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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Joe Biden will go into November’s US presidential election touting his lavish spending on the green transition — and his interventionist industrial policy more generally — as one of his great achievements. He also wants to export it to the rest of the world. Jake Sullivan, head of the White House National Security Council, said last year: “We will unapologetically pursue our industrial strategy at home, but we are unambiguously committed to not leaving our friends behind. We want them to join us. In fact, we need them to join us.”
In reality, Sullivan might have to resign himself to the administration going it alone. When your economic interventionism involves fiscal largesse other big economies can only dream of affording and protects US industry with trade barriers other governments find unpalatable, it’s tricky to see how you can assemble a gang of like-minded countries.
Biden has shielded US steel producers from import competition — though with nothing like the sweeping tariffs imposed by Donald Trump — and tried to build a US semiconductor industry through the Chips Act. But his centrepiece is the Inflation Reduction Act, which includes a massive programme of federal spending and open-ended tax credits aimed at creating domestic green production to service the American market.
The cost of the IRA’s spending elements for climate and energy was originally estimated at $385bn over 10 years, but projections made last spring suggested it had risen to about $1tn. Some estimates show that by the time the programmes have achieved their environmental targets, their cost could be nearly $3tn. Famously, the administration placated Congress by restricting the electric vehicle tax credits to car companies from US allies and in general excluding products made with certain amounts of Chinese components.
This is a trail that other big economies — except, ironically, China — can’t really afford to follow. European Commission president Ursula von der Leyen, a noted Americanophile, has talked about co-ordinating green policy with the US, and the EU has in theory assembled a one-off €800bn “NextGenerationEU” fund to finance the green and digital transitions.
But in practice it is proving painfully slow to get the money out of the door, because it requires the member states to meet performance targets set by the commission. Unlike the US, the EU doesn’t have a large permanent centralised taxing or borrowing function and has to create new spending mechanisms for projects rather than quickly disbursing money via tax credits. In November, Germany’s constitutional court upended the government’s budget plans by blocking it from employing unused borrowing capacity to fund a climate and transformation fund for German industry.
The EU has also resisted being quite as aggressive as the US on restricting trade and investment with China. Brussels has announced an investigation into subsidised Chinese EVs, but it’s unlikely to result in very high tariffs, and its domestic subsidies are not in general at present designed to exclude foreign (including Chinese) producers. The leading Chinese carmaker BYD recently announced it would produce EVs in Hungary, subsidised by the Hungarian government.
Outside the EU, the US has some hopes that the UK will join its industrial policy camp. It’s true the Conservative government has often at least rhetorically tilted towards the US. And the Labour opposition likely to take power after a general election later this year has adopted Biden’s slogan of a “worker-centric trade policy”.
But Britain can’t conceivably afford to copy the IRA. The public finances are already stretched and Liz Truss’s fleeting prime ministership in 2022, cut savagely short by financial markets taking fright at £45bn of unfunded tax cuts, is a cautionary tale for any government considering an open-ended fiscal commitment.
In any case, unlike the US, the UK economy is nothing like big enough to sustain a self-contained industry for EVs or other green goods. Indeed, the government has focused on integrating with the EU market by extending rules of origin that facilitate car companies building cross-Channel supply chains.
Brazil, where President Luiz Inácio Lula da Silva has committed himself to an active industrial policy, is also sometimes seen as a like-minded country by US officials. But Lula’s spending is often directed at heavy industries such as oil refineries and shipyards favoured by his electoral base. His idea of building a Brazil-based EV sector is enthusiastically to invite in Chinese investment, contrary to the US approach.
There is no doubt that there is a lot of IRA envy in the world, particularly in the EU. Officials long for the ability simply to flick open a spigot of tax credits rather than laboriously construct an elaborate fiscal apparatus, not to mention dealing with the interference of the German constitutional court. There will also be interest outside the US in transferring any technological breakthroughs made by American producers.
But as regards big economies actually joining its gang, the US’s industrial policy is blazing a trail that others are largely unable or unwilling to follow.