The Great Auction of Globalization: The U.S., China and Europe Pull Checkbook to Dominate Key Sectors

Globalization is no longer a neutral playing field – if it ever was – where companies analyze wage costs, market size, legal certainty, or transport facilities to decide where to install their factories. A new actor, the state, has burst in with force, loaded with multimillion-dollar subsidy programs, to send the laissez-faire capitalist maxim into the trunk of memories. The idea that the public authorities should not intervene because the system is capable of self-regulation has been buried under the Western conviction that crossing one's arms is synonymous with giving China – without qualms when it comes to delivering aid – the hegemony of certain strategic sectors, basically those related to climate, energy and technology. This happened with the production of solar panels, practically monopolized by companies from the Asian giant, which supply the world, in full boom of renewables, with hardly any competition for their low prices.

The ongoing trade dispute has been a reality check for Europe. The U.S. may have been an important ally in the Ukraine conflict for more than a year, but economic competition is another matter. Even when in the Oval Office sits Joe Biden, a Democrat, traditionally perceived as less tempted by the siren songs of economic nationalism and more in favor of caring for the transatlantic relationship. The new industrial policy that the United States is designing through the Inflation Reduction Act and the Chips and Science Act (both August 2022), and the Investment in Infrastructure and Jobs Act (November 2021), deploys a wave of attractive incentives for companies to produce on American soil. And that clashes with European interests: in many cases, doing so there will mean that they will not settle in the Twenty-seven, or worse, that they will leave in the case of those who are already there.

The Inflation Reduction Act (IRA) has been the trigger for Europe's malaise. Its firepower is 369,000 million dollars (about 350,000 million euros) in the next ten years to strengthen energy security and combat climate change, although it aspires to mobilize much more. The subsidies will promote clean energy such as green hydrogen, solar and wind projects and more sustainable aviation fuels and incentivize the production of critical minerals needed for electric car batteries, such as lithium, nickel, manganese and graphite, of which China is now one of the major suppliers. The powerful package of subsidies and tax cuts also provides for $7,500 in aid to consumers for the purchase of new electric cars, provided that at least 40% of the raw materials used for the car's battery are extracted in the United States or in a country with which it has signed a free trade agreement.

Electric Volkswagen model presented in Dresden by the German brand, on March 1. JENS SCHLUETER (AFP)

Music can have an attractive melody if listened to superficially, as they are beneficial measures for the planet that help comply with the Paris Agreement. But the more its European partners listen to it, the less they like it. For the Bruegel think tank, based in Brussels, Europe will suffer the consequences. "The IRA could have a direct impact on trade and decisions about where to locate production," he warns in an analysis. According to its calculations, it will reduce the average price of a vehicle by about a fifth, which will make electric cars excluded from credits less competitive. "This could have a substantial impact on the ability of foreign auto companies to maintain their current shares in the U.S. market. For the EU, there could be big losses in its exports to the US," he adds.

Given the reaction of the sector, it does not seem that Bruegel's predictions are apocalyptic. In a recent message on the social network LinkedIn, Volkswagen CEO Thomas Schmall issued a striking warning to the European authorities: "Today, the battery business is led by Asian companies. And while America is catching up thanks to the IRA, Europe is falling further and further behind. The terms of the IRA are so attractive that Europe risks losing the race for the billions of investments that will be decided in the coming months and years."

The message was something of a bad omen for what was to come. Weeks later, the German brand suspended its plans to install a plant in Eastern Europe, and is considering instead taking it to the US, where it could receive up to 10,000 million euros in subsidies. The change of mind is pending materialization, waiting to know if there is an ambitious European response to the US plan that makes it more profitable to stay. The power of public money, more than ever, rules over corporate decisions.

The perception is that Europe, despite the huge aid from the NextGenerationEU recovery plan, is lagging behind. Of that opinion is Carsten Brzeski, global head of Macro at ING. "The EU is very late to the party. The U.S. and China began the subsidy race much earlier. For the EU, the big question will be whether we can really close the gap with the US and China. Probably not. For me, the biggest winner of the race will be the U.S., given that it has its own (and low-priced) energy, a highly competitive high-tech sector and strong innovation. In addition to a properly functioning internal market," he said by email.

Protectionism?

The positions range from those who accuse the US of entering a protectionist drift by encouraging production on its soil in a way that violates the rules of the World Trade Organization (WTO), to those who defend its action and describe it as intelligent. In the latter group is Roland Gillet, professor of Financial Economics at the Sorbonne University in Paris and the Free University of Brussels. "Protectionism is the opposite of what the U.S. does, because they offer tax advantages to non-American companies, while we want them to continue producing here, even if they are less energy competitive. Europe could give the same advantages if it wanted to be competitive, but that costs dearly. Unlike Europe, the U.S. has not been hit as hard by the oil and gas price crisis, so it now has the means to encourage foreign companies to produce there. He is very cunning. Just like China, which has reached energy supply agreements with Russia to buy cheaper what it cannot sell to Europe."

Joaquín Almunia, European Commissioner for Competition between 2010 and 2014, does not think the same. It criticises the fact that the US IRA promotes unfair competition contrary to WTO rules, and believes that the EU should enter into talks as soon as possible so that there is a rectification. "It is necessary to reach an agreement with Washington before its negative consequences on the location of European investments spread," he estimates. Almunia points out that the EU is taking measures to minimize its impact, such as relaxing the control of State Aid so that countries have more room to subsidize the industry, support plans for the semiconductor sector and green technologies, and other aid that was already in force before.

The problem is that not all EU countries have the same capacity to act, because some are richer than others, or have less debt, which causes imbalances, as Almunia warns. "Almost 80% of all aid accepted as compatible has been agreed in Germany (50%) and France (almost 30%). If this practice continues, the internal market will tend to generate a very harmful distortion for member countries without that economic-financial power."

What happens with electric cars can be replicated in other areas, such as hydrogen. This is what Pau Ruiz Guix, Fulbright at Georgetown University and collaborator of the Elcano Royal Institute, points out. "U.S. support for hydrogen may affect investment decisions in this industry, shifting investments across the Atlantic and potentially turning the EU into an importer of subsidized hydrogen. If the EU wants to reach its target and produce 10 million tonnes of green hydrogen by 2030, European leaders will need to recalibrate how to attract investment."

Why is the Brussels plan less attractive if it also includes substantial subsidies? Bruegel explains it this way. "The main difference between the US and the EU may not be in the total volume of green subsidies (except in renewables, where the US is expected to continue to lag behind the EU), but rather in the qualitative aspect. IRA subsidies discriminate against foreign producers in a way that EU subsidies do not. And the IRA provides support for clean technology manufacturing in a particularly simple way – through tax credits covering 10 years – while comparable EU support is more fragmented, generally seen as slower and more bureaucratic, and sometimes designed for the short term."

Once again the idea of a heavy and clumsy Europe emerges, the one that was left without technological champions among the manufacturers of the juicy mobile telephony pie, stuck in its institutional morass of Parliament, Council, Commission and 27 States. For Alicia García Herrero, chief economist for Asia-Pacific at Natixis, "the Americans have done it better, much easier, and it seems that they will attract more companies than the Europeans with so many different instruments." However, he believes China has it even worse. "Their companies can't access subsidies, and they're going to have to get out of the U.S. production chain." That will come at a price for Washington. "It's going to take time to reduce dependence on China. I think little by little it will get it, but at a high cost, because it will not be as cheap as importing solar panels from China."

The chip wars

Another sector that is being watered by billions from the coffers of the States, that of semiconductors, is probably the one that best illustrates the geopolitical tug of war. The U.S. is seeking to block China's access to cutting-edge technology and last October banned certain semiconductors made with U.S. technology to its companies. But the mistrust is mutual. Just days ago, Beijing banned the country's key infrastructure operators from buying products from U.S. chip firm Micron.

Two employees work in the cleanroom of Intel's chip factory in Hillsboro, Oregon.

These microscopic components, smaller than a virus, are present in all kinds of machines with which we interact daily, such as household appliances, mobile phones or cars – electric ones use about 2,000, twice as many as conventional ones – but also in drones and technology applied to military uses. Today, they are mostly manufactured in Asia, especially in Taiwan and South Korea. Its lack during the pandemic, when supply chains suffered bottlenecks, forced the temporary halt of production at auto plants. And it provoked a paradigm shift in the West: better to increase home manufacturing, even if it is more expensive, than to be exposed to the economic shock that any new cut in supply would entail, especially when the danger of a Chinese invasion looms over the big supplier, Taiwan. If that were to happen, the gas supply problems caused by the Russian invasion would dwarf the government.

Washington has approved a $280 billion package to set up new chip factories — very expensive, just one of which can cost $000 billion — and invest in innovation, high-tech centers and worker training. The European chip law contemplates mobilizing 20,000 million euros. And all that manna is generating fierce competition, not only between blocs, but among the EU countries themselves, to convince companies to install factories in their territories.

U.S.-based Intel made headlines in February because after agreeing to build a factory in the German city of Magdeburg in exchange for 6.800 billion euros in public subsidies, it suddenly increased the amount it was asking for to 10 billion. He argued that energy costs were higher than expected, and the technology to be produced more advanced than initially planned. "I don't think it's an inflation problem. The strategy of "if I don't get more money here, I'm going to another country that promises me more" is, as always, an asset in the negotiation," says Gonzalo León, professor emeritus at the Polytechnic University of Madrid.

Spain seeks its place

South Korea, where the Samsung chip colossus is based. And Japan, home to a powerful car industry led by Toyota — and badly in need of chips — have also already launched ambitious public plans. Even India has its own advanced factory development project underway. In China, hit by US restrictions, private companies in the sector are very conditioned by the Government, as the American researcher Chris Miller collects in his fabulous work Chip War. "Almost all of China's chip companies rely on government support, so they are geared toward national goals as well as commercial ones." An executive of the firm YMTC put words to that reality: "To obtain profits and to be listed on the Stock Exchange ... They are not the priority [...,] the goal is to manufacture the chips for the country and make the Chinese dream a reality."

In Spain, the person in charge of fulfilling the complex task of building a chip ecosystem is Jaime Martorell, commissioner of the PERTE with the largest endowment, 12,250 million euros of taxpayers' money. "The fact that more than 80% of the world's chip manufacturing capacity is located in two Asian countries has created a need for diversification and rebalancing of the supply chain," he says. Along with the strength of subsidies, Martorell sells in its negotiations with multinationals the potential of Spanish scientific infrastructure, the availability of excellent human capital, the competitiveness of energy, logistics or transport infrastructure, connectivity, the low price of renewables and inflation below that of Europe. "Without forgetting the driving forces of domestic demand for microchips, such as the automotive sector, where we are the second European manufacturer, telecommunications or aerospace."

The auction is underway. And millions of jobs and investments in the coming decades depend on its outcome. "God decided where the oil reserves are. We decide where we put the factories," summarized Pat Gelsinger, CEO of Intel, one of the most courted companies.

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