America’s “making friends” experiment risks making enemies

And it wasn’t just American observers who were surprised and fascinated last week when West Virginia Senator Joe Manchin recalled his largely nominal party affiliation thus far and struck a constructive deal with Democratic Senate leadership on climate policy and clean energy.

Looking at the agreement from the outside, the agreement is also notable for suggesting one of the first seemingly real examples of “making friends” – favoring strategic allies when building supply chains – seen in the wild. Canadian automakers have been delighted by extending the tax credit for electric cars bundled into North America, not just the United States. It also prefers battery metals processed by economies with which the United States has already done preferential trade deals.

Manchin isn’t exactly referred to as an instinctive internationalist, but discussions about energy security and cross-border oil pipelines with Canadian companies and politicians seem to have convinced him of necessity the broader strategy of building supply chains that excludes China.

The allure of making friends (also known as ally support) has risen sharply. It initially escalated due to the US geopolitical tension with China and then accelerated due to the sanctions and trade embargo that followed the Russian invasion of Ukraine. But the concept is still fraught with multiple difficulties.

First, it is not always clear who your friends are and how you should choose them – and in fact choose between them. There may be fireworks lighting up the skies over Ontario in the Mansion Deal. But the European Union, Japan and South Korea may indignantly claim to some that they are seen as geopolitical allies, and even friends of the United States. Brussels has already complained about the discriminatory nature of the current proposed EV credit being limited to US-made products. You’re unlikely to be delighted — or persuaded that tax breaks comply with WTO law — by the glamorous circle that has expanded to include only Canada and Mexico.

The other clause in the deal, in favor of battery metals produced or recycled in countries with which the United States has a preferential trade deal, is also problematic. The list includes South Korea and not the European Union, despite years of painful negotiations over a trade agreement between Brussels and Washington, nor Japan.

Second, making a quick decision about political reliability in general is difficult enough, but trying to determine which friendships are likely to last is nearly impossible. This also applies to other countries that value the loyalty of the United States. Another presidential term for Donald Trump, or another economic nationalist along the lines, and supply chains built according to Joe Biden’s foreign policy preferences could quickly be crushed in another tantrum of haphazard protectionism.

In any case, few countries will want to be a consistent part of the gang of friends in the United States if they open them up to strategic and commercial retaliation from Beijing. It is not only related to emerging markets such as Vietnam and Brazil that have good strategic relations with the United States but are also heavily woven into supply networks that include China. EU governments have also resisted being automatically drawn into the American corner – for example refusing to impose a blanket ban on Huawei’s participation in 5G networks.

Third, the tools on which the authorities have to reconfigure supply chains are a clumsy and costly strategy. On exports, governments can restrict sales of sensitive technology, as the United States and the European Union have done over semiconductors and other products to Russia and China. But with imports, companies will resort to cheap inputs and it will take serious financial or organizational effort to get them to shift suppliers on a large scale. This has implications for public finances or product prices, or both.

Unless the electric vehicle tax credit improbably strengthens an incredibly efficient North American supply chain that is able to outperform all entrants even when removed, American consumers will end up paying more for their cars. It can be difficult to argue that the public should pay higher taxes or buy more expensive products due to the controversial official assessment of political risk, which is itself subject to self-interest pressure from domestic producers.

Finally, politically motivated disruptions of supply are not necessarily the biggest threat to vital imports anyway. It is true that there are sometimes very visible effects of government intervention for strategic ends, such as the current shortages of food and fertilizer due to Russia blocking exports from the Black Sea. But even before the war in Ukraine, the global economy suffered from a crisis in many supply chains.

Those reflected shocks to manufacturing production, demand, and the global shipping industry rather than malign interventions by hostile governments. It would mean another awkward conversation if voters saw supply chains painstakingly redesigned through state intervention and then didn’t work out anyway.

Assuming the Mansion deal survives, the tax credit provisions will be a valuable test of the ability of governments in general and the United States in particular to shape supply chains according to strategic considerations. The questions about the proposals are clear. Are they legal? Is it affordable? Will they work? It is up to the proponents of making friends to prove that the answers are yes.

alan.beattie. @ft.com

Related Posts

Leave a Reply

Your email address will not be published.