Stephen Booth is an Associate Fellow in Political Economy at the Council on Geostrategy.
As the leaders of the G7 meet in Japan this week, China looms large over the summit. The intensifying US-China great power rivalry is the defining issue of the modern age, permeating almost every geostrategic issue we face, from Russia’s war in Ukraine to the shifting tectonic plates of global trade and industrial policy.
US military and technological muscle is indispensable to its allies in the face of the Russian security threat in Europe and a more assertive China in the Indo-Pacific. And Beijing’s political support for Moscow throughout Russia’s invasion of Ukraine has seen many European leaders increasingly sharing Washington’s concerns about Chinese power and influence. But European nations’ greater economic exposure to China has made it difficult to reach a coherent EU position on how far to distance itself from Beijing.
Following Donald Trump’s unilateral trade war with Beijing, Joe Biden’s election was supposed to herald renewed US support for multilateralism and a more collegiate relationship with its allies with respect to the China challenge. However, while the Biden Administration has developed a more sophisticated policy approach, Washington’s America First economic outlook remains, which risks undermining its own objectives and poses problems for its natural allies.
Last month, Emmanuel Macron caused a political storm with his ill-judged and ill-timed warning that European nations could become “vassals” of the US in a confrontation with China over Taiwan. While Macron is not the only US ally wary of being drawn into an escalating conflict, his comments caused dismay among many EU states, particularly when transatlantic unity is so vital to backing Ukraine. Nevertheless, Macron’s constant insistence that the EU needs to develop its “strategic autonomy” would be easier to refute if recent US policy had given more thought to its allies.
Biden’s Inflation Reduction Act (IRA) and CHIPS Act are cases in point. The IRA offers huge fiscal incentives to onshore production of new green technologies, such as electric vehicles, to the US, while the CHIPS ACT provides investment and incentives for semiconductor manufacturing in the US. Both policies are ostensibly designed to reduce dependence on and increase competitiveness with China, but they are putting EU (and UK) manufacturers at a disadvantage and risk launching a transatlantic race for increased protectionism and government subsidy.
Within the EU, Macron has been leading the calls for an EU response to the US’s IRA. “We have to take back control of our supply chains, energy and innovation. We need more factories and fewer dependencies,” he argued recently. “‘Made in Europe’ should be our motto,” he added. Like French Presidents before him, Macron has urged the EU to introduce “Buy European” legislation similar to parts of the IRA that would favour EU-made components and products.
However, there have been deep concerns among certain member states about the merits of a subsidy race which would favour the largest member states at the expense of those with less deep pockets – state aid rules are primarily designed to ensure fair competition across the single market. Rather than a “Buy European Act”, in March the EU adopted the Temporary Crisis and Transition Framework, relaxing controls on subsidies until 2025. This allows individual countries to offer higher fiscal incentives if they can make the case that investments will be diverted away from the EU.
The French government this week announced plans to budget half a billion euros a year for a new tax credit for environmentally-friendly investments in wind and solar power facilities, heat pumps and batteries. “We’re not going to use French taxpayers’ money to boost non-European industry,” Macron said.
Germany is getting in on the act too. Berlin has promised Swedish battery maker Northvolt hundreds of millions of euros in order to build a “gigafactory” in northern Germany. Northvolt had previously suggested it might suspend its plans for the factory, unless the EU matched the generous subsidies that the Biden administration has provided.
This EU’s programme may be “temporary”, but it is another boost for protectionism which increases costs for like-minded democratic allies. And it is not simply the UK, but others such as Australia, South Korea, and Japan, that risk being left out in the cold.
The irony is that the US and its allies need each other now more than ever. During the Cold War, when Washington led the West in shaping the architecture of the (for want of a better term) “liberal rules-based order”, the Soviet Union was a significant security adversary and posed an ideological challenge, but the US was the undisputed economic hegemon. China’s rise is a completely different proposition, as Beijing is a significant global military, economic, diplomatic, and technological power. To put it in perspective, in 1990, the US economy was seven times the size of China and Russia’s combined GDP. That magnitude is now just 1.2 times.
There are some signs that the Biden Administration has recognised its recent missteps with its allies – that if it wants greater European support, it must win hearts and minds. It looks likely that the US will conclude mini trade agreements with the EU and the UK that will allow companies in both jurisdictions to benefit from some US subsidies – a similar deal was reached with Japan in March. Meanwhile, the Treasury Secretary, Janet Yellen, recently adopted Ursula von der Leyen’s preferred formulation of “de-risking” rather than “decoupling” from China, suggesting greater US sensitivity to some allies’ misgivings about adopting an increasingly antagonistic approach.
The G7 countries form the natural basis of a “friend-shoring” alliance to coordinate diversification away from China in critical industries, without protectionist policies harming each other. The US is likely to continue taking a more hawkish line than many of its partners, particularly if a Republican occupies the White House, but it is in the US’ and its allies’ interests for the world’s free and open economies to work together where possible to build their resilience and prosperity.
It is probably impossible to put the protectionist genie back in the bottle – and Britain must develop an industrial strategy that recognises this, but we should also continue to make the case with our allies in the US, the EU, and the Indo-Pacific that greater prosperity and security can be achieved when working together.