GLOBALIZATION NEEDS REINVIGORATION PART 8 | 2023 APRIL ISSUE

We have not seen the two parties that have been so united, both Democrats and Republicans, and have reached their consensus in such a short time. It is because of their belief that it is the only way for America to protect its industrial base to fend off the challenges from a rising China under Xi Jinping’s aggressiveness and to pave the way for the economy to head for the greener growth.

But this move from the U.S. has startled its allies from Europe to Asia and we have seen that although the European Commission President Ursula von der Leyen promised a relaxation of regulation and new funding to help the bloc to catch up as the EU’s response to the U.S.’s Inflation Reduction Ace, but Christine Lagarde, President of the European Central Bank, warned the governments in Europe not to increase subsidies to business and consumers like what Von de Leyen had promised.     

Furthermore, we have seen the director-general of the World Trade Organization, Ngozi Okonjo-Jweala, said that the aggrieved trading partners should speak directly to the U.S. government rather than to lodge the complains to the WTO.

The Inflation Reduction Act can be seen as a competition from the U.S. among its European counterparts and this can be very unwise. The allies would have seen a country that they have always counted as the partisan for an open-market world is taking a big step backward into protectionism. If this has not been handled wisely, it can result as a global race toward subsidy which can fracture international free trade system. Any further free competition for innovation and political co-operation would be jeopardized.

The world would have seen it coming when Trump administration called for “Make America Great Again- MAGA” and started to levy tariffs on products from around the world. The subsidies would make the situation worse only.

To advocate free trade, the use of subsidies would make products by one country artificially cheaper and reduce its economic efficiency. America’s new subsidies are more objectionable because in many cases they require the recipients to meet local-content thresholds. To obtain a $7,500 credit for their purchase of an electric vehicle, consumers would need to choose a car assembled in North America with at least half of the battery components must also be made in the U.S.  

For the renewable energy, all the wind, solar and geothermal projects will all receive substantial subsidies if they use American steel and iron. And again half of their components must be made in the U.S.

China’s dominance in the supply chain triggered the American’s awareness of their ambition. They helped China in building up their industry and hoped that their success would bring democracy to China and the world value would be shared. But this hope was smashed and it called for America to avoid the reliant on a rival in the new technology and it has learned many examples such as the 5G and the solar panel, just a few of the examples. And the pandemic for the last three years have shown to the world that China is a power too big to contain and the global supply chain has been disrupted to create many unfavorable situations.

For the U.S. to review its industrial policies and put the supply chain in their serious consideration without over reliant on one nation, invest in renewable energy to reduce America’s carbon emissions is another pressing issue.

The U.S. is using these trade measures toward China and the purpose is quite obvious. Coupled with the export controls and the sanctions, the industrial subsidies are used for the greater autonomy for the U.S. to become more self-reliance. But how the long-standing allies of the U.S. would be looking at this is becoming something more complicate.

We have to understand that the U.S. was not onboard in the fight against climate change during the four years of the Trump administration. When Joe Biden came into power, he picked up once again the initiative for the climate change, and when the green-tech subsidies were mentioned, he was met with praises in Europe.

But when the colossal amount of the $369 billion was mentioned, it angered the members of the European Union as it would push them into the deep trough. We have already noticed the energy crisis provoked by Russia’s war in Ukraine has hit the European firms very hard. They have to switch from the cheap piped gas with the expensive liquified natural gas, and already the U.S. has the advantage in lower energy prices.

The government of Europe in theory can take America to the World Trade Organization as it prohibits against subsidies involving local-content requirements. But this is not going to happen as America would appeal against the ruling. This is not going to happen also because that the WTO doesn’t have a viable appellate body as during the Trump administration he blocked the appointment and made it a lame duck.

For Europe and Asian countries to join the subsidy race would be an unpleasant choice. For the time being, it is advisable to stay on the sideline as America would have to pay high cost with the taxpayers’ money. It will have to wait for a long time before these technologies would become cheaper for everyone. And besides these subsidies are only meant for those specified industries and many of those are kept outside the doorway.

Just take for instance, the textiles and clothing have always been criticized as the second largest carbon emitters. There is no plan to help this industry which has always been serving the market with the heads duck down. Also knowing that it is impractical to ask for a comparative advantage in all products.

The European government and the Asian are exercising their restrain. A non-Americans can group together and work out some more workable strategy but with the two great powers, the U.S. and China, to consider.

In Europe, politicians and businesses are looking for strict state-aid rules that can be adjustable for governments to support industry more effectively. Economic Minister of France, Bruno Le Maire, and from Germany’s Vice-Chancellor. Robert Habeck, President of the European Commission, Ursula von der Leyen, are for the changes that are needed to let more aid to go into the strategy sectors. They have received the support from the German Chancellor, Olaf Scholz, who said that he would join them.

The U.S. needs to know that the industrial subsidies would raise many barriers for its trade partners. There has to be a rule-based system and to make sure that the rules be enforced. But in these days, its current trade representative, Katherine Tai, is a staunch believer in subsidies. It all sounds very well that America wants its allies to co-ordinate their investments to maximize their power, to take the hard stance toward China, to continue to stay under America’s security umbrella and support jointly in confronting climate change.

All these can be under the uttermost sincerity, but this coordinating at this beginning stage would fail  as there are so many egos and conflicts between the world leaders and the businesses stakeholders. Before they will come to know what exactly have caused the dysfunction although the intentions could be the best.    

Take for instance, already the Taiwan chipmaker, Taiwan Semiconductor Manufacturing Company (TSMC) is saying that the estimated cost of producing in the U.S. would be 55% higher than in Taiwan. TSMC will have to break up its network of expertise in their most advanced manufacturing center, and to surrender their technological leads that sustain their company in the semiconductor field. The Boston Consulting Group has suggested an investment of between $900 billion to $1.2 trillion would be required to build up a multiple self-sufficient semiconductor supply chain around the world with an annual operational costs rising by between $45 billion and $125 billion.

The American semiconductor subsidies do not have the same local-content rules as its green-tech subsidies and in another word that the current Inflation Reduction Act doesn’t apply to its semiconductor sector. When the IRA was passed into the law in August of 2022, it wasn’t thoroughly studied and planned in its first place, and now the timelines and conditions are not applicable. 

Not to forget that it was just now the U.S. has announced its national debt has reached $31.4 trillion and it is projected to grow at an average of about $1.3 trillion a year for the next decade. I am not sure if America has taken everything into its consideration.

U.S. is Hitting the Debt Limit

A letter from the U.S. Treasury Secretary Janet Yellen addressed to the Congress that the U.S. will hit the debt limit on January 19. The law makers would have to raise the statutory debt limit if it will continue to pay the nation’s bill. She mentioned that the resistance by House of Republicans to lift the borrowing cap would put the U.S. economy at risk and intense fight in Washington over spending and deficits would happen this year.

Republicans have insisted any increases to the debt limit should be accompanied with the cuts. They are already demanding cuts to Medicare, Medicaid and Social Security.

Democrats with the President Biden has already said that he has refused to negotiate over the debt limit, and the Congress must vote to raise it. This will take the entire Democratic caucus in the House of Senate, plus a handful of Republicans to pass bills in both chambers. This coalition will apply a rare tactic in the House, called a discharge petition, to force a floor vote on raising limit. It would take weeks if not months to produce a bill that Biden can sign into the law. This could have caused the default when Treasury can no longer pay the nation’s bills.

It is already said that the closer the country gets to a potential default, the more damage it would bring to the nation’s economy.

History tells us that in the end a solution is to be found.