Please Don’t Steer Your Smart Industrial Policy Off a Cliff, Mr. President

Rethink Trade
Rethink Trade

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By Lori Wallach, Rethink Trade Director

The electric vehicle (EV) consumer tax credit and related production support in the Inflation Reduction Act are the most likely-to-succeed and most carefully designed-to-purpose industrial policy tools that the Biden administration has created as part of its ambitious project to rebuild a more resilient and fair economy.

That’s precisely why the president must not alter these programs to accommodate complaints from the European Union, Korea, and Japan. The EV tax credit program is a primary public target of ire from foreign governments that host local EV or related battery production. But the European Union is targeting eight aspects of the IRA, including the EV production support. Yet, the United States following through on the EV program and implementing its other green-energy, microchips, and infrastructure investments in a way that builds U.S. production capacity is actually in the interest of U.S. allies, even if the focus on enhancing U.S. manufacturing capabilities makes them queasy.

Team Biden’s goal of enhancing U.S. supply chain resilience for critical goods necessarily includes building domestic production capacity.

Yes, we must also diversify import sourcing. We should not be reliant on any one country for large shares of critical goods. Geopolitics and national security considerations make it especially problematic that China is the source for 70% of the world’s EV batteries and refines most of the global supply of minerals for the lithium-ion batteries used in EVs, produces 80% of the solar equipment supply chain and, in the near future, 95% of the world’s polysilicon and wafers used to make both microchips and solar panels, and is the supplier of most of the world’s active pharmaceutical ingredients.

And also a continent-sized country abundant in natural resources must be able to produce critical goods domestically and be available to contribute to global supplies as well. And saying so is not an homage to Alexander Hamilton’s Report on Manufactures. (Although he must be rolling in his grave after decades of U.S. trade, procurement, and tax policies rigged by multinational corporations to incentivize and reward offshoring production and the related hollowing out of U.S. production capacity…)

Rather, the reality is that long, thin hyperglobalized supply chains relying on too few producers in too few locations are inherently unreliable. The COVID-19 pandemic made that widely evident. Our wake-up call was medical workers without PPE and now ongoing shortages of critical medicines, as well as consumers facing serial shortages and inflation.

This era of pandemics, shifting geopolitical conditions, and climate-related weather devastation (and the need to have less long-distance carbon-spewing shipping) means the world needs more production capacity in more places for critical products. That is why the Biden administration focus on building U.S. production capacity is good news for our allies as well. Over-relying on Chinese EV batteries, solar equipment, and microchips should be a source of concern to the Europeans, Koreans, and Japanese. Having in the United States a reliable ally with domestic capacity to produce these goods should be perceived as good news. And there is recent experience for why this is the case, as European nations were able to shift to U.S. energy supplies after Russia’s invasion of Ukraine resulted in the EU losing its main external energy source.

But the U.S. government throwing large sums of money, such as the Inflation Reduction Act’s $369 billion, in the general direction of the desired outcome will not deliver. That’s why it’s important that the EV program takes into consideration existing market structure and what specific investment and capacity needs to be incentivized.

Thus, the IRA updated the Clean Vehicle Credit (also known as “30D”) to build reliable demand to spur investment by providing consumers with a $7,500 credit for the purchase of a qualifying EV for the next ten years and without the old limits on numbers of cars per maker. The qualification terms promote investment in the U.S. EV supply chain, from minerals to assembly. Meanwhile, the Advanced Technology Vehicle Manufacturing (ATVM) Loan Program and the Domestic Manufacturing Conversion Grant Program provide support on the manufacturing end to build capacity to meet those qualifying terms.

For an EV to qualify for the consumer tax credit it must be assembled in North America. (Notably, the standard is North America, not United States, which was a subject of considerable debate and one reason why some see this program as an important first step if not the last word for incentivizing EV investment here.)

Consumers get $3750 if at least 50% of the battery’s components (anodes, cathodes, etc.) are manufactured or assembled in North America, with the percentage increasing from 2024 to 100% by 2029. The other half of the credit requires the battery also to contain at least 40% minerals recycled in North America or extracted here or in a U.S. free trade agreement partner country. (Notably, FTA partners Chile and Australia have the first and second largest lithium reserves globally.) The minerals requirement increases to 80% in 2027. Batteries that contain critical minerals mined, processed, or recycled or battery components manufactured or assembled in a “foreign entity of concern” are denied any credit starting in 2025 and 2024, respectively. IRA programs also cover used cars ($4,000 credit) and commercial fleets and add to the funds available in the 2021 Bipartisan Infrastructure Law for building charging stations. (Blue Green Alliance has an excellent chart laying this all out.)

This targeting can simultaneously deliver more EVs being produced globally and the U.S. establishing more capacity in EV production and its supply chain of minerals and batteries.

The Biden administration thinking about economic justice and using U.S. tax, procurement, and government investment policies to create jobs in industries of the future is essential to building political support for this and other policies necessitated by the climate crisis. Put simply, if workers and communities don’t see short-term benefits from the transition to a greener economy but only downsides, they might oppose the notion altogether.

In many circles, passage of the IRA was welcomed with an existential sigh of relief: The U.S. government finally was joining the global effort to fight climate chaos and the horrific threats it poses absent wrenching transformations of energy, transportation, and other systems in the next decade.

All that makes the EU and Asian government attacks on the Inflation Reduction Act as violating World Trade Organization (WTO) rules, as if that was the primary measure of a policy’s worth, sound like a flashback to the early 2000s. You know, that era before the Global Financial Crisis took the shine off of neoliberalism, the full impact of the China Shock was yet to be understood, and neither COVID nor climate-driven weather catastrophes were slaying us.

Business-as-usual is over, even here in the United States. The IRA’s domestic content provisions in specific U.S. government interventions and funding in shaping the economy in general reflect a new reality, not a temporary glitch. The shift began before President Biden, with the previous administration’s use of the Defense Production Act and billions in funding to try to respond to COVID. Unfortunately, that was done without targeting to achieve longer-term goals. So pharmaceutical corporations faced no obligations to share the vaccine technology we taxpayers funded. And there were no long-term contracts or other support, so domestic PPE production crashed when the government and consolidated hospital purchasing groups could get the goods from China again. U.S. Trade Representative Robert Lighthizer dusted off trade enforcement tools shelved for decades to try to bolster U.S. manufacturing, but Commerce and Treasury never did their part to secure real change.

The standard auto industry opposition to some of the IRA requirements was not a surprise. But why such a hostile take on the IRA from the closest U.S. geopolitical allies?

In part, the European reaction reflects domestic political challenges. European dependence on fuel from Russia and Russia’s invasion of the Ukraine has meant skyrocketing energy costs. This has threatened manufacturing and employment. At the same time, voters are reacting with fury to unaffordable heating and electricity bills as winter sets in, a trend which extreme right political movements across Europe are exploiting to build among the disaffected. In a submission to the U.S. Treasury Department, the EU targets eight different aspects of the IRA, including the EV and solar programs and other clean energy programs. Their claim is that these will divert investment from the EU and thus threatens deindustrialization. (The comments list three WTO agreements the EU claims the U.S. law violates — GATT, ASCM and TRIMS.)

Korea and Japanese EV makers generally have expressed a narrower concern. Hyundai announced it will invest $5.5 billion to open new EV and battery manufacturing plants in Georgia, while Toyota plans to spend $3.8 billion on a new EV battery factory in North Carolina. But neither will come online until 2025, meaning for two years those makers will be excluded from the benefits and may have to alter their battery supply chains to qualify.

Yet notably, the IRA funds for manufacturers and the consumer tax credits that will spur demand for EV vehicles are all accessible to Panasonic, LG, Honda, Toyota, and Stellantis, just to name a few of the companies based in Japan, Korea, and the EU that already had announced plans to establish production in the United States. That European and Asian firms can also get the funding had led many in Congress to echo what Senate Finance Committee member Sen. Debbie Stabenow (D-Mich.) said: “We’d love to have them come and build plants here and then be a part of it. We’re not going to be” changing the law.

A recent study comparing the subsidies, including tax credits and more direct support, granted to industry by the U.S., EU, and China also suggests that the United States is an odd target of EU wrath. From November 2008 to October 2021, China had 5,446, the EU 5,280, and the United State 3,501 subsidy awards and subsidy policy changes implicating import-competing firms. The study was conducted by Global Trade Alert, an outfit that describes its mission as providing “information on state interventions that are likely to affect foreign commerce.” This neoliberal-oriented organization cast a wide net, including U.S. financial sector bailouts. And still the results show what they do.

Rep. Dan Kildee (D-Mich.), a member of the House Ways and Means Committee, summed up the general view in Congress, where House and Senate leaders have made clear they will not reopen the IRA: European countries “have long engaged in substantial investments in their domestic industries… With the Inflation Reduction Act, we are investing to ensure that America, not China, leads the transition to electric vehicles.”

And particularly the automobile sector is not necessarily favorable ground for the EU, Korea, or Japan to complain about the Unites States. EU nations, led by Germany, shipped about $17.5 billion more automobile exports to the U.S. than America sent to Europe in 2021. And the EU, as a bloc, also charges a 10% tariff on automobiles imported from the U.S., but the United States has only a 2.5% tariff on European car imports.

To put this in perspective, consider an example. The U.S.-made best-selling EV last year was the Tesla Model Y, with a manufacturer’s suggested retail price (MSRP) of $65,990. A U.S.-made Model Y exported for sale to an EU country would face a 10% tariff, so the vehicle would likely cost a European consumer more than $72,500. One equivalent European-made model is Volkswagen’s ID.4 with a retail price of $61,380. Thanks to the tariff a Tesla Model Ys is already 18% more expensive than their German competitors in the European market. The European version of the consumer EVs tax credit applies to both cars, because it doesn’t differentiate based on country of origin. But the protection of European EVs happens at the border, when the tax credit applies. Non-EU vehicles are already at least 10% more expensive than those made in an EU country.

Conversely, if Volkswagen exports its ID.4 to the United States, the 2.5% tariff would raise the MSPR to around $63,000. Assuming that this vehicle doesn’t qualify for IRA tax credits and the Tesla Model Y does, a consumer would have to choose between a Tesla that would cost roughly $58,500 and a $63,000 Volkswagen ID.4. There is room for consumer preferences and automobile features to play a role in consumers’ choices when at issue is a 7.6% price differential, but not so much in Europe, where the U.S.-made vehicle is 20% more.

So, in a way, the IRA tax credit’s eligibility requirements level the playing field between European and U.S. carmakers. This is why the European attack on the IRA’s EV policy has been viewed as cynical and hypocritical by some observers here.

Car trade with Korea is duty free under the US-Korea free trade agreement, but Korea has maintained a significant auto trade surplus with the United States for decades, which was $14.5 billion in 2021. The U.S. trade deficit in cars with Japan in 2021 was also large at $31.9 billion.

These dynamics explained the administration’s initial responses to the complaints. “Our perspective is if you look at the economics of this, if you look at the amount of need around clean energy investments, around renewables investments, around EVs, there’s just a huge amount to be done — and more, frankly, to be done than the market would provide for on its own,” a senior administration official said during a recent press briefing. Former Vice President Al Gore had a similar take speaking after Thanksgiving in Brussels, arguing that the EU and other governments should “match what the U.S. has done.”

EU leaders were expected to meet on December 15 to discuss just that as EU Commission president Ursula von der Leyen suggested last week: “A common European industrial policy requires common European funding.”

Then French President Emmanuel Macron came to D.C. And President Biden, a foreign policy maven with relationships with many world leaders, commented at a press conference thick with bonhomie that the U.S. could “tweak” “glitches” in the IRA. “We can work out some of the differences that exist, I’m confident,” he said. At the same press conference, he said that he made no apology for the measure and would not overhaul it. Hum… so what does that mean?

Congress doubled down in noting the bill did not offer the executive branch room to alter the domestic content rules and Congress would not change the law. But Secretary of State Antony Blinken a week later referred to a Biden’s “commitment” to work with the EU to address the concerns.

In that ambiguity lies peril.

First, the administration has broken with decades of U.S. governments ignoring, if not promoting, the demise of our economic resilience and productive capacity. Success of their new industrial policy approach designed to simultaneously counter the interrelated crises of climate chaos, supply chain meltdowns causing shortages and inflation, and economic inequality and anxiety is proof of concept. And the opposite is also true.

Plus, politically, many Democrats recall the damage done by GOP attacks on the billions in President Barack Obama’s stimulus funds that went offshore to buy imported goods and hire foreign data entry services. The RNC’s infamous “Barack Obama, Outsourcer-in-Chief” ad went viral while mainstream publications covered the American Recovery and Reinvestment Act mess. “Senate Democrats Are Furious That The Vast Majority Of Grants From The Clean-Energy Program From Last Year’s Stimulus Have Been Awarded To Foreign Companies,” screamed a Politico headline.

If the administration’s high-profile industrial policy initiatives do not deliver concrete benefits to the communities and workers that have been hammered by failed trade policies in the short to medium term, the policy and political ramifications could be grim. To avoid the worst of the climate crisis, the world needs more of the goods needed to combat the climate crisis made and in as many places as viable as quickly as possible. And the politics to support that requires that people across the United States see the green economy future as a way out of economic hard times and a path to reverse their communities’ decline.

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Rethink Trade
Rethink Trade

Rethink Trade is for good jobs & fair markets, strong consumer & environmental protection & real democracy. Replace corporate-rigged trade policy!