Draghi report extends EU transport gap with China and US to the supply chain 10/09/24

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Source: https://elmercantil.com/2024/09/10/el-informe-draghi-extiende-la-brecha-en-transporte-de-la-ue-con-china-y-eeuu-a-la-supply-chain/

Draghi report extends EU transport gap with China and US to supply chain

EU competitors have increased their investments in infrastructure and logistics and are ahead of the EU in the supply of raw materials

The European Union (EU) is beginning to fall light years behind its main competitors (China, the United States and, to a lesser extent, Japan) in terms of transport, and this includes the area of goods and value chains. This is one of the main conclusions of the so-called Draghi report, presented this week to the European Commission and prepared by the former president of the European Central Bank, Mario Draghi. This analysis confirms that the demand for transport will increase exponentially in the coming years, which will lead operators to seek investment to digitalise, decarbonise and increase efficiency. As a consequence, “ logistics services will increasingly specialise in reverse distribution , while transport industries will take advantage of existing supply chains and processes for recycling and waste recovery.” According to the report, the European supply chain is not prepared to address this challenge because investment is insufficient and projects are “too slow to implement.” Europe also lacks an effective plan for the supply of raw materials.

The Draghi report calls on the EU to strengthen its financing to allocate the funds raised by the ETS to decarbonisation

The analysis led by Mario Draghi confirms what was an open secret for many European transport associations. “The injection of capital from the EU has slightly decreased in recent years. In the United States and China, on the contrary, it has increased ,” the study notes. This is a trend that both the report and many sector associations find worrying, since Europe, as Draghi points out in his study, “has better infrastructures and resources than its main rivals.” The Trans-European Transport Network (TEN-T) will require an estimated investment of 845 billion euros by 2040 and this injection “is not accompanied by a comprehensive plan to ensure the necessary financing and investment,” the study notes. “In addition, it remains difficult to obtain private financing due to long project execution times and a long wait to obtain a return on investment,” according to the document.

In this sense, Draghi's conclusions state that "the EU should reinforce financing" by allocating the income from emissions trading (ETS) to sustainable transport . A twin argument to the historic call from the International Union for Combined Road-Rail Transport (UIRR), which highlights its "full support, since the 16.5 billion euros per year required" to achieve decarbonisation "could easily be financed with ETS revenues". Along these lines, the Community of European Railway and Infrastructure Companies (CER) has also pointed out its mode of transport as one of the most benefited from this strategy. "It coincides with our claims, from the need to invest public and private money to increase Europe's competitiveness, to the role of high-speed rail in connecting European capitals and major urban centres, to the need for a rapid deployment of digital facilitators", said its president, Alberto Mazzola.

-50%
Use of China-Europe land freight corridors down 50% from 2022

However, the report singles out rail as the most affected by the lack of rolling stock and the fragmentation of its market. “The management of freight capacity is neither planned nor coordinated across borders,” the study says. It also points out that there are still some 800 state regulations for rail throughout the EU and that “there is scope to continue developing intermodal freight transport.” UIRR has also agreed with the need to harmonise and cohesive the regulatory and planning approach. In the case of container shipping, Draghi points out that “until recently, the Red Sea moved a third of global container traffic.” Now, he stresses, “there are few viable alternatives .” The calculations of his study specify that the use of the China-Europe land transport corridors has decreased by 50% since the start of the war in Ukraine “and investment in modern ships capable of operating on different inland waterway infrastructures is considered very risky.”

“European shipping is a success story and a cornerstone of our continent’s energy, food and supply chain security,” says Sotiris Raptis, Secretary General of the European Community Shipping Association (ECSA). “In these times of geopolitical uncertainty, it is crucial for Europe to maintain and grow the EU-operated fleet, which ensures Europe’s position in global supply chains as well as access to key international markets,” he concludes.

RAW MATERIALS: MORE INVESTMENT, BUT NO GUARANTEED SUPPLY
Among other pending tasks, the EU is facing a perfect storm in raw materials. The Draghi report confirms that “a comprehensive strategy covering all stages of the supply chain (from exploration to recycling)” for critical raw materials is lacking. In addition, investment in the development of critical minerals in Europe has increased, as it has in the rest of the world (30% in 2022), but adequate supply “is far from assured” on the Old Continent. While the EU remains heavily dependent on China in the production of critical raw materials (the EU's share of global production of these materials is less than 7%), the report recalls that the US model “has the capacity to act quickly and on a large scale”. This model includes “strengthening national supply chains for critical minerals and improving access to national critical mineral resources”.

Japan, for its part, has sought to secure its supply chains through trade, investment in overseas mining projects, storage, innovation and recycling since 2000. Meanwhile, the EU also lacks a comprehensive approach to critical raw materials that encompasses all internal and external tools. “The EU is therefore planning to increase its demand without having secured supply, which will come from abroad, and mainly from China,” the study laments. This is a risky strategy in the words of the former ECB president. “While China has promoted vertical integration to better control and manage the supply chain and the United States is dedicating relevant governmental and diplomatic support, the EU is mainly dependent on market conditions for each step of the value chain in a turbulent geopolitical context.”

FAILURE IN AUTOMOBILE AND SEMICONDUCTOR LOGISTICS
The EU is also lagging behind in the competitiveness of its automotive sector and in the microchip market. The former, Draghi notes, is already showing signs of erosion as the number of vehicles produced in the EU has declined over the past 20 years in favour of manufacturing in China, the country from which the main EU vehicle imports emanate . Therefore, the study indicates, “we must avoid the radical displacement of EU automotive production or the rapid absorption of EU plants and companies by state-subsidised competitors”.
Likewise, the EU’s dependence on microchips makes it particularly vulnerable to advances in the United States, for example, which has an allocation of 52 billion euros. The European Chip Law anticipated 100 billion euros in total, but most of this is financed by the member states and therefore depends on state aid. Draghi therefore calls for a “review and extension” of the law “to increase funding, coordination and speed”.

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