An arms race over industrial policy is the last thing Europe needs | Popgen Tech

The author is an FT contributing editor and writes the Chartbook newsletter

It was the year of industrial policy. In the pursuit of rapid decarbonisation, supply chain resilience and decoupling from China, we are seeing a redrawing of the boundary between government and business on both sides of the Atlantic. That means picking winners and living with the risk of getting it wrong. This means getting into bed with producers who sell you their solutions in exchange for preferential treatment. It also goes hand in hand with rising international tensions.

As early as 1742, David Hume warned against conflict prompted by the “jealousy of commerce”. In the early 1900s, the liberal JA Hobson and the Bolshevik Vladimir Lenin agreed to denounce the violent era of imperialism produced by the marriage of private capital with the nation-state.

Then it seemed that predatory business was the main driver. Today, economics still matter. It is China’s gross domestic product that makes it a formidable challenger. But it’s not Jack Ma who’s in the driver’s seat. The escalation of tensions is driven by the ambition of Xi Jinping’s Communist party regime and the response of the US national security agency. The future once mapped by global business has been deeply questioned. Our world is not Tina’s – there is no alternative. We are in a world of Tara – there are real alternatives, both in economics and grand strategy. And it invites the question of choice. Our world will be what the powerful make of it.

In this politicized tripolar world economy – shaped by the US, EU and China – the basic source of tension is the confrontation between Washington and Beijing. On top of Russia’s attack on Ukraine, rising tensions over Taiwan made 2022 the year a third world war became a real tail risk.

What is more surprising is that the year ends with a row between Europe and the US over America’s Anti-Inflation Act. This is no small matter. With a budget of $500 billion, the IRA is the largest industrial policy response to the global climate crisis to date.

For the Europeans, the law, with its overt preference for production in North America, breaks with the global norms embodied by the World Trade Organization. French President Emmanuel Macron warns that the US risks dividing “the West”. Others are calling for Europe to assert its strategic autonomy by starting its own industrial policy.

On one level it is predictable. There is a long history of trade tensions between the EU and the US. But even allowing for that, the EU’s current response to the IRA is disproportionate and begging. For one, the timing is odd. The terms of the IRA deal were clear by the end of July. It was only in November in the wake of the COP27 climate talks that Europe chose to respond.

The IRA’s principal allocation figure may be large, but the US economy is large and the spending will pay off in 10 years. In proportional terms, the law is half the size of what Europe has already committed in clean energy subsidies.

In terms of politics, far from a bold strategic move by the Biden administration, the act emerged from desperate congressional negotiations in which the terms were dictated by coal state senator Joe Manchin of West Virginia.

From the American point of view, the fuss the Europeans are making is gratuitous. When it comes to climate, the IRA is the best the US can do. Europe has to live with it. But if Washington asks for diplomatic consideration, the same also goes in reverse. What if Europe, to overcome its own inhibitions about industrial policy, needs something to make a fuss about?

People like to quote Jean Monnet’s line that Europe is made by crisis. This implies a reactive alchemy in which new institutions emerge as functional responses to challenges. What it obscures is that it takes politics to define a crisis and devise a response. The least you can say about the EU’s response to the IRA is that it is a crisis that Europe’s leaders have chosen. But that brings us back to the point. Strategic autonomy is not just about the ability to stand up to global bullies. It is defined by the battles you choose.

A European clash with Congress and the Biden administration would be very counterproductive. What we need is cooperation not conflict. Take the positive. A powerful US lobby has emerged to expand the green energy market, offering huge opportunities for European business. If Europe wants to boost its own companies, adopt a “buy European” clause. The US would be in no position to complain.

We are in an era of tumultuous transition. New ways of industrial intervention are our best way to respond to the multiple challenges ahead. This involves countless conflicts of interest. But let us not conflate that tension with questions of sovereignty any more than we must. The IRA may be a morbid symptom of America’s internal political process, but it does not pose an existential threat to Europe. There is no excuse for unleashing a transatlantic industrial policy arms race.