1. What’s triggered the subsidy race?
The US Inflation Reduction Act was meant to stimulate production of EVs and other clean energy goods. Apart from addressing climate change, the law creates US jobs by channeling huge amounts of public cash into swing-state industrial regions, potentially benefiting President Joe Biden’s 2024 reelection bid. Policymakers in Europe, Japan and South Korea worry it could put their own firms at a disadvantage and lure investment to the US that would otherwise flow to their countries. Describing the incentives on offer as akin to “a gold rush,” German carmaker Volkswagen AG, for example, opted in March to build a $2 billion EV factory in South Carolina. In May, Canada’s government had to massively increase a C$1 billion ($759 million) aid package for a new EV battery plant to ensure the project wasn’t transferred south of the border.
2. What happens in a subsidy war?
When deep-pocketed governments try to outspend each other to lure investment, less wealthy nations are negatively impacted because they can’t muster the same scale of funding. Subsidies undermine the goal of a level competitive playing field in global trade, raising costs for companies and consumers and, sometimes, hinder the industries they were designed to help. A standout example is the dispute between the US and the European Union over subsidies for aircraft makers Boeing Co. and Airbus SE, which led to tariffs on tens of billions of dollars’ worth of trade in 2019.
3. How did US allies react to Biden’s plan?
Initially, they condemned it as discriminatory and a threat to western unity. The European Commission, which handles international trade matters on behalf of the EU’s 27 member states, said the US measures include local content, production and assembly requirements that discriminate against non-US companies. Biden sought to reassure them, acknowledging his law had some “glitches” and offering possible carve-outs that allow companies from friendly nations to access some of the subsidies. What was clear, however, was that the US was resolved to dispense with some of the conventions of postwar global trade in order to compete with China in future technologies, and its allies needed to respond in kind.
4. What did US allies do next?
On March 15, South Korea unveiled a 550 trillion-won ($413 billion) investment plan focusing on public-private partnerships for chips, batteries, EVs and other growth sectors. The following day, the EU announced a Net-Zero Industry Act to spur investments to try to meet at least 40% of the bloc’s clean technology needs from within its own borders by the end of the decade. It also expanded a carve-out from the bloc’s state aid rules to allow more support for clean tech industries. Germany, France and Spain announced a flurry of tax credits and aid packages for EV investments — measures that might have incurred the wrath of EU competition officials in Brussels before the US law tilted the playing field. The EU also passed a €43 billion ($47.5 billion) subsidy program in April called the Chips Act to support advanced semiconductor manufacturing in the bloc. Germany said in July it was readying subsidies for high-end semiconductor plants totaling some €20 billion.
5. Could this evolve into a trade war?
That looks unlikely. A trade war would go beyond subsidies to impose barriers on imports of goods from competing nations. US allies have shown little appetite for a fight and none have lodged a formal complaint against the US at the World Trade Organization. That’s partly because they share a common goal with the US that the IRA helps to promote: redirecting global supply chains for clean-energy products away from China so that Beijing can’t abuse its dominant position in some key raw materials. The EU is almost entirely reliant on China for products such as rare-earth minerals and magnets. The risk for Europe is that the US green subsidies only increase the competition for scarce resources, making Europe even more reliant on Chinese minerals and technology in the near term.
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