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What America’s protectionist turn means for the world – The Economist – 09.01.23

Officials from Berlin to Tokyo are planning their response.

Step for a moment into the ancient past. The year is 2016. Michael Froman, the United States Trade Representative, is making a stirring call to arms. American workers and businesses are competing against firms that get subsidies and other favours from their governments. “The question”, he says, “is what do we do about it? Do we accept this status quo, or do we actively work to change it?” Mr Froman’s choice, in line with decades of his country’s trade policies, is the latter: try to tear down the subsidies hurting American exporters and gumming up global trade.

Now, return to the present—with a thud. America’s answer to Mr Froman’s question has been flipped. Rather than trying to get other countries to cut subsidies, the Biden administration’s unabashed focus is on building a subsidy architecture of its own, complete with the kinds of local-content rules that American officials once railed against. Thanks to landmark legislation passed last year, the government is poised to shower cash—potentially more than $1trn over the next decade—on semiconductors, renewable energy and other green technologies. Officials have started getting into the nitty-gritty of how to distribute the cash; some of the new rules went into effect on January 1st.

For many in Washington—both Democrats and Republicans—this new approach is common sense. It is, they believe, the only way that America can protect its industrial base, fend off the challenge from a rising China and re-orient the economy towards greener growth. But for America’s allies, from Europe to Asia, it is a startling shift. A country that they had counted on as the stalwart of an open-trading world is instead taking a big step towards protectionism. They, in turn, must decide whether to fight money with money, boosting their subsidies to counter America’s. If the result is a global subsidy race, the downsides could include a fractured international trading system, higher costs for consumers, more hurdles to innovation and new threats to political co-operation.

The first big crack in America’s commitment to free trade came when Donald Trump levied tariffs on products from around the world. In some ways, though, it is this second crack—the present ratcheting up of subsidies—that hurts more. “Free trade is dead”, is the blunt assessment of a senior Asian diplomat in Washington. “It’s basic game theory. When one side breaks the rules, others soon break the rules, too. If you stand still, you will lose the most.”

Although subsidies have long been part of America’s economic landscape, the new plans are notable for both their scale and their America-first emphasis. Putting an exact price tag on them is impossible because most subsidies will come in the form of tax credits, the total size of which will depend on how much companies produce. Yet the cumulative impact will be enormous. If the federal government’s investment spree reaches $100bn a year over the next decade, as many expect, that would be roughly twice as much as its total subsidies in the pre-pandemic decade. Credit Suisse, a bank, thinks American solar panels could wind up the cheapest in the world by the late 2020s.

To advocates of free trade, subsidies are bad in their own right: they make goods produced by one country artificially cheaper, reducing economic efficiency. America’s new subsidies are that much more objectionable because in many cases they require recipients to meet local-content thresholds. To obtain a $7,500 credit towards their purchase of an electric vehicle, consumers need to buy a car assembled in North America. At least half of the battery components in eligible cars must also be made in North America. Wind, solar and geothermal projects will all receive heftier subsidies if they use American steel and iron. Roughly half of their manufactured components must also be made in America. And so the list goes on.

America’s protectionist turn has numerous motivations. China’s ascendancy is the starting point. American leaders once believed they could get China to rein in the worst of its industrial policies. These hopes were dashed, giving way to the view that America needs its own industrial policies to avoid becoming reliant on a rival in the technologies of tomorrow. Politicians’ concerns about disruption to supply chains early in the covid-19 pandemic strengthened this view, as did a desire to boost middle-class jobs. Climate change is another reason: spending on renewable energy is expected to lead to a sharp reduction in America’s carbon emissions.

The economic thinking that underpins much of this logic is dubious. Yet its political momentum is, for the time being, inexorable. That gives rise to two critical questions for countries around the world. How big an economic threat are the American subsidies? And how should they respond?

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What America’s protectionist turn means for the world – The Economist – 09.01.23
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