The Inflation Reduction Act (IRA) and the European reaction
In this commentary, Daniel Gros raises some interesting issues about the effects of IRA on both the development of renewables and America’s global economic leadership:
- The IRA’s conditions – such as the car’s battery should not contain critical elements from foreign “entities of concern” – are not of much concern to US allies, as these provisions effectively target China.
- Implicit tariffs in the IRA are not likely to spawn new advanced manufacturing in the US: wind turbines and photovoltaic panels are mature technologies, one cannot expect any lasting first-mover advantage.
- The US may not even be able to finance all the subsidies the IRA promises: estimates indicate that investment in renewables, mostly solar and wind, will grow to $180 billion by 2024 and reach $380 billion by 2032, when the IRA provisions are set to expire.
US leaders, however, should look more critically at their approach. The protection of domestic manufacturing interests will mean higher costs, which might slow down the green transition. It could also have significant political repercussions. By flouting WTO rules – which the US, in its role as a “benevolent hegemon,” helped to write – the IRA could be the final nail in the coffin of American global economic leadership.
America’s Inward Turn on Trade
By: Daniel Gros – Centre for European Policy Studies
A new role for the WTO
Jeffrey Frankel argues that a revived WTO could foster new norms for beneficial CO2 border measures and generate a wave of trade in green goods and services.
An environmentally-driven reinvigoration of the WTO would benefit developing countries too. US and EU trade barriers against imports of solar panels and other renewable energy equipment, from Cambodia, China, Malaysia, Thailand, and Vietnam might give these exporting countries cause to bring cases before a resuscitated WTO. And the “buy American” aspect of subsidies in the US Inflation Reduction Act might give its trading partners a case to take to the WTO. The winners would include not just producers in the plaintiff countries, but also those buyers in the US who want to continue lowering the costs of wind turbines, solar panels, batteries, and electric cars.
Let the WTO Referee Carbon Border Tariffs
By: Jeffrey Frankel – Harvard University
A different take on protectionism
There are cases when protectionism might be warranted, argues Thomas Piketty:
- Environmental concerns: trade with China and the rest of the world without applying customs duties corresponding to the carbon emissions linked to the transport and production of these goods, is a flagrant contradiction with the climate objectives.
- Each country has the right to choose a productive specialization and to protect the sectors that it considers strategic: i.e. each country should set its own conditions, namely tariffs and subsidies, for further economic and trade integration, in terms of respect for fundamental rights, the fight against climate and tax dumping, and the protection of strategic sectors.
In parallel to any unilateral action, ambitious proposals for collective measures are needed, including a new form of social federalism. Europe must be at the service of the social betterment: countries that wish to do so must be able to adopt together the additional trade, social and fiscal policies that seem appropriate to them, but this must not prevent each country from adopting its own measures.
Rethinking protectionism
By: Thomas Piketty – Paris School of Economics
