Mon, Aug 14, 2023 page12

• How US climate plan has affected global trade ties

  • AFP, WASHINGTON
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  US President Joe Biden’s landmark climate action plan might have been trailed by billions of dollars in clean energy investment, but its potential to reshape trade lines has strained ties with allies.

  The Inflation Reduction Act (IRA), signed into law on Aug. 16 last year, directs US$370 billion in subsidies toward the US’ energy transition, including tax breaks for US-made electric vehicles (EVs) and batteries.

  However, the incentives to boost US manufacturing after years of offshoring have triggered fears that they could draw businesses out of other countries.

  

  Nicholas Hartnett, owner of Pure Power Solar, places a panel as his company installs a solar array on the roof of a home in Frankfort, Kentucky, on July 17. The Inflation Reduction Act has boosted the US transition to renewable energy, accelerated green domestic manufacturing and made it more affordable for consumers to make climate-friendly purchases, such as installing solar panels on their roofs.

  Photo: AP

  “This was really the United States coming into the game in a big way,” Brookings Institution senior fellow Joshua Meltzer said.

  Europe had been subsidizing the development of clean technologies since before the IRA, as had China and others, Meltzer said.

  However, Washington’s entry “meant that for these subsidies to remain competitive they had to be continued or raised,” he said.

  The legislation had some “unintended consequences” in constraining trade with key US allies, Peterson Institute for International Economics senior fellow Jeffrey Schott said.

  A sticking point was a consumer tax credit of up to US$7,500 for the purchase of EVs assembled in North America.

  To qualify for the full credit, vehicle batteries should also have a percentage of critical minerals sourced from the US or countries with which it has free-trade pacts, leaving the EU and, initially, Japan in the cold.

  This drew ire from those countries, and US officials eventually expanded access to the clean vehicle subsidies, saying in March that the free-trade agreement requirement could also include newly negotiated critical minerals deals.

  This includes one that Japan had inked with the US just shortly earlier — opening doors to benefits from some subsidies.

  “Part of the initial friction was because ... the last revisions of the IRA were done in haste and in secret,” Schott said.

  There appeared to be a “lack of understanding that US allies were not all US free-trade partners,” he added, leading to some “creative accounting” by the Treasury Department in defining how the law would be implemented.

  Meltzer said that the US “quite quickly tried to respond to these concerns by negotiating these kind of bilateral deals,” referring to Japan’s pact and the EU’s efforts toward a similar accord.

  This alleviated many concerns, he said.

  Canada, which warned about the risks of a subsidy war, has since responded by matching certain IRA incentives with those of its own.

  In April, it announced up to C$13.2 billion (US$9.8 billion) in subsidies over 10 years for Volkswagen AG’s first overseas battery plant in Ontario.

  Elsewhere, South Korea’s largest automaker, Hyundai Motor Co, is hoping to produce US-assembled electric cars eligible for subsidies at a site under construction in Georgia.

  Other South Korean companies have forged partnerships with US ones to build assembly lines meeting IRA requirements, such as battery maker Samsung SDI Co’s joint venture with General Motors Co to build an EV battery plant in the US.

  “The IRA would benefit the US through additional output and lower strategic dependence vis-a-vis China,” an analysis by three European Central Bank economists showed last month.

  “The US would gain from positive relocation effects, increasing production by six percent to 30 percent in electrical and optical equipment,” the economists said in a column on the Center for Economic Policy Research’s policy portal.

  This comes mainly at China’s expense, and to a smaller degree the EU’s, the economists said.

  While the relocation involves a relatively small share of total output, losses in specific sectors can be more substantial.

  Since the climate law was signed, at least US$75 billion in new manufacturing investments has been announced, according to policy analyst Jack Conness of think tank Energy Innovation: Policy and Technology.

  IRA green subsidies might be “of similar size” to those available in the EU, but the US clean-tech subsidies are “simpler and less fragmented,” European think tank Bruegel said in a report this year.

  Such factors could make the US subsidies more attractive to businesses, at a time when Europe also faces rising energy costs following Russia’s invasion of Ukraine.

  “If you’re in an energy-intensive sector such as chemicals... the US looks increasingly attractive,” Meltzer said.
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