Tuesday, November 29, 2022

Oh, what a lovely subsidy war

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This article is an on-site version of our Trade Secrets newsletter. Sign up here to get the newsletter sent straight to your inbox every Monday

Welcome to today’s Trade Secrets, which looks at developments in American insistence on doing the green tech transition on its own — not just decoupled from China but without undue concern for allies such as the EU and Japan. In that context, it’s notable that Olaf Scholz last week continued the tradition of the German chancellor personally touring China accompanied by a phalanx of the country’s business representatives. Seen from Washington, especially given the dismal failure of Berlin’s trade-based foreign policy in the Russia case, the optics of a tour such as Scholz’s simply harden American determination to go it alone. Relatedly, today’s main piece is on the Biden administration encouraging the EU and other supposed allies to start a green subsidy war. (Not in so many words, but it’s definitely the vibe.) Charted waters looks at the uneven impact of climate change.

Get in touch. Email me at alan.beattie@ft.com

Illegal handouts? So sue me

Washington’s message to Brussels, Tokyo and Seoul over the now famous electric vehicle tax credits has become pretty clear: we aren’t giving your carmakers our subsidies, so you’d better start forking out for some yourself.

Officially, as US trade representative Katherine Tai said in a Financial Times interview last week, the Biden administration is still considering the EU’s request that cars assembled in Europe become eligible for the credits in the Inflation Reduction Act (IRA). Those subsidies have already been extended to automakers in Canada and Mexico.

As we reported in a story over the weekend, the EU is upping its level of complaint over a total of nine measures in the IRA it says are discriminatory, sending in a fairly cross submission to the US Treasury, which is writing the implementing legislation. Brussels concludes in a threatening but unspecific way that the act could provoke reciprocation or retaliation.

In reality, certainly as regards the electric vehicle credits, the best way to read the EU’s harrumphing is an attempt to get loopholes written into the interpretations of the rules rather than reopen the law as such. Only the most optimistic EU officials genuinely think the law is going to be changed substantially to make European manufacturers eligible, and only the more hotheaded EU member states really want to plunge into a broad-based trade war at this stage.

The US has made it clear privately that widening the charmed circle is highly unlikely to happen. It would constitute unpicking a carefully constructed political deal on Capitol Hill, a big risk even after this week’s congressional midterms are out of the way. Joe Manchin, the West Virginia senator who has modestly accepted the role that fate has handed him of micromanaging hundreds of billions of federal dollars according to personal whim, was reportedly persuaded to make the tax credits a Mexico-Canada thing by the lure of North American energy security (oil sands and pipelines and so on). The same logic doesn’t apply to a net energy importer such as the EU.

The US tactic for trying to head off a trade war over this has been pragmatic rather than principled, telling the EU their producers wouldn’t benefit from the credit much anyway because the $55,000 retail price cap on eligible cars ($80,000 for SUVs and pick-up trucks) is below the value of most autos exported to the US from Europe. In fact there’s also a genuine question about how even many US-made EVs will manage to qualify, suggesting an element of industrial activism theatre about the entire thing. (There is also, of course, a big question over what happens to industrial policy altogether if the Republicans retake Congress tomorrow, though trade measures will remain a tool for onshoring even if the federal dollars dry up.)

The one vaguely substantive thing Tai did say was that the EU should have its own green industrial policy and the two should co-ordinate. The problem is that there isn’t a binding mechanism for co-operation, particularly not for the practicalities of spending money and especially where Congress is concerned. The EU and US have now set up a task force to address subsidies in the IRA, but it’s going to be very hard to get Capitol Hill to pay attention.

Traditionally Congress, more so than the White House, is instinctively more willing to ignore international trade law when writing policy, though it often unexpectedly found itself as the adult in the room during Donald Trump’s presidency. A piece of legislation such as the IRA, where the administration ceded so much influence to Congress, was always likely to contain some unilateral nasties.

If the EU can afford a subsidy war (and interventionists such as internal markets commissioner Thierry Breton are certainly up for it), it’s likely to be an inefficient and duplicative one, with an increasing risk of spending being buttressed by Buy Europe domestic procurement provisions to match the US versions. The race has already started elsewhere with Canada last week announcing big tax credits for green tech investments to keep up with the US.

There are excellent reasons to put public money into green technology, but not to waste resources by doubling up (or indeed tripling, quadrupling or quintupling) with countries supposedly on the same geopolitical side and starting a trade war along the way. Still, that’s where we’re going. Good work, everyone.

As well as this newsletter, I write a Trade Secrets column for FT.com every Thursday. Click here to read the latest, and visit ft.com/trade-secrets to see all my columns and previous newsletters too.

Charted waters

COP27 is upon us, so it would seem remiss not to talk about the global impact of climate change on economies. As world leaders gather in Sharm el-Sheikh in Egypt, attention is focusing on who pays for the damage already done.

Heating up: research published ahead of COP27 shows the disparity in the impact of climate change between rich and poor nations

New research from the Climate Impact Lab, illustrated in the dynamic map above, concludes (perhaps unsurprisingly) that poorer countries are the hardest hit by global warming. Pressure is growing, backed by the FT’s editorial board, to make the richer countries help poorer nations fund the necessary changes to reduce carbon footprints. The data illustrates the need to do this. Politics is another matter. The question is whether a deal can be struck. (Jonathan Moules)

This particularly good episode of the excellent Trade Talks podcast looks at the US semiconductor export ban and the intersections with trade and national security policy.

Columbia University polyguru Adam Tooze’s Chartbook examines exactly how intertwined the German economy is with China.

Chinese chipmakers are tweaking their products to slow processing speeds in order to avoid US sanctions.

FT tech sage John Thornhill argues that the US and China are too intertwined to achieve radical economic decoupling without inflicting intolerable damage.


Trade Secrets is edited by Jonathan Moules


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