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EU leaders will meet in a Belgian castle on Thursday to try to inject much-needed political momentum into efforts to boost competitiveness and innovation. Alongside further internal market integration and regulatory simplification, they will grapple with whether the EU needs to adopt “Buy European” rules to safeguard high-value-added manufacturing and the capacity to innovate in certain strategic sectors. 

The European Commission is due to publish its draft Industrial Accelerator Act later this month setting local content requirements for electric vehicles, renewables technology, low-carbon cement and steel, and potentially other industries. The details are in flux but these rules would in theory apply to public procurement and goods receiving public subsidies or financing support. There also would be potentially far-reaching restrictions on foreign direct investment in the same sectors to avoid circumvention, such as Chinese plants assembling Chinese components.

In principle, such rules have many downsides. They increase input costs, pushing up prices at home and making EU products less competitive abroad. They close off sources of innovation and reduce pressure on businesses to shape up. They reward special pleading and deals between big countries to protect their own companies. They alienate trade partners and could trigger retaliation.

There are, however, two important reasons why “European preference” measures should be a limited part of the EU’s policy toolbox. First, the EU is decarbonising faster than other economies. So if it wants viable businesses producing low-carbon cement or steel it may have to create a “lead market” using procurement or subsidy conditions, as former European Central Bank president Mario Draghi recommended in his 2024 competitiveness report.

The second is China’s massive industrial overcapacities, which threaten to overwhelm entire European manufacturing sectors and, crucially, eliminate their capacity to innovate further and regain market share. Leaving Europeans dependent on Chinese technologies also creates security and geopolitical risks. New FDI rules mandating technology transfer and knowledge sharing in the EU, like those China itself used to industrialise, would mitigate those risks. But they are likely to be hotly contested by national governments, which are keen to preserve control over investment policy.

Some European preference can already be introduced under existing procurement rules and subsidy schemes. France, for example, has factored in the climate impact of manufacturing and long-distance shipping into its electric car subsidy scheme, in effect excluding cars imported from China. This is allowed under international trade rules. Other EU countries would do well to follow suit. The UK has; Germany has not.

Binding pan-EU preference rules would be more effective but should only be used as a last resort. They should be evidence based and targeted, preferably on crucial technologies rather than entire sectors. These instruments should not penalise the EU’s like-minded trading partners, especially the UK but also Japan or South Korea. It is thanks to the latter’s battery factories in Europe that European carmakers are still in the EV race at all. It should be Made with Europe, not Made in Europe.

The EU does need new ways to nurture its remaining industry. But it should not distract from other priorities such as deregulation, further internal market integration and national welfare reforms which would do more to boost European growth. Nor should the initiative turn into blanket protectionism.