!-- consent -->
Stephen Booth is an international public policy analyst and political commentator.
Be careful what you wish for. For years, particularly under Donald Trump, Europeans have complained about the US’ lack of urgency in meeting the challenges of climate change and the transition to greener energy. Well, now Joe Biden’s Administration is serious about it and has put sizeable sums of money where its mouth is. But Washington’s new interventionism poses significant challenges to its allies, including the UK, who traditionally looked to the US to uphold a (relatively) free and open trading system.
The Inflation Reduction Act (IRA) is part of the biggest shake up in US industrial policy for decades, and it is having a far reaching economic and political impact. Signed into law last summer, the IRA has little to do with lowering US living costs but comprises $369 billion worth of tax credits and subsidies designed to stimulate the US’ green technology and electric vehicle industries.
It is just part of a suite of recent policies, including the Infrastructure Investment and Jobs Act, and the CHIPS and Science Act, which are providing sizeable subsidies for domestic manufacturing. Together, these initiatives will provide an estimated $650 billion of investments.
Driven by the bipartisan political response to geopolitical and technological competition with China, these policies have a strong “Buy American” element designed to reconnect with the American working class, which has turned decisively against the globalisation of the late twentieth century.
The drive to onshore manufacturing and investment is fuelling anxiety amongst the US’ trade partners and allies in Asia and Europe, including the UK. The biggest source of contention is that in many cases the new subsidies require recipients, be it manufacturers or consumers, to meet local content thresholds. For example, a tax credit of up to $7,500 is available for buyers of electric or hydrogen-powered vehicles but, to be eligible for the full tax credit, the EV must be made in North America, and specific percentages of its components must be extracted or processed in the US or countries with a trade agreement with the US.
The White House says that the package is not a “zero-sum” threat to its allies, arguing that the package will drive down global emissions and lower the cost of green technologies elsewhere. However, the US’ partners remain to be convinced. Japan, South Korea, the EU, and the UK have all expressed concerns about the new US approach.
In December, Emmanuel Macron reportedly described the IRA as “super-aggressive for our companies”, warning that Washington’s policies “will fragment the West”. This week UK, Kemi Badenoch labelled the IRA “protectionist”, and warned that it would reduce resilience by concentrating supply chains in the US.
The question is: how can other countries respond?
A legal challenge at the World Trade Organisation would only raise the political temperature and is likely to be fruitless. South Korea’s Trade Minister, Dukgeun Ahn, has called on the EU, the UK, and others to cooperate in a diplomatic push to persuade the US to amend its rules. However, any adjustments are likely to be minor, since the legislation specifies amounts, timelines, and conditions in detail. Equally, US policymakers would be forgiven for pointing out that the EU has its own protectionist policies in place, particularly for electric vehicles, designed to onshore production within the Single Market.
There is an argument that there has been an overreaction on the part of the US’ critics, particularly in the EU. The headline figures may be eye-watering, but the US economy is huge, and the spending will be carried out over a ten-year time horizon. Equally, there is a logic to the argument that if US investment brings down the cost of green technologies, other countries will benefit too. However, these arguments are difficult to make for the politician who sees investment by European companies being diverted to the US. Europe is also contending with the fallout from the war in Ukraine, which has pushed up energy costs relative to the US.
Therefore, the pressure for the EU to join the subsidy race is increasing, particularly from those countries that have always wanted looser state aid rules. Predictably, last month it was France’s Finance Minister, Bruno Le Maire, who said, “There is no time to lose in establishing a new European industrial policy to support green industry and encourage industries to relocate to European territory.” It seems a long time ago that Brussels was insisting that the UK be bound to level-playing field rules on state aid in the UK-EU Trade and Cooperation Agreement.
At the start of the month, the European Commission tabled its Green Deal Industrial Plan, saying that relaxing its state aid restrictions would “enhance the competitiveness of Europe’s net-zero industry and support the fast transition to climate neutrality.” With the EU lacking its own significant funding schemes, many smaller EU member states are concerned that loosening state aid rules will simply favour those with the deepest pockets – France and Germany – and undermine competition within the Single Market.
Taken together, there is a clear risk that the UK will be caught in the crossfire of a race to protectionism between the US and the EU. This week Jeremy Hunt acknowledged that the IRA presented “a very real competitive threat”. Noting that the UK could not compete in a subsidy race, he added that, “This is not a time when it’s going to be easy for us to access the GDP equivalent of $369 billion.”
With resources limited, the UK will need to systematically prioritise the interventions it does make. For example, if the UK is serious about being a global player in the electric car industry, there needs to be an urgent and strategic approach to supporting investment in battery manufacturing.
While we should not be naïve about the changes underway to globalisation as we knew it, the UK should work with its partners – via groupings such as the Trans-Pacific Partnership – to illustrate that trade and cooperation among like-minded countries can provide an alternative to protectionism. That “friend-shoring” is better than onshoring.
If possible – and an acceptable deal on the Northern Ireland Protocol could be the catalyst – this includes improving the relationship with our European partners. The UK would benefit from a reduction to the post-Brexit friction in UK-EU supply chains and evading any new European moves towards protectionism.
Meanwhile, the UK continues to have much to offer Europe. The UK remains the continent’s tech capital. The UK boasts four universities in the Times Higher Education top 25 rankings, the EU has none. Capital markets in the UK are roughly twice as deep relative to GDP as in the rest of the EU, and better access to these markets can improve the EU’s ability to support growth and finance investment.
Most importantly, the UK needs to offer a stable political and regulatory environment to encourage inward investment, including developing a more agile regulatory framework for emerging technologies. The world has changed significantly since 2016 and the UK must up its game to ensure that it is equipped to compete.