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Johannesburg, May 19 (Dialogue) The Biden administration stepped up protectionism and industrial policies amid heightened economic tensions with China.
Legislation passed in 2022 unleashes hundreds of billions of dollars in subsidies to stimulate domestic production of renewable energy and electric vehicles, and support other decarbonization goals.
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The legislation also aims to support indigenous strategic industries such as high-end semiconductors while restricting China’s access to such technologies.
Having observed the pattern of global trade since World War II, I worry that we are now entering a new, more dangerous period.
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Washington’s protectionist industrial policy began with the Trump administration’s US-China trade war.
It is exacerbating the economic fragmentation of the global economy due to the war in Ukraine and the economic sanctions imposed on Russia. It does this by disaggregating trade and investment flows based on geopolitical considerations. As a result, global economic integration is going backwards. Over the past three decades, global economic integration has increased productivity, raised living standards and reduced extreme poverty.
We can see this happening as U.S. allies respond with inward-looking protections of their own and align with the U.S. to create a global supply chain less dependent on China. Typical examples are the European Union, Japan and South Korea.
This could have profoundly negative consequences for African countries. Some people will be hit harder than others. For example, 19 African countries facing debt distress have scarce financial resources to manage the costs of the consequences.
But almost everyone will feel the effects of higher inflation due to lower global output in a less productive world. Many will also feel the effects of hampered regional integration efforts, as importers do not have ready access to the competitively priced inputs needed to add value. Fragmentation of investment flows may limit access to investments.
This will adversely affect growth and plans to boost green investment on the continent.
U.S. takes action on conservation and industrial policy
Last year, Congress approved the Chips and Science Act and the Lower Inflation Act. They provide hundreds of billions of dollars in funding to encourage domestic production of chips and clean energy technologies. They also aim to ban exports of high-end semiconductors and equipment to China and urge allies to do the same.
Those bills, along with the infrastructure bill that Biden signed in 2021, aimed at boosting U.S. steel production through increased federal spending, have shaped America’s current protectionist industrial strategy.
That has rattled policymakers in Europe and Asia, where the laws are seen as unfairly favoring U.S. companies and deviating from free trade. They have also raised concerns that companies and investments from their regions will be attracted to the United States. The concerns foreshadowed moves by Germany-based Volkswagen AG in March to build a $2 billion auto plant in South Carolina for a new electric car brand.
In addition, Swedish battery maker Northvolt AB said that entering the US market is now one of its top priorities. For its part, Samsung intends to use chip subsidies for the advanced factory it is building in Texas.
Unnerved by the moves, the EU has launched its own massive subsidy scheme to support companies paving the way for a low-carbon economy. It also passed a chip bill in April to support semiconductor manufacturing in the region with billions of dollars in subsidies.
Other U.S. allies are following suit. The Japanese government has negotiated a deal with Washington that would allow shipments of critical minerals from Japanese companies to be eligible for U.S. subsidies.
The European Union is also interested in a similar agreement. South Korea plans to spend hundreds of billions of dollars on investments in chips, batteries, electric vehicles and other green technologies.
A US-led subsidy push and export controls are splitting the global economy by shifting supply chains away from China. They also alienate non-EU and Asian allies that cannot support their companies with similar subsidies.
These shifts will ultimately reduce the gains made in enhancing the integration of international commodity and investment markets. These include higher global output growth, opportunities to take advantage of new technologies, and lower costs for businesses and consumers.
That means countries with larger economies such as Nigeria, South Africa, Ethiopia and Kenya need more imports, and they could be hit harder by higher domestic costs and higher international prices for imported goods. All of this will lead to higher inflation, hurting businesses and households.
Another blow is that regional trade integration efforts, including the expansion of the digital economy, infrastructure improvements, enhanced regional trade logistics, and provision of financial services, will suffer from higher intermediate input costs and lack of access to new technologies. Both are critical to establishing regional value chains and diversifying production.
Moreover, companies in most African countries will fail because they do not have the support of deep-pocketed governments to provide huge subsidies and other incentives to take advantage of green investment opportunities on a scale approaching that of the United States and its wealthy allies.
The African continent will stand to lose the most from a fragmented global economy, the IMF said. It said in a recent assessment that the cost could be as high as 4% of GDP for middle-tier African countries.
The U.S. sub-Saharan Africa strategy unveiled last year by the Biden administration appeared to be the ideal platform to address concerns about U.S. protectionist industrial policies.
That’s because its main goals include helping Africa navigate the energy transition and enhancing U.S. trade and investment with the continent.
Building on this strategy, policymakers in Washington and Africa should prioritize the following:
Establish public-private partnerships in mineral production and domestic processing as key components of the green energy transition. These include nickel from Tanzania, palladium and manganese from South Africa, copper from Zambia, cobalt from Congo and lithium from Zimbabwe.
Promote investment to build strong regional supply chains. This should include enabling Africa to take advantage of technologies such as digitization, which can facilitate trade through e-commerce.
Leverage any positive impact to drive growth and diversification of trade with Africa in accordance with the African Growth and Opportunity Act. (dialogue)
(This is an unedited and auto-generated story from a Syndicated News feed, the content body may not have been modified or edited by LatestLY staff)
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