U.S. spending on clean energy and technology spurs allies to compete

The United States has embarked on the biggest industrial policy push in generations, dangling tax breaks, subsidies and other financial incentives to attract new factories making solar panels, semiconductors and electric vehicles.

That spending is intended to boost the domestic market for crucial products, but has consequences far beyond the United States. It is pushing governments from Europe to East Asia to try to keep up by proposing their own investment plans, setting off what some are calling a global subsidy race.

Officials, especially in Europe, have accused the United States of protectionism and complained to the Biden administration about its policies for months. Governments in the European Union, Britain and elsewhere are debating how to counter U.S. policies by offering their own incentives to attract investment and prevent their companies from moving to the United States.

“I think we all deny that there is a subsidy race, but to some extent it is happening,” said Markus Beyrer, director general of BusinessEurope, Europe’s largest trade association.

The administration says the investments will put the United States in a better position to deal with climate change and make the country less dependent on potentially risky supply chains running through China.

But the spending has raised concerns about diverting government funds from other priorities and increasing countries’ debt burdens, while high interest rates make borrowing riskier and more expensive. Gita Gopinath, the 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 when the United States, the European Union or China introduce subsidies or tariffs, there is a very good chance that one of the other two will respond with its own subsidies or tariffs within a year.

“We see a tit-for-tat there,” Ms. Gopinath said.

Spending competition is also putting pressure on alliances by giving companies that make prized products such as batteries, hydrogen and semiconductors the opportunity to ‘buy in’ or play governments against each other in their search for the most hospitable home base for their technologies.

Freyr Battery, a European-founded company that develops lithium-ion batteries for cars, ships and storage systems, was halfway through building a factory in Norway when executives learned that the Inflation Reduction Act was being developed. In response to the law, the company moved production to a factory in Georgia.

“We think it’s a very ingenious piece of modern industrial policy, and that’s why we’ve shifted our focus,” Freyr CEO Birger Steen said in an interview. “The increase in scale will take place in the United States, and that is because of the Inflation Reduction Act.”

Mr Steen said the company is keeping the Norwegian factory ready for a “hot start”, meaning production there could scale up if local policies become friendlier. The company is talking to policymakers about how to compete with the United States, he said.

Some countries are reaping direct benefits from U.S. spending, including Canada, which is part of the clean energy bill’s benefits and has mining operations that the United States does not.

Killian Charles, the CEO of Brunswick Exploration in Montreal, said in an interview that Canada’s lithium industry would benefit as battery production moved to the United States and companies looked for nearby sources of raw materials.

But in most cases, the competition seems more zero-sum.

David Scaysbrook, the 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 U.S. Clean Energy Act was the most influential legislation passed by any country was introduced and that other governments did the same. unable to replicate “the sheer size” of it.

“Other countries cannot match that fiscal firepower,” he said. “It is clear that this is a threat to the EU or other countries.”

The United States has sought to address some of its allies’ concerns by signing new trade deals that would allow foreign partners to share in some of the clean energy law’s benefits. The A minerals agreement signed with Japan in March, it will allow Japanese facilities to supply minerals for electric vehicles that receive U.S. tax breaks. American officials have negotiated with Europe for a similar agreement 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 facilities that produce minerals outside the United States and Europe. Officials will continue to work to finalize a deal in the coming weeks, but in the meantime the lack of agreement has further undermined US-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 desperately needed. Even with such significant investments, the United States is unlikely to meet international goals to combat global warming.

John Podesta, the president’s senior adviser for clean energy innovation, said in a conversation at the Brookings Institution in October that foreign governments had engaged in “a certain amount of whining.” But he said the U.S. spending had ultimately prompted action from other partners, including a green industrial policy that Europe introduced at the beginning of this year.

“So with the nagging comes a little more shoulder to the wheel, so that’s a good thing,” he added.

In addition to the Green Deal Industrial Plan, which the European Union proposed in February, the bloc approved a significant green stimulus program as part of an earlier pandemic recovery fund, and 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 passed measures this year offering more tax breaks to semiconductor companies, and Japan has set aside new subsidies for major chipmakers such as TSMC And Micron.

Europe also proposed a “chips act” last year, although its size is considerably smaller than that of the US program. And China has pumped money into manufacturing semiconductors, solar panels and electric vehicles to defend its share of the global market and prop up its weakening economy.

The competition has also raised concerns in smaller economies such as Britain about the ability to keep up.

“The UK will never compete on the same level as the US, EU and China in terms of money and scale, because we face budget constraints first and foremost, but also just because of 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 this is the case The intention is not to offer a wide range of subsidieslike the United States, and instead rely on a more free market approach with some interventions on a case-by-case basis.

Some economists and trade groups have criticized this approach and Britain’s resistance to creating a sweeping industrial strategy to steer the economy more clearly towards green growth, using subsidies.

“The question is: Do you want to capture the economic benefits along the way and tap into these sources of growth?” asked Mr. Ruparel.

Some experts argue that fears of a subsidy race are exaggerated. Emily Benson, a senior fellow at the Center for Strategic and International Studies, said the size of total spending by the United States and the European Union was not significantly different, although European spending was spread out over time.

“I don’t see a huge kick-off to this massive subsidy race that will completely upend global relations,” Ms. Benson said.

Business leaders and analysts said frustration in the European Union stemmed partly from broader economic concerns following the conflict with Russia. The combination of higher energy prices and tougher competition from the United States and China has depressed foreign direct investment in Europe and stoked other fears.

Fredrik Persson, the president of BusinessEurope, said the companies his group represented had “a very strong response” to the Inflation Reduction Act.

“We fully support the underlying direction of the green transition, but it came at a sensitive time,” he said.

Madeleine Ngo contributed reporting from Washington.