US’s protectionist paradox: subsidies and global economy

By IMRAN KHALID | Gwadar Pro Aug 24, 2023

Editor's Note: The writer is a freelance columnist on international affairs based in Karachi, Pakistan. The article reflects the author's opinions and not necessarily the views of Gwadar Pro.

Regrettably, the global economic landscape is witnessing a continuation of protectionist policies under the tenure of U.S. President Joe Biden. As expected, the administration has fortified its stance by maintaining the bulk of its predecessor's tariffs and trade impediments. A paradox emerges as Biden's "buy American" mandates amplify, contributing to an escalation in expenses borne by American consumers and taxpayers. The unwise persistence of these insular tactics casts a shadow over the trajectory of U.S. economic engagement. These actions stand as a stark departure from free market practices. In a surprising shift, the Biden administration is delving deeper and embracing this controversial  industrial policy with gusto.

The $430 billion Inflation Reduction Act (IRA) reflects this shift, channeling massive subsidies into green technologies and renewable energies. The $280 billion CHIPS and Science Act strides forth, trying to build a domestic semiconductor sector. This belligerent approach marks an intriguing departure from the so-called notion of free market economy. The White House contends that the CHIPS Act is the much-needed catalyst to rejuvenate domestic semiconductor manufacturing, promising a boon of tens of thousands of good-paying, union construction jobs and a cascade of high-skilled manufacturing positions. But this purported revival hinges on marshaling private investments amounting to hundreds of billions. The strategy involves a $52 billion allocation for research, development, and workforce training, coupled with a 25 percent tax credit extended to homegrown manufacturers, a move that conspicuously sidelines foreign competitors. Similarly, the IRA extends a generous $7,500 incentive to buyers of U.S.-crafted electric vehicles (EVs), tilting the playing field in favor of American models, while disadvantaging their Chinese and Japanese counterparts.

A recurrent theme in studies in different countries underscores the counterproductive nature of subsidies, frequently proving injurious to the very nations deploying them. These initiatives wield a penchant for quelling competition, stifling the impetus for innovation, elevating costs, and handicapping exporters dependent on external inputs. Regrettably, the entry of subsidies into the arena often triggers a cascading effect: as one country strives to bolster domestic producers through such measures, others invariably retaliate with protectionist strategies. This volatile cycle of retaliation can precipitate economic harm not just on involved nations but also on their global trading counterparts, ensnaring them in a damaging tit-for-tat escalation. The trajectory of the impending subsidy clash portends a haze of uncertainty with no clear victors. The magnitude of counteractive foreign subsidies has the potential to neutralize the competitive advantages sought by initial subsidization efforts. This narrative unfolds notably in sectors like semiconductors, batteries, and electric vehicles. Responding to Biden's industrial blueprint, the European Union sanctioned a €43 billion ($47 billion) as subsidies to support its semiconductor sector. Concurrently, South Korea and Japan have also orchestrated their own campaigns to prop up native chip manufacturing. Paradoxically, European, Japanese, and South Korean enterprises are planting roots or investing stateside to tap into IRA incentives and tax concessions.

This kind of protectionism took center stage during Donald Trump's presidency. The U.S. wielded a heavy-handed 25 percent tariff on steel imports and an additional 10 percent tariff on aluminum imports. Trump's administration kindled an acrimonious trade war with China, abruptly departing from the carefully crafted Trans-Pacific Partnership (TPP), a pact previously negotiated with a dozen Pacific Rim nations by George W. Bush and Barack Obama. Not stopping there, Trump's team performed a theatrical "renegotiation" of the North American Free Trade Agreement, repackaging it as the United States-Mexico-Canada Agreement. This sequence of choices sculpted an isolationist narrative that left reverberations across the global economic landscape. Trump's choices veered toward unilateralism, sidestepping the more potent and cooperative route of multilateralism through the World Trade Organization, thereby risking damage to U.S. alliances.

While President Biden's subsidies might amplify the U.S.'s semiconductor production capacity, a nuanced assessment underscores that this stride comes not without its costs. The prowess of America's capacity for substantial subsidization, outstripping most competitors, could wield its influence. However, the shadow of this ambition casts its own complexities. Some experts are asserting that chip manufacturing costs are a staggering 50 percent higher in the U.S. than in China's Taiwan region, a jurisdiction that reigns over more than 90 percent of global high-end chip production. Skepticism looms over the efficacy of existing U.S. subsidies in bridging this yawning cost chasm. Adding to this problem is the precarious allocation of substantial funds toward industrial subsidies, aggravating the burden on the shoulders of all taxpayers. Yet, a disheartening undercurrent persists. U.S. Secretary of Commerce Gina Raimondo's assertion that the CHIPS Act could serve as a template for buttressing other domestic sectors exacerbates concerns. With other countries poised to reciprocate, a distressing scenario emerges: what began as Trump's China-centered trade skirmish now metamorphoses into an all-consuming global subsidy battle, a fiscal quagmire where victory is elusive for all involved.

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