The United States has embarked on the biggest industrial policy initiative in generations, dangling tax breaks, subsidies and other financial incentives to attract new factories making solar panels, semiconductors and electric vehicles.
This spending is intended to revive the domestic market for essential products, but it has implications far beyond the United States. That’s prompting governments from Europe to East Asia to try to keep pace by coming up with their own investment plans, sparking what some are calling a global subsidy race.
Officials, particularly in Europe, have accused the United States of protectionism and have spent months complaining about its policies to the Biden administration. Governments in the European Union, Britain and elsewhere are debating how to counter U.S. policy by offering their own incentives to attract investment and prevent their companies from relocating to the United States.
“I think we all deny that there is a race for subsidies, but to some extent it is happening,” said Markus Beyrer, director general of BusinessEurope, Europe’s largest business association.
The administration says these investments will put the United States in a better position to address climate change and make it less dependent on potentially risky supply chains running through China.
But the spending has raised concerns about diverting public resources from other priorities and increasing countries’ debt burdens as high interest rates make borrowing riskier and more expensive. Gita Gopinath, first deputy managing director of the International Monetary Fund, said in an interview in October that the spending race was “a matter of concern.”
Ms. Gopinath pointed to statistics showing that whenever the United States, the European Union or China adopts subsidies or tariffs, there is a very good chance that one of the other two will respond with subsidies of their own. or rates within one year.
“What we are seeing here is an exchange of retaliation,” Ms. Gopinath said.
Spending competition also strains alliances by giving companies that make prized products like batteries, hydrogen and semiconductors the opportunity to “country shop” or pit governments against each other. others as they try to find the most welcoming home for their technologies.
Freyr Battery, a European-founded company that develops lithium-ion batteries for cars, ships and storage systems, was building a factory in Norway when its executives learned that the Energy Reduction Act inflation was being developed. In response to the law, the company moved production to a factory in Georgia.
“We think this is a really ingenious piece of modern industrial policy and, as a result, we have shifted our focus,” Birger Steen, Freyr’s chairman and CEO, said in an interview. “This increase will occur in the United States, and this is due to the Inflation Reduction Act.”
Mr Steen said the company was keeping the Norwegian factory ready for a “hot start”, meaning production there could increase if local policies became more favorable. The company is talking with policymakers about how it can compete with the United States, he said.
Some countries reap direct benefits from U.S. spending, including Canada, which enjoys some of the benefits of the Clean Energy Act and has mining operations that the United States lacks.
Killian Charles, managing director of Brunswick Exploration in Montreal, said in an interview that Canada’s lithium industry stands to benefit from battery manufacturing moving to the United States and companies seeking raw material sources nearby.
But in most cases, competition seems to be more of a zero-sum game.
David Scaysbrook, managing partner of Quinbrook Infrastructure Partners Group, which has helped finance some of the largest solar and battery projects in the United States, said the US Clean Energy Act was the most influential legislation introduced by a countries and that other governments were not able to reproduce the “scale”.
“Other countries cannot match this fiscal firepower,” he said. “This obviously poses a threat to the EU or other countries.”
The United States has sought to ease the concerns of some of its allies by signing new trade agreements that allow foreign partners to share some of the benefits of the Clean Energy Act. A mining deal signed with Japan in March will allow Japanese facilities to supply minerals for electric vehicles benefiting from U.S. tax credits. U.S. officials have been negotiating a similar deal with Europe since last year.
But at a meeting in October, the United States and Europe clashed over a U.S. proposal to allow labor inspections at mines and mineral-producing facilities outside the United States and Europe. Officials continue to work toward reaching a deal in the coming weeks, but in the meantime, the lack of an agreement casts a further pall over U.S.-EU relations.
Biden administration officials have continued to defend their approach, saying the Inflation Reduction Act does not signal a turn toward U.S. protectionism and that climate spending is absolutely necessary. Even with such significant investments, the United States risks failing to meet international goals in the fight against global warming.
John Podesta, Senior Advisor to the President for Clean Energy Innovation, said: in a conversation at the Brookings Institution in October that foreign governments had made “a number of complaints.” But he added that U.S. spending ultimately spurred other partners to act, including a green industrial policy that Europe introduced at the beginning of this year.
“So with the rattle, there’s a little bit more shoulder in the steering wheel, so that’s a good thing,” he added.
In addition to the Green Deal industrial plan, proposed by the European Union in February, the bloc approved a major green recovery program as part of a previous pandemic recovery fund, as well as additional spending for industries green in his latest budget.
Japan and South Korea have proposed their own plans to subsidize green industries. In the technology industry, South Korea And Taiwan both approved measures this year offering more tax breaks to semiconductor companies, and Japan set aside new subsidies for major chipmakers like TSMC And Micron.
Europe also proposed a “Chips Act” last year, although it was significantly smaller in size than the U.S. program. And China has poured money into manufacturing semiconductors, solar panels and electric vehicles to defend its global market share and prop up its flagging economy.
The competition has also sparked concerns in smaller economies, like Britain, about their ability to keep up.
“The UK will never be competitive on money and scale on the same level as the US, EU and China because we are firstly constrained by budget, but also simply the size of the economy,” said Raoul Ruparel, director of the Boston Consulting Group. Center for Growth and former special advisor to the government.
British officials have made it clear that they do not intend to offer a broad range of subsidies, like the United States, and are instead relying on a more free market approach with interventions at case by case.
Some economists and business groups have criticized this approach as well as Britain’s resistance to creating a sweeping industrial strategy aimed at steering the economy more clearly toward green growth, with the help of subsidies.
“The question is: do you want to capture the economic benefits along the way and exploit those sources of growth? » asked Mr. Ruparel.
Some experts insist that fears of a race for subsidies are exaggerated. Emily Benson, a senior fellow at the Center for Strategic and International Studies, said the scale of overall U.S. and European Union spending was not significantly different, even though European spending was spread out over time. .
“I don’t see a massive kickoff to this massive subsidy race that would completely upend global relations,” Ms. Benson said.
Business leaders and analysts said frustration within the European Union stems in part from broader economic concerns after the conflict with Russia. The combination of higher energy prices and tougher competition from the United States and China has driven down foreign direct investment in Europe and sparked other fears.
Fredrik Persson, president of BusinessEurope, said the companies his group represented had “a very strong reaction” to the inflation reduction law.
“We fully support the underlying direction of the green transition, but it has come at a sensitive time,” he said.
Madeleine Ngo contributed reporting from Washington.