Green Deal: the EU responds to the US

Green Deal: the EU responds to the US

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Walter Galbiati, head of the Economy of the Republic

There is no doubt that globalization, as we have known it, is in (not dead) crisis and undergoing change, but that a further blow will come during the World Economic Forum, in Davos, makes us understand how even those places responsible for reconciling the various players on the world scene are on the same downward slope. The walls to global trade that had reached their peak with the introduction of tariffs by the president Donald Trump are far from collapsed and in theit was from Joe Biden they are simply changing their appearance into subsidies aimed at growing US industries at the expense of foreign competitors.

What remains of Davos

by Walter Galbiati

An attitude that runs counter to the traditional US philosophy of the free market and open economies that had given strength to globalization, a closure aimed at bringing technological leadership and supply chains back to the United States in spite of competitors such as China and Russia, which could only provoke the response of other countries, including those considered “friends”, such as Europe itself.

The US subsidies to its own companies. In 2022 the US Congress approved two bills with the aim of strengthening national industry, airing dangers for national security, the need to create new jobs and tackle decarbonisation, when in reality it was financing its own struggling industry in some key sectors or at risk of supplies for the new international geopolitical scenario following the Russian invasion of Ukraine.

  1. The CHIPS Actwhich provides incentives for 52 billion dollars for semiconductor companies, in fact attempts to reverse a decades-long decline of the US industry in the production of those components that are the basis of an economy that is increasingly moving towards digitization.
  2. L’Inflation Reduction Act (IRA), which plans nearly $400 billion to scale up clean energy, will go above and beyond to reduce dependence on China in important supply chains, such as for electric vehicle batteries.

The EU response: the Green deal industrial plan. These two moves have aroused serious concern in Europe and, in Davos, in the temple of globalization, the countermove has arrived from the mouth of the President of the European Commission Ursula von der Leyen. “It is no secret – he declared – that some provisions of the Inflation Reduction Act have raised a series of concerns due to the incentives for companies”. And despite the announcement 1) of wanting to collaborate with the USA (“We have worked with the United States to find solutions, for example so that EU companies and electric cars manufactured in the EU can also benefit from the IRA”) and 2) of not wanting to block globalization (“Our goal should be to avoid disruption to transatlantic trade and investment. We should work to ensure that our respective stimulus programs are fair and mutually reinforcing”), the European Union has in response launched its own industry support plan, the Green deal industrial plan.

The declaration of war. Von der Leyen did not mince words and faced with the threats of competing countries which, with the excuse of the ecological transition, aim to attract European companies with subsidies, he pointed out that it is necessary to act immediately in order not to find oneself in a situation of dependence. “Even we Europeans need to get better at nurturing our cleantech industry. We have a small window to invest in cleantech and innovation to gain leadership before the fossil fuel economy becomes obsolete. We have an industry sapped by a pandemic, problems in the supply chain and price shocks. We see aggressive attempts to attract our industrial capabilities to China or elsewhere. We have an urgent need to make this Net-zero transition without creating new dependencies. And we know that future investment decisions will be made based on what we do today.”

The four pillars of the Green Deal. We need to act immediately and with clear ideas. 1) The regulatory context. The European Union aims to create a regulatory environment that creates favorable conditions for sectors crucial to achieve Net-zero (zero carbon emissions) and which allows companies to grow rapidly. It will be launched a Net-zero industry Act on the same model as the Chips Act, which will strengthen the NextGenerationEU and RePowerEU programs and go hand in hand with the Critical Raw Material Act, designed to guarantee the EU access to the rare materials necessary for the technology industry. Today the dependence is 98% on China. 2) Funding. To maintain the attractiveness of European industry in the face of offers and incentives currently available in other countries, the European Union will temporarily adjust state aid rules to speed them up and simplify them. In addition, it will create a European sovereignty fund in the medium term to allow all countries, even those with fewer resources, to facilitate their companies. 3) The skills. We need to develop the skills to make the ecological transition successful. And with strong growth in innovative technologies, Europe needs to grow the skills of workers in the sector in parallel. 4) The Commerce. To achieve Net-zero globally, we need fair trade with robust and resilient supply chains. Europe proposes to increase trade agreements with countries such as the UK, Canada, Chile, New Zealand, Mexico and Australia and to counter those who do not respect the rules, such as China, which on the one hand attracts companies by promising energy and low-cost work cost, with weak environmental rules, and on the other subsidize its own companies and not allow European competitors to enter its domestic market.

The consequences of “Run faster and trip the other guy”. The policy of subsidies contributes, among other factors, to a re-globalization on a regional basis, despite the rules on free trade meticulously negotiated over decades. And in this race, the United States is having a decisive weight, because it came second William Reinsch, senior adviser at the Center for Strategic & International Studies, from a “Run faster” policy in which they aimed to be better and faster than the other guy to a “Run Faster and trip the other guy” policy. the other”), in which obstacles to competitors play a fundamental role. These plans increase investment in national economies, but globally represent a huge increase in costs. Duplicating the world’s existing stock of investments in semiconductors, clean energy and batteries would cost between 3.2% and 4.8% of global GDP. This is a huge effort, weighing heavily on taxpayers’ pockets. And it makes sense to do so, only if it allows you to free yourself from mortal embraces with countries that do not share those rights and freedoms of which Europe was the cradle. Even if this will lead to an increase in costs.

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