The EU goes head to head with the US on industrial policy, right when cooperation is most necessary. Plus, BP says that fossil fuels are out but US oil production surges and the world can’t kick coal, China’s pending export restrictions on solar and rare earth technology, and General Motors pushes ahead with investments in vertical integration. Plus: disinflation with a side of hot jobs, Made in China Covid antivirals, and, of course, China’s spy balloon.
The EU this week unveiled its “Green Deal Industrial Plan.” It’s a counteroffer to the United States’s massive Inflation Reduction Act, and aims to correct what the bloc describes as “subsidies abroad [that] are uplevelling the playing field.” The plan proposes to increase levels of state aid to allow more targeted subsidies for renewable energy industries, to repurpose existing funds, to speed up permitting for clean tech projects, and to set up a new fund to support emerging technologies.
Will it work? A major challenge is that, to state the obvious, where the US is a single country, the EU is many: Relaxing state aid rules could pit bigger economies against smaller ones. That in turn could fragment the internal market—the core of the EU’s economic model.
Then there are the ideological concerns: The Financial Times argued this week against the “orgy of subsidies” thrown at the battery industry by the IRA (and now the EU’s Green Deal). Batteries are about “[s]cale, capital, and cost: it all points to China,” the essay notes. It urges the West to focus instead on high margin areas of the EV industry, like software, data, and design.
But the FT’s case against what it calls the “great battery industry fallacy,” misses a broader point: It’s the West’s singular focus on high value-add downstream segments of value chains, while neglecting and outsourcing the upstream and midstream, that has hollowed out its industrial base and led to an overwhelming reliance on China. The IRA and Green Deal are an attempt to correct that asymmetry. Forgoing domestic battery manufacturing capacities to chase higher downstream margins would do nothing to shore up economic security.
Still, our lingering questions: How to reconcile this subsidy tit for tat with today’s unprecedented imperative of US-EU cooperation? And is this subsidy war an ill-fated effort to replicate Chinese approaches to industrial policy at the expense of free(r) market solutions that could better leverage enduring US and EU strengths?