Giant subsidies and rising protectionism are upending decades of free trade. Smaller countries, from the U.K. to Singapore, are getting left behind.
world’s biggest economies are offering huge subsidies in a cutthroat race to
win the industries of the future. The losers: all the countries that can’t pay
credits for manufacturing batteries, solar-power equipment and other green
technology are drawing a flood of capital to the U.S. The European Union is
trying to respond with its own green-energy support package. Japan has
announced plans for $150 billion of borrowing to finance a wave of investment
in green technology. All of them are working to become less dependent on China,
which has a big lead in areas including batteries and the minerals to make
some smaller players are getting left behind. Many are nimble economies that
were on the rise during decades of free trade, but are at a disadvantage in a
new era of aggressive industrial policy. Industrialized nations such as the
U.K. and Singapore lack the scale to compete against the biggest economic blocs
in offering subsidies. Emerging markets such as Indonesia, which had hoped to
use its natural resources to climb the economic ladder, are also threatened by
has been offered $11 billion in subsidies from the German government to build
two semiconductor plants, in what Prime Minister Olaf Scholz called the largest
foreign direct investment in German history. The pledged government financing
is substantially more than the annual budget of Singapore’s Ministry of Trade
tell you plainly: We cannot afford to outbid the big boys,” deputy Prime
Minister Lawrence Wong told supporters at a recent political rally.
tech companies nurtured in the U.K., growth lies elsewhere. British
battery-technology startup Nexeon, which developed its technology near Oxford,
helped by government funding, raised over $200 million last year. Its first
commercial factory will be in South Korea, likely followed by a plant in North
the U.K., sadly,” said Scott Brown, Nexeon’s chief executive. Nexeon doesn’t
see that changing without more government support for the battery industry.
Power, one of the U.K.’s few homegrown battery manufacturers, has said it may
rethink plans to locate a proposed $200-million-plus factory in Scotland given
the difference in subsidies on offer in the U.S. and Europe. Arrival, an
electric-vehicle startup, said last year it wants to focus its manufacturing in
the U.S. instead of the U.K, citing the tax breaks.
U.S., which is offering $369 billion in incentives and funding for clean energy
as part of the Inflation Reduction Act, is seeing a windfall of foreign
investment. German carmaker BMW just broke ground for a new battery plant in
South Carolina. South Korean firms Hyundai and LG announced a $4.3 billion
battery plant in Georgia. Panasonic of Japan is building a plant in Kansas.
subsidy race marks a step away from the economic integration that for decades
broke down barriers to trade and investment between countries.
transformed once-poor countries such as South Korea and Taiwan into high-tech,
developed economies, lifting hundreds of millions of people out of poverty.
Western consumers got an abundance of affordable consumer goods and a higher
standard of living. Technological advances and new management ideas also moved
more freely between countries, along with goods and financial resources.
model also had steep costs. Once-thriving communities in the U.S. and Western
Europe were hollowed out as manufacturing jobs moved to Asia or the former
Soviet states. Environmental concerns mushroomed as the global economy consumed
more natural resources. Some economies faced destabilizing bouts of capital
flight as foreign money flooded in and out.
that global integration—whether for reasons of national security, geopolitical
rivalry or supply-chain anxieties—comes with its own problems, economists say.
Especially at risk are smaller, developing economies that need access to global
markets if they’re to trade their way to greater prosperity.
world as a whole is becoming more inward and turning away from open trade and
investment,” said David Loevinger, a former U.S. Treasury official who is
managing director for emerging markets at asset manager TCW Group. “Europe, the
U.S. and China are in a subsidy competition and the losers in that competition
are poorer economies with less fiscal resources.”
Western embrace of industrial policy could be especially painful for countries
that had hoped to exploit the adoption of green technologies to turbocharge
their own economic development.
has ambitions to parlay its abundant nickel resources into a world-leading
battery industry. But U.S. rules, put in place as part of the IRA, deny
subsidies for EV batteries that contain large amounts of minerals from nations
that are not American free-trade partners. Indonesia is among them.
all the natural resources. We have the human resources. And we are a country
that’s a democracy,” said Arsjad Rasjid, the head of the Indonesian Chamber of
Commerce and Industry, in an interview. “Please don’t shut us down.”
leader in the subsidy race, the U.S. is experiencing an investment boom. The
U.S. took in about 22% of global foreign direct investment last year, making it
the world’s top recipient, according to United Nations data. That is slightly
lower than the 26% it received in 2021 when global investment bounced back
after a lull during the pandemic, but significantly higher than the 13% it got
in 2019. Spending on construction related to manufacturing rose 76% in May
compared with a year earlier, to a seasonally-adjusted annual rate of $194
billion, Census Bureau data show.
U.K., Nexeon’s funding underscores the power of the U.S. purse to skew the
playing field. As well as the private capital it raised last year, Nexeon
received two million pounds, worth about $2.55 million, from a U.K. government
later, two U.S. rivals, Sila Nanotechnologies and Group14 Technologies, both
got $100 million from the Energy Department under a battery-industry funding
program introduced in the 2021 infrastructure law. Like Nexeon, those companies
are making silicon-based materials to be used in battery anodes to improve
economics of projects in the U.S. are just out of sight,” said Guy Debelle, a
former deputy governor of Australia’s central bank and now director of
Fortescue Future Industries, the green energy unit of West Australia miner
Fortescue Metals. The company is scouting investment opportunities and
currently sees the U.S. as the most likely location due to subsidies that could
knock up to 60% off a project’s price tag, said Debelle.
European Union is preparing its own support package, relaxing limits on
subsidies member countries can give industry. By 2030, the EU wants 40% of the
key technologies needed for the green transition to be manufactured in the
bloc, including solar equipment—a sector currently dominated by China—wind
turbines and batteries.
battery production pipeline, which measures capacity from projects in the
works, has jumped 67% since the IRA was announced and now matches the size of
Europe’s, which grew by 26% over that period, according to estimates by
Benchmark Minerals Intelligence, a U.K. based firm that gathers industry
shift in global trade comes at a particularly awkward time for the U.K., which
has been struggling to chart a new course in the global economy after leaving
the European Union in 2020, which meant it no longer had easy access to its
giant single market.
proponents said the U.K. could strike bilateral trade deals with other
countries and double down on
globalization. Since then, momentum for free trade has stalled and now appears
to be in retreat.
during the Brexit vote, nobody had any idea that we’d see a resurgence of
industrial policy in the U.S.,” said Gernot Wagner, a climate economist at
Columbia Business School.
U.K. government is facing calls from all corners of the country’s economy to
respond to the interventionist turn in global economics with its own
reinvigorated industrial strategy.
U.K.’s auto sector got a boost recently when the owner of Jaguar Land Rover
chose to build a new EV-battery plant there, but the overall scale of green
subsidies lags far behind the U.S.
Minister Jeremy Hunt has promised to unveil the U.K.’s response this fall, but
has downplayed expectations and said Britain will not “go toe-to-toe with our
friends and allies in some distortive global subsidy race.” He said the U.K.
will look to target funding to areas where Britain has a clear competitive
solution for countries that can’t compete is to draw rich trade partners closer
and benefit from their industrial policies, as Canada and Mexico have done
through their free-trade deal with the U.S., said Chad Bown, a trade expert and
former World Bank official at the Peterson Institute for International
Economics, a think tank in Washington, D.C. Indonesia’s government is
participating in the American-led Indo-Pacific Economic Framework for
Prosperity, an economic pact that it hopes will improve market access for its
year, Investment Minister Bahlil Lahadalia said Indonesia would seek to form an
OPEC-like cartel for nickel, a battery mineral whose production Indonesia
dominates, as a response to protectionism by countries that make EVs. An
OPEC-modeled organization would coordinate nickel production levels with other
major exporters to ensure elevated prices.
doubt the plan, in part because other nickel producers don’t want to alienate
powerful trading partners such as the U.S. and China. Similar ideas for an
OPEC-like organization of lithium producers have been floated by left-wing
leaders in Latin America, but haven’t been enacted.
and Zimbabwe have put in place export restrictions on minerals such as nickel,
bauxite and lithium, along with requirements that foreign companies build
processing facilities in the country as a condition for exporting.
a fan of these policies but they’re clearly very popular,” said Simon Evenett,
a professor of international trade and economic development at the University
of St. Gallen in Switzerland. “Clearly it will drive up prices and it will
increase uncertainty and risk.”