Industrial sovereignty: should we be concerned? (Note)

Usefulness of the article: This article analyzes the evolution of industrial policy in France and reviews the arguments currently fueling debates on industrial sovereignty. The article will be supplemented by a second part that will explore possible short- and medium-term industrial policy strategies.

Summary:

• The Covid-19 crisis has exacerbated the trade tensions that have persisted for several years between the world’s major economic powers.
• France is one of the countries that has undergone the most significant deindustrialization in recent decades, suffering greatly from vulnerabilities to external shocks and losses linked to declining productivity gains;
• The decline of French industry can be explained by the deterioration of the sector’s cost competitiveness.
• The revival of industrial policies is still not sufficient to offset the vulnerabilities that the industrial sector continues to face (deterioration in cost competitiveness, technological backwardness, regional disparities, etc.).
• It is imperative to devise new strategies capable of supporting industrial competitiveness in France, while guaranteeing the autonomy of local authorities.

This article will be divided into two parts. This first part will explore the issues that are fueling the current debate on industrial sovereignty in France. The second part, entitled « Industrial sovereignty: towards an Industrial Free Zone model? », will propose new industrial policy strategies.

The Covid-19 crisis has tended to exacerbate the trade tensions that have been ongoing for several years now between the world’s major economic powers (particularly Sino-American trade tensions). In addition, this crisis has raised awareness in Europe, and particularly in France, of the vulnerability of the industrial sector.

Indeed, the health crisis has highlighted the difficulties in supplying medicines and medical equipment, as well as bottlenecks in the semiconductor market in meeting the explosion in global demand for IT equipment due to teleworking. Europe’s dependence on a small number of third countries has thus been put to the test. After many years of industrial decline, particularly in advanced economies, the current debate highlights the immediate need for an industrial policy capable of preserving the sovereignty of the European continent, as well as its ability to not depend so heavily on other nations to meet essential needs.

1. Industrial decline

The France Stratégiereport (2020)provides an in-depth analysis of the evolution of industrial policy in France. Marked by a sharp decline since the mid-1980s, industry has taken a back seat in the public policy agenda in advanced countries. In addition, gains in industrial productivity have contributed to a reduction in labor demand in this sector, while the structure of consumption has gradually shifted in favor of the service sector. The process of deindustrialization has thus naturally begun.

In 2018, industry accounted for only 13.4% of French GDP (10 points less than in 1980, Figure 1), compared with 25.5% in Germany, 19.7% in Italy, and 16.1% in Spain. The closures and relocations of several factories and industrial companies also led to a sharp decline in employment in this sector. Today, industry accounts for only 10.3% of total employment in France, having lost nearly half of its workforce (2.2 million jobs) since 1980 (Figure 2). These data only corroborate the fact that, among the major industrialized powers, France is one of the countries that has undergone the most significant deindustrialization in recent decades.

In addition to creating a certain level of vulnerability to external shocks, such as that experienced during the Covid-19 health crisis, deindustrialization generates losses related to productivity gains, which are on average higher and more dynamic in industry than in services.

This industrial loss translates into a chronic trade deficit in goods (-€62.9 billion in 2020) (Figure 3), only partially offset by a surplus in services (€8.3 billion) and net income from foreign investments (in 2020, the current account balance reached -€53.2 billion,or -2.3% of GDP).

Figure 3. Trade balance from 1971 to 2020 (trade in goods)

Source: DGDDI, December 2020 results.

Furthermore, deindustrialization can also compromise technological development. According to the France Stratégie report (2020), in 2017, 71% of private R&D in France was carried out by industrial sectors, compared with 24% by service sectors.

2. Declining cost competitiveness

The decline of French industry can be explained by the deterioration in the sector’s cost competitiveness. One of the main reasons for this drift is linked to the heavy tax burden on the sector.

Firstly, taxation is particularly high on industrial production factors. Indeed, it is not a direct effect of wage « drift » within French industry that explains this deterioration in competitiveness, as the increase in French industrial wages over the last twenty years has been similar to the average for eurozone countries. Rather, it is the significant increase in the cost of indirect labor contained in the intermediate consumption of French industry that has weighed on its cost competitiveness. As indirect labor costs account for at least as much of the industry’s production costs as direct labor costs, their increase can be explained mainly by a sharp rise in unit labor costs in sectors sheltered from international competition (+35% between 2000 and 2016, compared with +5% in exposed sectors) (France Stratégie, 2020).

Furthermore, the rate of compulsory levies on French industry is higher than that prevailing in non-industrial sectors. According to COE-Rexecode data (2018), these levies on the manufacturing sector as a whole represented 27.9% of gross value added, compared with 24% for non-industrial activities. French industry is also subject to a higher burden of production taxes. While manufacturing accounts for 15.4% of gross value added in the market sector, it contributes more than 23% to production taxes (the corporate social solidarity contribution (C3S), the corporate property tax (CFE) and the corporate value-added contribution (CVAE)). If we compare the level of taxation in France with that in Germany (where total compulsory levies on the manufacturing sector correspond to 17.2% of gross value added), we see a significant difference of 10.7 points in the value added of the manufacturing industry, 7.1 points of which are due to production taxes.

Faced with this deterioration in cost competitiveness, the French industrial fabric, which is composed more than elsewhere of large companies (see the Fortune Global 500 ranking), has opted to take advantage of its ability to relocate production to low-cost countries. France has thus been more severely affected by the phenomenon of relocation than its European neighbors. In 2017, employment in the foreign industrial subsidiaries of French groups accounted for 62% of industrial employment in France, compared with 52% in the United Kingdom, 38% in Germany, 26% in Italy, and 10% in Spain (Figure 4). This significant movement of production sites abroad largely explains why deindustrialization has occurred more rapidly in France.

Furthermore, France’s non-price positioning is average compared to other major developed countries (particularly Germany), explaining its greater sensitivity to a deterioration in cost/price competitiveness. The poor performance of the education system in international comparisons (OECD PISA surveys) and the skill levels of young workers (see PIAAC survey) are a major challenge for France and may have contributed to the deterioration of its non-price competitiveness (CEPII, 2019). The country has thus remained more exposed to price competition from emerging countries and part of the European Union. With Germany’s industry already well established in high-end markets, France has had to content itself with continuing the trend of offshoring, which became much more accessible in the 2000s with the integration of low-labor-cost countries into the global economy (France Stratégie, 2020).

3. The return of industrial policy

Over the last decade, industrial policy has become more explicit in the agendas of advanced countries. This positioning by public decision-makers reflects an awareness of the need to correct certain structural imbalances (notably a strong dependence on foreign suppliers and vulnerability to external shocks), exacerbated by the health crisis, and to address major new challenges (decarbonizing the economy, correcting regional disparities, etc.).

Public decision-makers have thus become aware of the importance of strengthening the competitiveness of French industry in order to maintain industrial production on national territory, while respecting the needs of innovation, the environment and sustainable development, sovereign interests, and social and territorial balance.

To this end, a series of measures have been put in place in recent years. In the form of tax credits, we saw the introduction of the tax credit for competitiveness and employment (CICE) in 2012 (transformed into a reduction in social security contributions in 2019), as well as the rise of the research tax credit (CIR) in 2008, both with the aim of stimulating competitiveness. We can also highlight the creation of industrial territories in 2018, in order to respond to certain challenges in supporting industry (access to financing, training, innovation, digital and ecological transition), while providing balance and territorial dynamism.

According to France Stratégie, of the €175 billion in interventions, mainly from the state, in favor of French companies in 2019, 11.5% was allocated to the industrial sector. While tax credits played a predominant role in the structure of support measures for industry (34% of the total compared with 15% for all sectors), tax exemptions benefited all sectors of the economy more (34% of the total compared with 13% for industry). This can be explained by the weight of the CIR and CICE tax credits. If tax exemptions and reductions in social security contributions are included, these three levers account for a total of 70% of economic interventions in favor of industry.

In total, 40% of all aid to companies in the industrial sector is in the form of employment and training aid (indirect aid to promote competitiveness by reducing labor costs). Aid for R&D and innovation in turn accounted for between 23.6% and 27.1% of this industrial aid (compared with only between 5.3% and 6.6% of total aid to businesses)[iii]. Reductions or exemptions from the TICPE (domestic consumption tax on energy products) accounted for around 10% of aid to industry and 6% in equity investments and subsidized loans. The remainder consisted of various forms of aid from local authorities or the European Union (France Stratégie, 2020). In addition, as part of the industrial recovery plan, the government plans to mobilize €1 billion to support industrial projects until 2022.

Despite these efforts to benefit industry, the aid is far from compensating for the sector’s handicap, which remains more heavily taxed than French companies as a whole. The tax burden on production remains quite high and is one of the factors that most influence the choice of location for production sites. Even though in 2020 the government announced a reduction of around €20 billion in certain production taxes, this measure could compromise the fiscal autonomy of local authorities, given that these taxes represent a significant part of their revenue.

In addition, the vulnerabilities created by significant sensitivity to price competitiveness (pressure to relocate production) highlight the need for France to specialize in high-end products in order to strengthen the industry’s non-price competitiveness. This would require encouraging training, improving workers’ skills, and promoting disruptive innovation.

Conclusion

Public policy makers’ awareness of the role of industry in ensuring economic and social well-being has been evident in recent decades. Nevertheless, the phenomenon of deindustrialization is very real, and the revival of pro-industry policies is still not sufficient to offset the vulnerabilities that the sector continues to face.

It is therefore imperative to devise new strategies that can meet the needs of industry without losing sight of the priorities of digital and ecological transition, as well as social and territorial cohesion.

Furthermore, the need for genuine coordination of industrial policies at the European level should not be overlooked. It is in this context that avenues for reflection and solutions are explored in the second part, entitled « Industrial sovereignty: towards an Industrial Free Zone model? », of our series of two articles on the theme of industrial sovereignty.

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