The United States has embarked on its biggest industrial policy push in generations, dangling tax breaks, subsidies and other financial incentives to attract new factories making solar panels, semiconductors and electric cars.
The spending is aimed at boosting the domestic market for critical products, but its impact extends beyond the United States. This has set in motion what some are calling a global subsidy race, with governments from Europe to East Asia trying to catch up by proposing their own investment plans.
European officials in particular have accused the United States of protectionism and have spent months complaining to the Biden administration about its policies. Governments such as the European Union and the United Kingdom are debating ways to counter U.S. policy by offering their own incentives to attract investment and deter companies from moving to the United States.
“I think everyone denies that there is subsidy competition, but to some extent it is happening,” said Markus Beiler, executive director of BusinessEurope, Europe’s largest trade group.
The administration says the investment will put the United States in a better position to address climate change and make it less reliant on potentially risky supply chains that run through China.
But the spending has raised concerns that it will take government resources away from other priorities and increase countries’ debt burdens by increasing the risks and costs of borrowing at higher interest rates. International Monetary Fund First Deputy Managing Director Gita Gopinath said in an October interview that spending competition was a “concern.”
Gopinath said that every time the United States, European Union or China enact a subsidy or tariff, it is very likely that one of the remaining two countries will respond with its own subsidy or tariff within a year. He pointed out statistics that show this.
“We are seeing tit-for-tat there,” Gopinath said.
Spending competition also gives companies that make valuable products like batteries, hydrogen, and semiconductors the ability to “country shop” and pit governments against each other to find the most welcoming places for their technology. This puts a strain on the partnership.
Freya Battery, a European company that develops lithium-ion batteries for cars, ships and energy storage systems, was in the middle of building a factory in Norway when executives learned that anti-inflation legislation was in the works. Ta. In response to this law, the company moved production to a factory in Georgia.
“We think this is a truly original piece of modern industrial policy, and as a result we have shifted our focus,” Frey CEO Birger Steen said in an interview. “Scaling up will happen in the United States as well, and that’s because of the Inflation Control Act.”
Steen said the company is preparing its Norwegian factory for a “hot start,” meaning production there could expand if local policies become more friendly. He said he is doing so. He said the company is consulting with policymakers about how it can compete with the United States.
Some countries benefit directly from U.S. spending, such as Canada, which is among the beneficiaries of the Clean Energy Act and has mining operations that the U.S. does not have.
Cillian Charles, CEO of Montreal-based Brunswick Exploration Corp., said in an interview that Canada’s lithium industry will benefit as battery manufacturing moves to the U.S. and companies look for nearby sources of raw materials. Stated.
But most of the time, competition appears to be zero-sum.
David Scaysbrook, managing partner at Quinbrook Infrastructure Partners Group, which has helped finance some of the nation’s largest solar and battery storage projects, said he believes the U.S. clean energy bill will He said it was the most influential law ever introduced in the country and was followed by other governments. Its “hugeness” cannot be recreated.
“No other country can match that fiscal firepower,” he said. “Clearly it’s a threat to the EU and other countries.”
The United States is trying to allay some of its allies’ concerns by signing new trade deals that will allow foreign partners to share in some of the benefits of clean energy laws. A mineral agreement signed with Japan in March allows Japanese facilities to supply minerals for electric vehicles that receive U.S. tax credits. U.S. officials have been negotiating a similar deal with Europe since last year.
But at the October meeting, the United States and Europe clashed over a U.S. proposal to allow labor inspections at mines and mineral production facilities outside the United States and Europe. Officials continue to work toward a deal in the coming weeks, but in the meantime, the lack of an agreement has cast further clouds over U.S.-EU relations.
Biden administration officials continue to defend the administration’s approach, saying the inflation control law does not signal a shift toward U.S. protectionism and that spending on climate change is desperately needed. . Even with these large investments, the United States is unlikely to meet international goals to limit global warming.
said John Podesta, Senior Advisor to the President for Clean Energy Innovation. in conversation At the Brookings Institution in October, he said foreign governments had engaged in “a degree of whining.” But he said U.S. spending ultimately prompted other partner countries to act. green industrial policy Europe introduced it earlier this year.
“So by complaining, it takes a little bit of weight off your shoulders, so that’s a good thing,” he added.
In addition to the Green Deal industrial plan proposed by the European Union in February, the EU approved a major environmental stimulus program as part of its initial pandemic recovery fund and approved additional spending on green industries in its latest budget.
Japan and South Korea have proposed their own plans to subsidize green industries. In the technology industry, South Korea and Taiwan Both have approved measures to give semiconductor companies further tax breaks this year, and Japan has set aside new subsidies for major chipmakers, including: TSMC and micron.
Europe also proposed a “chip law” last year, but its size is significantly smaller than the U.S. program. And China is pouring money into manufacturing semiconductors, solar panels and electric cars to protect its share of the global market and prop up its weakening economy.
This competition is raising concerns about whether even small economies like the UK will be able to keep up.
Raoul Leparel, director at Boston Consulting Group, said: “The UK will never be able to compete on the same level as the US, the EU or China in terms of capital or size, because firstly there are financial constraints, but also because of economic constraints. This is because there are restrictions on scale.” Former Special Government Adviser to the Center for Growth.
British officials have made clear they do not intend to offer massive subsidies as in the United States, relying instead on a more free-market approach with intervention on a case-by-case basis.
Some economists and industry groups have criticized this approach and the UK’s resistance to developing a radical industrial strategy to shape the economy more clearly towards green growth, supported by subsidies. .
“The question is: do we want to reap economic benefits in the process and do we want to leverage these sources of growth?” Ruparel asked.
Some experts argue that concerns about subsidy competition are overblown. Emily Benson, a senior fellow at the Center for Strategic and International Studies, said that although European spending has been spread out over time, there is no significant difference in the overall size of spending between the United States and the European Union.
“I don’t think this big subsidy race is going to be a huge kickoff that completely upends global relations,” Benson said.
Business leaders and analysts said dissatisfaction within the European Union (EU) was partly due to broader economic concerns following the conflict with Russia. Rising energy prices and increasing competition from the United States and China have combined to curb foreign direct investment in Europe and raise other concerns.
Fredrik Persson, president of BusinessEurope, said the companies his group represents had “a very strong reaction” to the anti-inflation law.
“We fully support the fundamental direction of the green transition, but it comes at a sensitive time,” he said.
Madeline Ngo Contributed to reporting from Washington.