Europe and Asia react to US push for technology and clean energy

Europe and Asia react to US push for technology and clean energy

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

That spending is aimed at reviving the domestic market for crucial products, but it has implications 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, triggering what some call a global subsidy race.

Officials, particularly in Europe, have accused the United States of protectionism and have spent months complaining to the Biden administration about its policies. 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 are all in denial that there is a race for subsidies, 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 confront climate change and make it less dependent on potentially risky supply chains that run through China.

But the spending has raised concerns about diverting government resources from other priorities and increasing countries’ debt burdens when high interest rates make borrowing riskier and more expensive. Gita Gopinath, first deputy managing director of the International Monetary Fund, said in an interview in October that the spending race was “a cause for concern.”

Ms. Gopinath pointed to statistics that show that every time the United States, the European Union or China enact subsidies or tariffs, there is a very high probability that one of the other two will respond with their own subsidies or tariffs within a year.

“We’re seeing an eye for an eye there,” Gopinath said.

The competition for spending is also testing alliances by giving companies that make prized products like batteries, hydrogen and semiconductors the ability to “buy domestic,” or pit governments against each other as they try to find the most suitable home. welcoming to its 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 its executives learned that the Inflation Reduction Act was being drafted. In response to the law, the company moved production to a factory in Georgia.

“We think it’s a really clever piece of modern industrial policy and we’ve changed our approach accordingly,” Birger Steen, Freyr’s chief executive, said in an interview. “The increase will occur in the United States, and that is due to the Inflation Reduction Act.”

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

Some countries are reaping direct benefits from American spending, including Canada, which is included in some of the benefits of the clean energy act and has mining operations that the United States lacks.

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

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

David Scaysbrook, 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 US clean energy bill was the most influential legislation introduced by any country. and that other governments were unable to replicate “the absolute magnitude” of it.

“Other countries cannot match that fiscal power,” he said. “Obviously, that is a threat to the EU or to other countries.”

The United States has tried to allay some of its allies’ concerns by signing new trade agreements that allow foreign partners to share some of the benefits of the clean energy act. A minerals deal signed with Japan in March will allow Japanese facilities to supply minerals for electric vehicles that receive U.S. tax credits. U.S. officials have been negotiating a similar deal with Europe 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 mineral-producing facilities outside the United States and Europe. Officials continue to work to complete an agreement in the coming weeks, but in the meantime, the lack of agreement has further cast a shadow on the relationship between the United States and the EU.

Biden administration officials have continued to defend their approach, saying the Inflation Reduction Act does not signal a shift toward American protectionism and that climate spending is badly needed. Even with such significant investments, the United States will likely fall short of international goals to curb global warming.

John Podesta, senior adviser to the president for clean energy innovation, said in a conversation at the Brookings Institution in October that foreign governments had been making “a certain amount of complaining.” But he said U.S. spending had ultimately spurred action by other partners, including a green industrial policy which Europe introduced earlier this year.

“So with complaints comes a little more accountability, and 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 major green stimulus program as part of an earlier pandemic recovery fund, and additional spending for 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 been setting aside new subsidies for major chipmakers such as TSMC and Micron.

Europe also proposed a “chip law” last year, although its size is significantly smaller than the US program. And China has been pouring money into the manufacturing of semiconductors, solar panels and electric vehicles to defend its global market share and shore up its ailing economy.

Competition has also created anxiety in smaller economies, such as Britain, about their ability to keep up.

“The UK is never going to compete on money and scale at the same level as the US, the EU and China because, first of all, we are under fiscal constraints, but also simply because of the size of the economy,” said Raoul Ruparel, director from Boston Consulting Group. Center for Growth and former government special advisor.

British officials have made clear that they do not intend to offer a wide range of subsidies, like the United States, but instead rely on a more free-market approach with some case-by-case interventions.

Some economists and business groups have criticized this approach and Britain’s resistance to creating a broad industrial strategy to shape the economy more clearly toward green growth, with the help of subsidies.

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

Some experts insist that fears of a subsidy race are overblown. Emily Benson, a senior fellow at the Center for Strategic and International Studies, said the scale of overall U.S. and European Union spending was not significantly different, although European spending was spread out over time.

“I don’t see a great start to this massive subsidy rush that will completely upend global relations,” Ms. Benson said.

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

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

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

Madeleine Ngo contributed reporting from Washington.