To counter China, G7 countries borrow its economic playbook

Midway through his face-to-face meeting with President Biden in Indonesia last fall, Chinese leader Xi Jinping issued an unsolicited warning.

Mr Biden had signed a series of laws in previous months to boost America’s industrial capacity and impose new restrictions on technology exports to China, hoping to dominate the race for advanced energy technologies that could help climate change to fight. For months he and his aides had been working to recruit allied countries to impose their own restrictions on sending technology to China.

The effort echoed the kind of industrial policy China had pursued to become the world’s manufacturing leader. In Bali, Mr. Xi join Mr. Pray to give it up.

The president was not convinced.

As Mr. Biden and fellow Group of 7 country leaders meet this weekend in Hiroshima, Japan, a focal point of their discussions will be how to quickly accelerate what has become an internationally coordinated round of massive public investment. For these wealthy democracies, the goal is both to reduce their dependence on Chinese manufacturing and to help their own companies compete in a new energy economy.

Mr. Biden’s legislative agenda, including bills targeting semiconductors, infrastructure and low-emission energy sources, is beginning to lead to potentially trillions of dollars in government and private investment in US industrial capacity. Think of subsidies for electric vehicles, batteries, wind farms, solar power plants and much more.

The spending — the United States’ most significant industrial policy intervention in decades — has goaded many of America’s best allies in Europe and Asia, including key leaders of the Group of 7. European countries, South Korea, Japan, Canada and others push for better access to America’s clean energy grants while launching their own outreach efforts.

“This clean-tech race is an opportunity to go faster and further together,” Ursula von der Leyen, the president of the European Commission, said after a meeting on economics at the Group of 7 summit on Friday.

“With the G7 in this race together, our competition should create additional production capacity and not at the expense of each other,” she said.

Mr. Biden and his Group of 7 counterparts have embarked on a project with two ambitious goals: to accelerate demand, even by decades, for the technologies needed to reduce emissions and combat climate change, and to empower workers in the United States and related countries an advantage over Chinese workers to meet that demand.

Much of that project has roared to life since G7 leaders met in the German Alps last year. The wave of recent actions by the Group of 7 on supply chains, semiconductors and other measures to counter China has been based on “economic security, national security and energy security,” Rahm Emanuel, the US ambassador to Japan, told reporters this week in Tokyo.

He added: “This is a turning point for a new and more relevant G7.”

Mr Emanuel said the effort reflected growing impatience among Group of 7 leaders with what they call Beijing’s use of economic measures to punish and deter behavior by foreign governments and companies that Chinese officials dislike.

But most of all, the shift has been fueled by the urgency of climate action and by two bills Biden signed last summer: a bipartisan bill to shower the semiconductor industry with tens of billions of dollars in government subsidies, and the climate provisions of the so-called Inflation Reduction Act, which companies are on. played in.

Those bills have led to a flurry of newly announced battery factories, solar panel factories and other projects. They have also launched an international subsidy race, which has evolved after being highly contentious in the immediate aftermath of the signing of the climate law.

The lucrative US support for clean energy and semiconductors – along with stricter requirements for companies and government agencies to buy US-made steel, vehicles and equipment – ​​have put unwelcome pressure on competitive industries in allied countries.

Some of those concerns have been allayed in recent months. The United States signed an agreement with Japan in March allowing battery materials made in Japan to qualify for the benefits of the Inflation Reduction Act. The European Union is seeking a similar deal and has proposed its own $270 billion program to subsidize green industries. Canada has passed its own version of the Biden climate bill and Britain, Indonesia and other countries are angling for their own critical minerals deals.

Government officials say once-bad allies have bought into the potential benefits of a coordinated industrial strategy for a wealthy democracy.

At the Group of 7 meeting, “you see a degree of agreement on this that, from our perspective, can continue the conversion of the Inflation Reduction Act from a source of friction to a source of cooperation and strength between the United States and our G7 partners,” Jake Sullivan, the national security adviser, told Air Force One reporters as Biden flew to Japan.

Some Group of 7 officials say the alliance has much more work to do to ensure that high-growth economies like India benefit from increased investment in a new energy economy. “It is important that the acceleration this creates does not discourage investment around the world,” Kirsten Hillman, Canada’s ambassador to the United States, said in an interview.

One country they don’t want to see benefited is China. The United States has imposed sweeping restrictions on China’s access to US technology, namely advanced chips and the machines used to make them. And it leans on its allies as it tries to impose global restrictions on technology sharing with Russia and China. All these efforts are designed to hinder China’s continued development in advanced manufacturing.

Biden officials have urged allied countries not to intervene to supply China with chips and other products it can no longer get from the United States. The United States is also considering further restrictions on certain types of Chinese chip technology, including a likely ban on venture capital investments that US officials are expected to discuss with their counterparts in Hiroshima.

While many of the Group of 7 governments agree that China poses a growing economic and security threat, there is little consensus on what to do about it.

Japanese officials have been relatively eager to discuss coordinated responses to economic coercion from China, following Beijing’s move to cut off Japan from a supply of rare-earth metals in a collision more than a decade ago.

European officials, on the other hand, are more divided on whether or not to establish close and lucrative business ties with China. Some, such as French President Emmanuel Macron, have reversed US plans to disconnect supply chains with China.

Mrs von der Leyen, the President of the European Commission, has been insist on a “risk reduction” of relations with China that means acknowledging China’s growing economic and security ambitions, while at the same time reducing Europe’s dependence on China for its industrial and defense base in targeted ways. European officials said in Hiroshima they were pleased to see US leaders moving more towards their approach, at least rhetorically.

Yet the Allies’ industrial policy threatens to complicate an already strained relationship with China. Consultancy firms with foreign ties have been victims of raids, detentions and arrests in China in recent months. Chinese officials have made it clear that they view export controls as a threat. The Chinese embassy in Washington, which is adopting the stage used by US officials to criticize Beijing, this week warned the Group of 7 against what it called “economic coercion.”

Mr Xi issued a similar rebuke to Mr Biden in Bali last fall. He pointed to the late 1950s, when the Soviet Union support withdrawn for China’s nuclear program.

China’s nuclear research continued, Mr Xi said, and four years later it detonated its first nuclear bomb.