Western economies are implementing subsidies and tariffs in strategic sectors to compete with China and support clean energy and technology.
The shift towards industrial policies raises concerns about market distortions, resource allocation, and government decision-making skills.
Deep dives
US Shift Towards Industrial Policy
The United States has recently shifted towards implementing industrial policy, a departure from decades of advocating for free trade. This change in direction is driven in part by competition from countries like China, which have seen success through planned economies. The US government has introduced tariffs and subsidies for strategic sectors, such as semiconductors, renewable energy, and infrastructure, with the aim of boosting the economy, rejuvenating the manufacturing sector, and creating jobs. This shift has made other advanced economies nervous, leading them to introduce their own subsidies to remain competitive in this new trade environment.
Competing in Clean Tech Manufacturing
Western economies, including the US and Europe, are striving to compete in the clean tech industry due to the need to transition to green energy sources and reduce reliance on China, which dominates the supply chains for clean tech products. However, China's lead in clean tech manufacturing poses challenges. Chinese companies excel in producing lithium-ion batteries, processing rare earth materials, and scaling up electric vehicle (EV) production. Despite efforts to limit China's presence in supply chains, US solar power installations dropped when investigations into tariff dodging by Chinese suppliers were launched. The EU's car market remains open to Chinese imports, with Chinese EVs being cheaper and Chinese manufacturers having an advantage in scaling up EV production.
Controversy and Concerns Surrounding Industrial Policies
The adoption of industrial policies at a large scale raises concerns and controversy. Critics argue that government spending and protectionism can lead to market distortions, inefficient resource allocation, and reliance on subsidies rather than innovation. While industrial policies have been successful in some cases, they do not guarantee economic success, especially when multiple governments are supporting the same sectors. The success of authoritarian regimes and the desire for more government control have also influenced the shift towards industrial policies. However, questions arise about whether government decision-makers have the necessary skills and wisdom to effectively allocate resources and pick winning sectors.
Send us a textWhen the Biden administration passed the Inflation Reduction Act and the Chips and Science Act for clean energy and tech last year, Americas trade allies in Europe and Asia were surprised. Now they are scrambling for ways to catch up. Are western economies in a war of subsidies with each other and China over technology and green infrastructure?Patrick's Books:Statistics For The Trading Floor: https://amzn.to/3eerLA0Derivatives For The Trading Floor: https://amz...
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