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Is the UK too late to beat the US in the global trade war?

  • By Faisal Islam
  • economic editor

In the dusty cornfields of Western Kentucky, an area long abandoned for industrial use is reviving once again.

American manufacturer Ascend Elements chose the site to build a factory to make electric car batteries made from recycled batteries – an industry that was previously almost entirely based on China.

It was drawn here by US preferences. The country is spending billions of dollars on new subsidies through loans and tax breaks targeting green energy and vehicles.

Half of Ascend’s $1 billion initial construction costs were covered by the US government under this new program, known as the Inflation Reduction Act (IRA).

The move is part of an emerging tectonic shift in where the world makes everything. It could spark a global trade war between Western allies, as the EU responds to US plans in kind.

It’s about people in the West refusing to bow to what is arguably China’s inevitable ascent to the world’s largest economy.

And it’s about the livelihoods of those hoping to find jobs in the industries of the future.

In the UK, that means there are choices to be made. A government preoccupied with Brexit and domestic political turmoil may have missed the moment to begin dividing future industries among the giant trade blocs that have come out of the pandemic.

The assumption that has dominated British politics for nearly half a century that governments do not “pick winners” in industry is seriously challenged by the fact that most of the G7 allies are doing just that, for its efforts to reduce carbon emissions to net zero, posting concerns about pandemic supply chains and a desire to decouple from China.

‘Standing on the sidelines’

John Neil, boss of major UK manufacturing company Unipart, said the combination of incentives offered by the US and similar government and regional plans could amount to 10 trillion. dollars – five times the size of the entire UK economy.

“The risk is that we’re on the sidelines while these big blocks compete… play the game. I’m not sure if anyone else is. [in UK politics] adjusted for the size of change that the IRA and the Chips Act and the rest of it will have.”

Mr. Neil’s publicly stated views reflect the personal views of many in the UK car industry and beyond.

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Unipart’s John Neil says UK risks staying on the sidelines while big blocks compete

The blueprint for the US plan was written during the pandemic. On the sidelines of the IMF finance ministers’ meeting at the G7 in late 2021, US Treasury Secretary Janet Yellen invented a whole new word: “friendshiping”.

It’s a game based on efforts to “restore” domestic production in key industries, but including allies or “friends” in these rebuilt supply chains.

The French were very nervous when President Biden expanded the plan.

Notably, then-French Finance Minister Bruno Le Maire talked about reducing dependence, not only on China but also on its East Asian allies.

Last year, Le Maire alone was shocked when his officials reported that Europe’s electric car battery supply chain was 85% dependent on China. For solar panels it is 95%.

Indeed, that week, Biden promised “never” to depend on another country for important industries.

‘America leads the world?’

At a rally to promote his efforts in January, President Biden told auto workers: “You see, I’m being criticized internationally for focusing too much on water. America. That’s damned. Where is it written that America can’t lead the world in manufacturing?

Insiders say that while the focus is on green industries, the strategy is intended to support middle-income jobs and wages in the regions that are left behind – the areas that determine the United States presidential election.

Former US President Donald Trump overtook Kentucky by some margin in 2016 and promised to deregulate the industry, abandon climate change efforts and allow mines to reopen. It didn’t happen.

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Former miners are being paid union wages to fill unused mines

Mining union boss Steve Earle recognized the targeted nature of the White House’s investment drive, directing new industries to start up near where the coal mines closed, going beyond paying union wages to old miners.

“We welcome funding, we welcome jobs, but I wanted President Biden to come down here from Washington DC and see first-hand how these people have suffered for several years,” he said. he told me.

While Mr. Earle and his fellow miners don’t appear to be Trump fans, they are skeptical of the new world of green technology and electric cars. “Scale anxiety” in open and empty states like Kentucky is still inherent, and especially for farmers.

IRAs and other policies are designed to capture the clean energy transition and direct the benefits of these changes to the areas left behind.

Finance Secretary Janet Yellen calls it: “Modern Supply-side Economics”.

Supply-side economics is often seen as the opposite of what President Biden is doing today. It focuses on the benefits of free trade, free markets, low taxes and deregulation.

Ms Yellen said these policies had led to a “race to the bottom”.

Instead, she said in a keynote last year: “We’re not basically just focusing on getting high, unsustainable growth numbers – we’re aiming for inclusive and green growth.”

Washington insiders say there is an important strategic shift in environmental policy. While climate policy has long focused on regulations, such as emissions limits, it is now focused on the carrot of incentives, on a large scale. This has brought business on board.

In the face of criticism around the world that it is redirecting investment from Europe and Asia to the US, Deputy Treasury Secretary Wally Adeyemo said the US wanted the rest of the world to follow and praised Canada’s recent success. announced similar special incentives for electric car manufacturers. .

He acknowledges there are “Made in America” ​​provisions but says they represent a “small element” of the support package.

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Wally Adeyemo praises Canada for introducing US-like incentives for its electric carmakers

EU Trade Commissioner Valdis Dombrovskis pointed out that EU countries would not dream of excluding US-made Tesla from their electric car subsidies.

“Many EU member states also have subsidy schemes for electric vehicles, but they are not discriminatory. What the US is doing… discriminating against other manufacturers, also makes it. .. becomes less efficient in terms of green transition, because the best technology will not always be available”.

One European leader told me that the US had said that targeting European industry was purely a “major accident” and by no means “aggressive”.

In the US, insiders said the IRA was created by Biden’s environmental group, not his trade group, who only claimed there was a relevant trade deal with the EU. Do not have.

The aim of the policy is to ensure that EU producers enjoy the same subsidies as other allies such as Canada. However, if there is a subsidy war, the large EU countries will be able to compete and side with the smaller countries, creating significant pressure on the European single market.

So where does all this leave the UK? Not officially participating in the US-EU negotiations.

Business and Trade Minister Kemi Badenoch “compared the note” with Dombrovskis. There could be a minerals deal to help UK car exporters benefit from US auto incentives.

The official line laid out by both the Prime Minister and the Energy Secretary is that the US is catching up with Europe and the UK on climate change, and that the UK uses twice as much renewable energy as the US .

But the language used by the government seems to be evolving. Just last month, cabinet ministers described US plans as “protective” and “dangerous”, and insisted the UK would not “confront” the US.

But manufacturers have pointed out the consequences of staying out of the way in public, and even more so in private. Now there is some talk of focusing on target areas, even the return of “industrial strategy” two years after the phrase was dropped by Kwasi Kwarteng.

The government’s self-imposed fiscal rule aims to reduce the national debt, limiting maneuverability and spending power.

Labor has embraced the language of Britain’s “Inflation Reduction Act” but has yet to commit to substantial new funding for such schemes.

Does shadow chancellor Rachel Reeves want to announce a purse easing that risks accepting a growing national debt in the economy? In the US, President Biden is facing pressure to cut back from Republicans threatening Congressional debt-limiting legislation.

The UK’s post-Brexit economic strategy is to focus on areas of strength that could benefit from faster, more efficient or lighter regulation outside the EU – life sciences, cities and AI.

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Unipart operates in Europe, North America, Japan and Australia

But John Neil and others fear the UK is being squeezed between the US and the EU in this new world, especially in industries that have been promised “level up”.

The Prime Minister has said that he is waiting for the EU’s response to the US push. This may reflect a calculation that the EU may not react as strongly as expected, due to a number of divisions.

But this is the crux of the dilemma. The United States is engaged in a large-scale atypical economic intervention designed to change the map of global manufacturing, address the regions left behind and the net zero and reduce dependence on China. It is here to stay and other blocs, especially the EU, will respond and have been quick to roll out some subsidies.

So the question is, should the UK follow suit, and can it afford to follow suit? There are concerns in the industry about the scale of the intervention elsewhere meaning it is too late.

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