The United States has embarked on its biggest industrial policy push in generations, providing tax breaks, grants and other financial incentives to attract new factories making solar panels, semiconductors and electric vehicles.
This spending is aimed at boosting the domestic market for crucial products, but it has implications well outside the United States. It is pushing governments from Europe to East Asia to try to keep pace by proposing their own investment plans, triggering what some call a global rush for subsidies.
Officials, especially in Europe, have accused the United States of protectionism and have spent months complaining to the Biden administration about its policies. Governments in the European Union, Britain and other countries are discussing how to counter American policies by offering their own incentives to attract investment and prevent their companies from moving to the United States.
“I think we all deny that there is a subsidy rush, but to a certain extent it is happening,” said Markus Beyrer, director general of BusinessEurope, Europe’s largest business association.
The administration says the investments will put the United States in a better position to address climate change and make it less dependent on potentially risky supply chains that pass through China.
But the spending has raised concerns about diverting public resources from other priorities and increasing countries’ debt when high interest rates make borrowing riskier and more expensive. Gita Gopinath, the first deputy managing director of the International Monetary Fund, said in an October interview that the spending spree is “a matter of concern.”
Gopinath pointed to statistics showing that whenever the United States, the European Union or China adopt subsidies or tariffs, there is a high probability that one of the other two will respond with its own subsidies or tariffs within a year. .
“We are seeing tit-for-tat,” Ms. Gopinath said.
Competition over spending is also straining alliances, giving companies that make prized products like batteries, hydrogen and semiconductors the chance to “country shop,” or pit governments against each other as they try to find the most welcoming home for their technologies.
Freyr Battery, a European-founded company that develops lithium-ion batteries for cars, ships and storage systems, was building a factory in Norway when its executives learned that the Inflation Reduction Act was in development. In response to the law, the company moved production to a plant in Georgia.
“We think it’s a really ingenious piece of modern industrial policy and, as a result, we’ve shifted our focus,” Birger Steen, Freyr’s chief executive, said in an interview. “The retrenchment will happen in the United States, and that’s because of the Inflation Reduction Act.”
Steen said the company is keeping the Norwegian factory ready for a “hot start,” meaning production could increase if local policies become more favorable. The company is talking to politicians about how to compete with the United States, she said.
Some countries are reaping direct benefits from U.S. spending, including Canada, which is included in some of the Clean Energy Act’s benefits and has mining operations that the United States lacks.
Killian Charles, CEO of Montreal-based Brunswick Exploration, said in an interview that Canada’s lithium industry would benefit from battery production moving to the United States and companies looking for nearby sources of raw material.
But in most cases, the competition seems more zero-sum.
David Scaysbrook, managing partner of Quinbrook Infrastructure Partners Group, which has helped finance some of the largest solar and battery projects in the United States, said the U.S. Clean Energy Bill was the most influential legislation introduced by any country and that other governments have been is unable to replicate “its vastness”.
“Other countries cannot match this fiscal firepower,” he said. “Obviously, this is a threat to the EU or other countries.”
The United States has sought to allay the concerns of some of its allies by signing new trade agreements that allow foreign partners to share some of the benefits of the Clean Energy Act. A minerals deal signed with Japan in March will allow Japanese plants to supply minerals for electric vehicles that receive U.S. tax credits. American officials have been negotiating with Europe for a similar deal since last year.
But at a meeting in October, the United States and Europe clashed over an American proposal to allow labor inspections at mines and mineral production facilities outside the United States and Europe. Officials continue to work to finalize a deal in the coming weeks, but in the meantime the lack of a deal has cast a further shadow over US-EU relations.
Biden administration officials have continued to defend their approach, saying that the Inflation Reduction Act does not signal a shift toward American protectionism and that climate spending is badly needed. Even with such significant investments, the United States is likely to fall short of international goals for curbing global warming.
John Podesta, senior adviser to the president for clean energy innovation, said in a conversation at the Brookings Institution in October that foreign governments have made “a certain amount of complaining.” But he said U.S. spending ultimately spurred action from other partners, including a green industrial policy that Europe introduced earlier this year.
“So with the complaints comes a little more shoulder to the wheel, so that’s a good thing,” he added.
In addition to the Green Deal industrial plan, proposed by the European Union in February, the bloc approved a significant green stimulus program as part of an earlier pandemic recovery fund and additional spending for green industries in its latest budget.
Japan and South Korea have proposed their own plans to subsidize green industries. In the tech sector, both South Korea and Taiwan have passed measures this year offering more tax breaks to semiconductor companies, while Japan has set aside new subsidies for major chipmakers such as TSMC and Micron.
Last year, Europe also proposed a “chips act,” although its size is significantly smaller than the American program. And China has poured money into the production of semiconductors, solar panels and electric vehicles to defend its global market share and support its weakening economy.
The competition has also given rise to concerns in smaller economies, such as Britain, about their ability to keep up.
“The UK will never compete in financial terms and scale at the same level as the US, the European Union and China because we are first and foremost under fiscal constraints but also just the size of the economy,” said Raoul Ruparel, director of the Boston Consulting Group. Center for Growth and former special advisor to the government.
British officials have made it clear that they do not intend to offer a wide range of subsidies, like the United States, and are instead relying on a more laissez-faire approach with some case-by-case interventions.
Some economists and trade groups have criticized this approach and Britain’s resistance to creating a radical industrial strategy to shape the economy more clearly towards green growth, with the assistance of subsidies.
“The question is, do you want to reap the economic benefits along the way and do you want to tap into these sources of growth?” asked Mr. Ruparel.
Some experts insist that fears of a subsidy run are overblown. Emily Benson, a researcher at the Center for Strategic and International Studies, said the size of overall spending by the United States and the European Union was not significantly different, although European spending was spread out over time.
“I don’t see a great start to this massive subsidy rush that will completely disrupt global relations,” Ms. Benson said.
Business leaders and analysts say frustration in the European Union stems in part from broader economic concerns after the conflict with Russia. The combination of rising energy prices and tougher competition from the United States and China has pushed down foreign direct investment in Europe and sparked other concerns.
Fredrik Persson, president of BusinessEurope, said companies represented by his group had “a very strong reaction” to the Inflation Reduction Act.
“We fully support the underlying direction with the green transition, but it has come at a delicate time,” he said.
Madeleine Ngo contributed reporting from Washington.