Saturday, February 4, 2023

An arms race on industrial policy is the last thing Europe needs

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The writer is an FT contributing editor and writes the Chartbook newsletter

This has been the year of industrial policy. In pursuit of rapid decarbonisation, supply chain resilience and decoupling from China, we are witnessing a redrawing of the boundary between the government and business on both sides of the Atlantic. This means picking winners and living with the risk of getting it wrong. It means getting into bed with producers who sell you their solutions in exchange for preferential treatment. It also goes hand in hand with rising international tension.

Already in 1742, David Hume was warning of conflict spurred by the “jealousy of trade”. In the early 1900s, the liberal JA Hobson and the Bolshevik Vladimir Lenin agreed in denouncing the violent era of imperialism produced by the marriage of private capital with the nation state.

Then, it seemed as though rapacious business was the main driver. Today, economics still matters. It is China’s gross domestic product that makes it a formidable challenger. But it isn’t Jack Ma who is in the driving seat. The escalation of tension is driven by the ambition of Xi Jinping’s Communist party regime and the reaction of the US national security establishment. The future once mapped by global business has been put profoundly in question. Our world is not one of Tina — there is no alternative. We are in a world of Tara — there are real alternatives, both in economics and grand strategy. And this invites the question of choice. Our world will be what the powerful make of it.

In this politicised tripolar world economy — formed by the US, EU and China — the basic source of tension is the confrontation between Washington and Beijing. On top of Russia’s attack on Ukraine, escalating tension over Taiwan made 2022 the year in which a third world war became a real tail risk.

What is more surprising is that the year is ending with a row between Europe and the US over America’s Inflation Reduction Act. This is no small matter. With a budget of $500bn, the IRA is the largest industrial policy response to the global climate crisis to date.

For the Europeans, the act, with its overt preference for production in North America, breaks with the global norms embodied by the World Trade Organization. French president Emmanuel Macron warns that the US risks splitting “the west”. Others call for Europe to assert its strategic autonomy by launching its own industrial policy.

At one level this is predictable. There is a long history of EU-US trade spats. But even allowing for that, the EU’s current response to the IRA is disproportionate and question-begging. For one, the timing is odd. The terms of the IRA deal were clear by the end of July. It was not until November in the wake of the COP27 climate talks that Europe chose to react.

The IRA’s headline appropriation figure may be large, but the US economy is huge and the spending will be disbursed over 10 years. In proportional terms the act is half the size of what Europe has already committed in clean energy subsidies.

As for the politics, far from being a bold strategic move by the Biden administration, the act emerged from desperate congressional haggling in which the terms were dictated by Joe Manchin, senator from the coal state of West Virginia.

From the American point of view, the fuss the Europeans are making is gratuitous. As far as climate is concerned, the IRA is the best that the US can do. Europe must live with it. But, if Washington asks for diplomatic consideration, the same also goes in reverse. What if Europe, to overcome its own inhibitions over industrial policy, needs something to make a fuss about?

People are fond of quoting Jean Monnet’s line that Europe is made through crisis. That implies a reactive alchemy in which new institutions emerge as functional responses to challenges. What this obscures is that it takes politics to define a crisis and devise a response. The least you can say about the EU’s reaction to the IRA is this is a crisis Europe’s leaders have chosen. But that brings us back to the key point. Strategic autonomy doesn’t just consist of the capacity to stand up to global bullies. It is defined by the fights you pick.

A European clash with Congress and the Biden administration would be profoundly counterproductive. What we need is co-operation not conflict. Take the positives. A powerful US lobby has emerged to expand the green energy market, offering big opportunities for European business. If Europe wants to boost its own companies, adopt a “buy European” clause. The US won’t be in a position to complain.

We are in an era of turbulent transition. New modes of industrial intervention are our best means of responding to the multiple challenges ahead. These involve countless conflicts of interest. But let us not conflate those tensions with questions of sovereignty any more than we have to. The IRA may be a morbid symptom of America’s inwardly turned political process, but it does not pose an existential threat to Europe. There is no excuse for unleashing a transatlantic industrial policy arms race.




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