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The US administration’s IRA legislation provides for public investment to boost an emerging sector of “green economy”; the efforts are supplemented by regulating expanded federal tax collection and some pharmaceutical-drug price controls. The IRA authorized at least $369 billion in subsidies for clean energy projects and products: in this way, a new US industrial policy tries to combine liberalism and state regulation. With almost equal amount of funding, the EU explores a slightly different approach…
Note: Our Institute has already published some information on the IRA and the EU-US conflict on that ground concerning the automotive companies on both sides of the Atlantic; see, e.g. https://www.integrin.dk/2023/01/02/us-eu-automotive-bilateral-competition-resolved/
However, the dispute between the both sides is far from over; on the contrary, there are still numerous issues to be resolved, as well as some theoretical problems inherent to the socio-economic growth patterns in the US and the EU. Recently, popular US magazine Foreign Affairs, (on 26 January, 2023) published an article that suggested, among other things, some ways to clear up the differences. We think that the article needs additional attention and clarification for our readers.
It has to be mentioned from the start that theoretical and practical aspects in “doing business” in the EU and US are fundamentally different. Quite often these differences serve as a background for political and business-like controversies negotiations between the two sides: one of the latest was that on ill-fated Transatlantic Trade and Investment Partnership, TTIP.
Suffice to say that some years ago American scientists tried to clear “the differences”; see, e.g. Guay, Terrence R. The business environment of Europe: firms, governments and institutions. Textbook. – United Kingdom, Cambridge University Press, 2014.- 345 pp.
Review in: http://www.baltic-course.com/eng/book_review/?doc=93616
But recently the differences were visualized again through the IRA’s adoption by the present US administration at the end of 2022.
European reactions to this American embrace of a more proactive role for government in the economy are, at best, split. In December, French President Emmanuel Macron frostily warned of European job losses, saying that the IRA would “fragment the West.”
All references to follow and citations from Foreign Affairs, 26 January, 2023: https://www.foreignaffairs.com/united-states/tale-two-industrial-policies?check_logged_in=1&utm_medium=promo_email&utm_source=lo_flows&utm_campaign=registered_user_welcome&utm_term=email_1&utm_content=20230130
Clashes in political economy’s patterns
Neo-liberals’ postulate that democratic reforms would be necessarily based on free trade; even some so-called autocratic countries (e.g. China, Russia, etc.) in perspective would become more democratic and better integrated into the liberal international order. However, presently, “autocrats” are getting stronger while seeking to use the international disorder in their benefit.
Traditionally, neo-liberalism is defined as a policy model that encompasses politics and economics to favor private enterprise, and seeks to transfer the control of economic factors from the government to the private sector. More recently, the theory has been associated with policies of austerity and attempts to cut unnecessary government spending.
More in: https://www.investopedia.com/terms/n/neoliberalism.asp
The US economists have long argued that greater state investment in the economy’s productive capacities was critical to reducing inequality, boosting the resilience of supply chains, and facilitate clean energy transition. It seems they agreed that trade deals (aimed at favoring multinationals) were at best insufficient and at worst deeply harmful. Progressive climate agenda in the present, the US administration put emphasis on public investment to effectively deal with the issue. However, as soon as climate legislation needed serious federal public spending, the US Supreme Court (dominated by conservatives) eliminated several proposed regulations; though it did not strike down federal spending legislation.
Thus, present level of the US public investment – by adopting IRA- can facilitate climate progress both in political and logistical terms: there are already at least 44 states and 141 congressional districts (out of totally 50 states and 435 districts) that are almost ready to produce goods within “the green energy supply chains”. Hence, the US is already well on its way, note the Foreign Affairs publication, to finding a basis for bipartisan support for clean energy action in the US Congress.
Present US administration’s drive to “Make in America” does not require products to be made in America by American companies. Firms from over 20 countries make up the U.S. supply chain of clean energy products, including many European subsidiaries in the United States; these firms and others stand to benefit from the IRA’s new tax credits and they will have new opportunities to grow. New European legislation can do the same for U.S. companies operating in Europe. These benefits can also extend to workers. Economic research suggests that some foreign direct investments can help fuel states’ employment, i.e. when companies – through the economies of scale – can “share” generated revenues with workers. And more broadly, robust, publicly funded industrial policies will benefit European workers by allowing greater “democratic structure of markets”, which otherwise would operate by the maximizing profit’s concept.
Left to the “blind forces of the free market”, green technologies and renewable energy would probably not grow rapidly enough and would not facilitate efforts to combat climate change. The US administration, postulate the Foreign Affairs, is seeking to create a global economy that uses less carbon and is more dynamic and equal; to that end, the government investment is necessary to steer the private sector and to move the entire world economy out of the secular stagnation…
Tackling climate change effectively
In the efforts to tackle climate change, the US administration in the IRA’s act focused more on efficient use of public spending; it did so in part because of the US institutional weakness. The Foreign Affairs numbers some deficiencies in American democracy: e.g. the debilitating influence of corporate lobbying and electioneering by the fossil fuel industry, as well as a Supreme Court choked by lifetime appointments that has evinced a growing hostility to environmental regulation, etc. which have allowed the Republican Party to be resolutely committed to blocking any climate regulation.
Due to existing the US party system’s controversies over a “proactive policy on climate change”, the best way was to “incentivize the public and private sectors to change their behavior, rather than by simply imposing limits on what those sectors can do”, said Foreign Affairs.
Along with other recent US legislation – including the 2022 CHIPS legislation, the Science Act and the 2021 Bipartisan Infrastructure Law, the IRA offers consumers and producers payments and incentives to make a fruitful transition from fossil fuels, as well manufacture goods in the US. Thus, the IRA also aims to foster a “manufacturing renaissance” that helps rebuild local communities in the US left behind modern globalization trends, in turn hoping to create good jobs, nurture competitive industries, and facilitate the thorough decarbonization of the US economy, argue scientists.
Assuming that new “green industry” sectors, including green hydrogen and floating offshore wind facilities are still in their infancy, markets are not able fully operate public consumption of appearing new green products; the federal involvement was necessary.
Encouraging signs for the net-zero industrial opportunities are already seen around the world: besides the EU’s € 372 billion and the US with $ 360 billion (by 2032), there are also Japan with its green transformation plans (aimed to raise about € 140 billion) through the so-called ‘green transition’ bonds; India, that has put forward the Production Linked Incentive Scheme to enhance competitiveness in sectors like solar photovoltaics and batteries, as well as the UK, Canada and many other states with their investment plans in clean tech technologies.
The EU green industrial policy
The EU institutions and the Commission have already formulated the Union’s green industrial policy, which is based on four pillars: first, to accelerate deployment of clean energy by issuing permits in certain key renewable areas, such as in wind energy, solar energy, heat pumps, and clean hydrogen. The second pillar is financial, which includes new subsidies and regulatory changes supported by the EU-wide budget (specifically, by the European Structural and Investment Funds, see below). The third and fourth pillars deal with: a) reforms in education and improved job training for workers, and b) measures to protect Europe from external unfair trade practices.
The US politicians assume that the EU’s “more centralized EU financing” will logically follow the American way of dealing with sustainability’s issues. Thus, recommendation from the US scientists is the following: the EU “will need to continue its halting progress toward raising and delivering funds at the continental level”, as big companies and wealthy member states “need to bear their fair share of the burdens and ensure that low-income member states have the funds they need”.
Regulatory “burden” on business in the EU member states is quite big; just to mention: there are 36 socio-economic “developmental sectors” within the range of European integration, which one can call the “business environment”. For any potential state to join the EU there are over 30 so-called approximation chapters covering 20 socio-economic policy sectors; they are subject to a certain level of “EU approximation” through the EU regulatory instruments (see: http://eur-lex.europa.eu/en/index.htm ).
Among these EU policy sectors – 17 sectors are of a purely social-economic significance, though the “regulatory burden” is different from sector to sector. For example, most complicated of them include: external relations – with more than 3 thousand legal acts; industrial policy and internal market – with about 1,5 thousand; general, financial and institutional matters – with more than one thousand; agriculture and rural development – more than 3 thousand; competition policy and law – over 1,8 thousand; health, environment, consumes policy -1,3 thousand legal acts, etc.
There are as well sectors with smaller number of EU rules: about 400 legal acts are in such sectors as: science, information, education and culture (number of acts: 389); regional policy and coordination of structural instruments (number of acts: 370); energy (number of acts: 360); right of establishment and freedom to provide services (number of acts: 236). Around 200 legal acts are in such sectors as taxation (number of acts: 174); legal instruments relating to undertakings (number of acts: 110), etc.
The EU’s acquis, so-called the body of the EU law, includes presently about 80 thousand pages of legal texts, mainly regulations, directives and decisions. Each year the EU institutions adopt thousands of legal acts (with different competence “power”): e.g. in 2011 there were adopted over 78 thousand regulations, 5,5 thousand directives and over 28, 4 thousand decisions; in total over 112 thousand legal acts for economic policies and business development.
For example, during 2014-2020, the European Structural and Investment Funds (ESI Funds) unleashed about €731 billion of investment (of which €535 billion was funded by the EU) aimed at fostering socio-economic convergence and territorial cohesion among the EU member states, as well as towards smooth green and digital transition.
https://ec.europa.eu/commission/presscorner/detail/en/IP_23_389
Something in the conclusion…
The US politicians suggests that “Europe should embrace” the IRA’s initiative, which at the same time favors its own exporters and producers; besides, the US and the EU “should work to replicate this model in other carbon-intensive sectors, perhaps through joint carbon tariffs for a wider range of products”.
Naturally, some of such measures may violate the WTO’s trading rules; some even forbid treating foreign producers less favorably than domestic ones. However, global trade regulations shall not be a stumbling block on the way to progressive measures; they are bound to adapt and reform and not be a burden to sustainability. Additionally, a joint US-EU task force, which was established at the end of 2022 to resolve emerged differences, should discuss controversies; therefore, if major global powers (like, e.g. the US, the EU-27, OECD and G-7 states) agree on a “common denominator”, then the WTO would be forced to follow the lead.
It is critical, postulate the Foreign Affairs, that international agreements on climate change and trade would take into consideration “fair labor and production practices and deliver finance to the world’s developing and poor countries”. Thus, reaching a global green agreement on green subsidies and carbon tariffs must have in mind politico-economic incentives; the last annual UN climate summit approved already greater funds to developing countries in this regard.
The US and the EU could reach a “green peace” on subsidies, accepting rather than warring over each other’s schemes until zero-carbon industries achieve the necessary reach and scope to meet consumer demand, conclude authors in the magazine.
As the Foreign Affairs, 26 January, 2023 put it, “democracies on both sides of the Atlantic can work through today’s disputes, marrying greater state involvement in markets at home with new forms of cooperation abroad”.