In a predictable game of tit-for-tat, Chinese trade officials countered with an export-control regime that concretely translates to a threatened export ban on two types of critical raw materials to unfriendly countries based on national security concerns.

The chess pieces of choice are gallium and germanium–both vital for the role they play in key technologies including semiconductors, 5Gs base stations, and solar panels. Beijing obviously chose these targets carefully–the European Union considers these metals as “critical and strategic”, as well as integral elements of Europe’s digital and green transitions.

The Netherlands’ decision to curb microchip technology exports came in the wake of the economic security package published by the European Commission with the goal of “de-risking” supply chains, in particular the bloc’s economic dependency on China. Critical raw materials were, unsurprisingly, high on the list of priorities–meaning that the fresh restrictions on gallium and germanium (China accounts for 94% and 83% of the world’s supply, respectively, of the metals) marks a significant escalation in the trade war between China and the West. “[The] decision by China… [regarding] export of gallium and germanium clearly shows that the Communist Party will put on its economic boxing gloves sooner rather than later,” said European Parliament VP Nicola Beer, in charge of the Critical Raw Materials Act portfolio.

The restrictions are also an obvious blow to European industry in key sectors, and policymakers and companies alike will have to come up with innovative solutions, which could include reformulating product designs to avoid the metals entirely if Beijing curbs exports too severely. Under the circumstances, it’s more essential than ever that European policymakers support the continent’s industrial base to develop next-generation technologies–and yet the bloc risks shooting itself in the foot with counterproductive policies such as the proposed standard essential patent (SEP) overhaul, which European industrial giants have warned could sharply inhibit innovation.

At a moment when China is putting on its “economic boxing gloves” and the EU needs to urgently accelerate its drive towards industrial autonomy, it seems foolish to penalise companies that could help with de-risking and achieving self-sufficiency.

SEP overhaul “fundamentally flawed” strategy?

Standard Essential Patents (SEPs) are patents essential to implementing technical standards–underpinning key technologies such as 5G–which promote innovation and interoperability. Historically, Europe has enjoyed an advantageous position as the center for ICT standard developments. A broad coterie of actors, from industry experts to lawmakers, have warned that the overhaul of the EU’s SEP system proposed by the European Commission in April would jeopardise Europe’s hard-earned leading position, threatening both its authority in standardisation and the competitiveness of the EU’s knowledge economy–to China’s benefit.

One part of the regulation’s multi-pronged approach has been singled out as particularly problematic–the proposal that the EUIPO (European Union IP Office) take on a central role in overseeing SEPs, despite a complete lack of experience in the sector.

In the new proposal, it would be the EUIPO that would register SEPs, assess their essentiality and determine the FRAND rates of the SEPs. FRAND terms (fair, responsible, and non-discriminatory) are already an extremely delicate subject as they are essentially how SEP holders are remunerated. Through FRAND terms, licensing can support “deep standardisation”, like that of WiFi or USB, and enables scalable manufacturing. The key of FRAND terms is, of course, that through patent royalties companies can reinvest in R&D–thus continuing the virtuous cycle of innovation. By giving the EUIPO, which currently has no patent or standards experience, competence over specialised SEPs, the EU risks destabilising this system and impeding European companies’ abilities to innovate in key sectors–right when that innovation is needed most.

Consult first, act later

The new proposal for changes to the SEP regulation fails to account for the complexity of SEPs. The aim of increasing transparency through a European Registry of SEPs and mechanisms for aggregate royalties and dispute resolution might sound promising in theory. Yet experts have raised the alarm over the prospect that, in a market economy, royalties could be decided by the EUIPO in a top-down process. In practice, this would greatly impact the bottom line of companies and hike up their R&D costs, costs which would either be passed on to the consumer or cause companies to invest in R&D elsewhere than in Europe–again something which could stand to China’s benefit.

The EU has argued that reforming the SEP system is necessary to build a more “transparent, effective and future-proof framework for intellectual property rights” and claimed that existing EU rules have led to frequent and costly litigation. While many industrial giants and trade bodies are staunchly opposed to the overhaul, some, such as the trade body representing European automakers, have agreed that the existing framework leads to too-frequent costly legal battles.

An abrupt shift to a system that has alarmed industry experts and policymakers alike, however, is no solution. Should the EU actually want to work in favor of both the consumer and industry, it would do well to include the relevant stakeholders in the conversation–something which manifestly did not occur, with key individuals like Christian Loyau, director of legal affairs and governance at ETSI, an international ICT standards organisation which operates one of the world’s biggest databases of SEPs, flagging that the European Commission did not consult them when preparing the proposal. Due to the complexity of SEPs and the vital importance of encouraging European innovation, it is essential to understand the subject and the long-term implications any changes could have.

Ultimately, the debate over SEPs has at its heart the question of economic fairness: intellectual property rights form the backbone of the global economy, and their protection is a key driver of innovation. As the trade war with China heats up and Europe tries to de-risk its economy, pursuing policies that catalyse rather than curb innovation and technological advancement is essential.

Image credit: fdecomite/Flickr

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