Comment

Unintended consequences of U.S. industrial policies: discord in the transatlantic alliance

Gibbs McKinley and Jocelyn Trainer / Dec 2022

Photo: Wikimedia Commons

 

The European Union’s (EU) internal commissioner, Thierry Breton, recently pulled out of the US-EU Trade and Technology Council (TCC) Summit. According to his aide, the summit “no longer gives sufficient space to issues of concern to many European industry ministers and businesses.” His decision is the latest signal of growing tension between the United States and its European allies over a series of U.S. actions taken to protect and strengthen its own industrial base—including the Inflation Reduction Act (IRA), and new semiconductor export controls.

Each of these steps is intended to bolster U.S. industrial capacity, limit Chinese access to U.S. semiconductor technologies, and better secure American interests in the face of an increasingly aggressive People’s Republic of China (PRC). However, if the United States ignores the collateral damage done to allies, it is starting down a counterproductive path on which it can lose the support of European allies “who add significantly to our own strengths.”

The IRA, passed in August, is designed to boost clean energy, reduce healthcare costs, and increase U.S. tax revenue. The Act allocates roughly $400 billion toward reducing U.S. carbon emissions within the next decade. There are four primary climate change sectors targeted in the Act: improving domestic manufacturing capacity, securing critical mineral supply chains domestically or from free-trade partners, accelerating research and development, and commercializing green energy technologies.

While these steps are essential for reaching net zero and can boost the U.S. economy, certain stipulations are creating friction with European partners. For example, the  IRA provides tax credits for the purchase of electric vehicles only if the car is assembled in North America, and if a certain percentage of the critical minerals used in the battery are extracted or processed in the United States, a Free Trade Agreement country, or recycled in North America. This caveat disincentivizes the purchase of European electric vehicles; in response to the IRA, Christian Linder, the German finance minister, said “our common approach should be that value partners should stay the preferred trade partners.” The EU also expressed concern that the Act violated international trade rules.

In October, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) issued two rules to enhance U.S. export controls on the PRC’s ability to purchase, manufacture, and maintain advanced computing chips, supercomputers, and advanced semiconductors. Most notably, the rules added certain chips and semiconductors to the Commerce Control List, increased semiconductor licensing requirements, and restricted U.S. persons from supporting the development or procurement of select integrated circuits in China. These are some of the most far reaching extraterritorial export controls that could affect U.S. and non-U.S. companies and will need support from U.S. allies—particularly the Netherlands, which is a leading chip producer—to effectively cut China off from these advanced technologies. While the U.S. Department of Commerce stated that it “briefed and consulted with close allies and partners on these controls,” additional diplomatic engagement was required between U.S. and Dutch policymakers to persuade the Netherlands to adopt similar export controls. 

These policy steps taken by the United States are necessary to protect U.S. national security interests—specifically, by supporting U.S. strategic competition with the PRC. At an event held at the Center for a New American Security addressing the export controls, the Under Secretary of Commerce for Industry and Security Alan F. Estevez stated that “this is about national security. Our actions are purely about national security...we do not balance trade with national security.” But while it is not the BIS’ responsibility to consider the economic impact of national security measures, it is remiss to ignore the secondary effects of the legislation and export controls. The United States needs its allies to support its security interests— and they continue to support U.S. interests—just as the Netherlands chose to back U.S. chip controls. However, policies made to strengthen U.S. national security become counterproductive when they unintentionally sow public discord in the Transatlantic Alliance.

The Biden administration’s National Security Strategy  prioritizes pooling complementary industrial capacity and technical expertise with U.S.  allies and partners. However, according to David Kleimann of the Bruegal think tank, “the Europeans are discernibly frustrated about the lack of prior information and consultation.” The first step to  achieve this goal is to prioritize open and consistent communication with European allies, in the government and private sectors.

A simple and effective first step towards improving communication across both sectors would be transatlantic collaboration in neutral spaces such as think tanks. The avenues for conversation, such as private roundtables,already exist. U.S. officials can readily reach out to American or European think tanks to hold those conversations. Dialogue should not be an afterthought, but a priority.

U.S. officials should also prioritize discussion and coordination of industrial policies in future meetings of the TTC. The TTC is an excellent forum to “promote cross-agency, whole-of-government coordination on U.S. and EU approaches to key global trade and technology issues,” and it would be foolish to waste it.

European counterparts have made it clear that communication about new policies with the United States affecting their economic interests is a priority. To preserve the integrity of the Transatlantic Alliance, American partners should prioritize as agenda items the IRA, and similar steps taken by U.S. legislators, in future TTC meetings. In turn, European officials should continue to engage in the forum as a platform to raise EU concerns, rather than withdrawing entirely.

The transatlantic alliance will continue to face significant challenges in the coming years, not least the political and economic fall out of the Russian war in Ukraine. But as U.S. officials ramp up industrial policy responses to maligen PRC behavior, it is more important than ever that they move in lockstep with its European allies. Mitigating conflict driven by its industrial policies and export controls is not only good diplomacy, but a priority for U.S. national and economic security.. Open and consistent transatlantic communication is the best place to start.

 

Gibbs McKinley

Gibbs McKinley

December 2022

About this author ︎►

Jocelyn Trainer

Jocelyn Trainer

December 2022

About this author ︎►

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