Losers in the New World Order

The huge subsidy packages of the US and Europe are threatening globalization, making smaller economies, even the UK or Singapore, lose out, according to the WSJ.

Tax incentives for the production of batteries, solar equipment and other green technology are drawing capital into the US. The European Union tries to respond with its own green energy support package. Japan announced plans to borrow $150 billion to finance investments in green technology. All are working to become less dependent on China, which leads in sectors such as batteries and battery minerals.

This puts some smaller countries, which have been on the rise for decades on the back of free trade, at a disadvantage. Even industrialized countries like the UK and Singapore lack the scale to compete in subsidy capacity with the largest economies. Emerging markets like Indonesia, which hope to use natural resources for economic development, are also threatened by changes.

Intel received an $11 billion grant from the German government to build two semiconductor plants. Prime Minister Olaf Scholz called it the largest foreign direct investment in the country's history. This funding commitment is significantly more than the annual budget of the Ministry of Trade and Industry of Singapore. "Let me be clear to you: We cannot pay (subsidy) higher than the big countries," Singapore Deputy Prime Minister Lawrence Wong said at the recent event.

With many tech companies born in the UK, growth prospects lie elsewhere. Funding more than $200 million last year, battery startup Nexeon will build a factory first in South Korea and then possibly in North America. "Unfortunately, the factory is not located in the UK," said Scott Brown, CEO of Nexeon. He thinks this will not change if the government does not provide more support for the battery industry.

AMTE Power, one of the UK's few domestic battery manufacturers, may rethink plans to build a more than $200 million factory in Scotland due to differences in subsidies in the US and Europe. Electric vehicle startup Arrival also wants to focus production in the US instead of the UK because of tax breaks.

Construction site for Panasonic EV battery factory near DeSoto, Kansas. Photo: AP

The US is offering $369 billion in incentives for clean energy as part of the Inflation Reduction Act (IRA). This helps them catch the wave of foreign investment. German automaker BMW just broke ground on a new battery plant in South Carolina. South Korean companies like Hyundai and LG announced the construction of a $4.3 billion battery factory in Georgia. Japan's Panasonic is building a factory in Kansas.

The 'de-globalization' order

The subsidy race marks a step away from the trend of international economic integration in the past decades. Globalization has transformed once impoverished places like South Korea and Taiwan into advanced, high-tech economies.

Western consumers have more affordable goods and a higher standard of living. Along with goods and capital, technological advancements and new governance solutions also move more freely between countries.

But this model also has its price. Communities that once prospered in the United States and Western Europe decimated when production moved to Asia or the countries of the former Soviet Union. Environmental problems become worrisome as the world consumes more natural resources. Some economies face uncertainty as capital flows in and out.

By contrast, according to economists, reversing globalization - whether for reasons of national security, geopolitical competition or supply chain concerns - has consequences. In particular, small developing economies are especially at risk. Because they need access to global markets to achieve prosperity through international trade.

David Loevinger, a former US Treasury official and now head of emerging markets for wealth management company TCW Group, says the world is becoming more inward and turning its back on trade and investment. open. "Europe, the US and China are competing for subsidies, and the losers in that competition are poorer economies with fewer financial resources," he said.

The Western adoption of industrial subsidies could greatly affect countries that had hoped to leverage green technology for economic development, such as Indonesia. The country has ambitions to rely on abundant nickel resources to build a world-leading battery industry.

But the US refuses to subsidize electric vehicle batteries containing large amounts of minerals from countries that are not its free trade partners. And Indonesia is among them. Arsjad Rasjid, head of the Indonesian Chamber of Commerce and Industry, says his country has it all, from natural resources to human resources. "Please don't close the door on us," he said.

America sucks money, Britain is confused

As the leader in the subsidy race, the US is witnessing an investment boom. According to United Nations data, the United States received about 22% of global foreign direct investment last year, making it the world's top recipient of investment.

This is slightly lower than the 26% they received in 2021 as global investment recovers from a lull in the pandemic. But it's still significantly higher than 13% in 2019. Spending on manufacturing-related construction jumped 76% in May from the same period in 2022, to $194 billion, according to Bureau of Investigation data. population census.

"The economics of projects in the US have surpassed expectations," said Guy Debelle, former deputy governor of Australia's central bank and now director of green energy company Fortescue Future Industries, a subsidiary of mining company Fortescue Metals in the US. Western Australia commented. His company is looking for investment opportunities and currently considers the US as the most viable because project development costs can be reduced by up to 60% thanks to subsidies.

Capacity at battery projects in the US has increased 67% since the IRA was announced and is now comparable to the size of Europe, according to estimates by data firm Benchmark Minerals Intelligence (UK).

In response, the European Union is preparing its own package of incentives, loosening the limits on industrial subsidies that member states can deploy. By 2030, the EU wants 40% of key technologies needed for a green transition to be produced within the bloc, including solar equipment, wind turbines and batteries.

After Brexit, the UK is in an even more challenging situation. At Nexeon, the limited funding they receive shows the difference from the US. In addition to private funding it raised last year, Nexeon has received two million pounds ($2.55 million) from a UK government electric vehicle industry fund. But in the US, two of its rivals, Sila Nanotechnologies and Group14 Technologies, both received $100 million from the Department of Energy under a program to fund the battery industry.

The shift in global trade comes at a particularly awkward time for the UK, as it struggles to chart a new path in the global economy after leaving the European Union in 2020. This is no longer easy to access the huge EU market as before.

Brexit supporters think Britain can sign bilateral trade deals with other countries. But since then, global free trade has stagnated and now appears to be going backwards. "When it came to the Brexit vote, no one expected to see a resurgence of industrial policy in the US," said Gernot Wagner, a climate economist at Columbia Business School.

Now, the British government is facing calls from all sides of the economy to respond to a new industrial strategy in major countries. The auto industry has been in the limelight lately, with Jaguar Land Rover planning to build a new battery plant through subsidies, although the scale of the incentives is far behind the US.

Finance Secretary Jeremy Hunt promised to publish specific policies this autumn but also said Britain would not "put head to head with friends and allies in a disruptive global subsidies race". Instead, the government will seek to direct subsidies to areas where Britain has a clear competitive advantage.

New alliance solution

Chad Bown, a Senior Research Fellow at the Peterson Institute for International Economics, who worked at the World Bank, says the solution for countries that can't compete is to bring richer trading partners closer. and benefit from their industrial policies, as Canada and Mexico have done through their free trade agreement with the US.

The Indonesian government is participating in the US-led "Indo-Pacific Economic Framework for Prosperity", an economic pact it hopes will improve market access for water minerals. This.

A nickel processing complex in Indonesia. Photo: WSJ

Last year, Investment Minister Bahlil Lahadalia said Indonesia would seek to form an OPEC-like alliance for nickel, a key mineral in batteries for which the country has an advantage in reserves. Mr. Bahlil's idea is that an organization modeled on OPEC would jointly coordinate the supply of nickel to ensure high prices for producing countries.

But analysts are skeptical of the plan, in part because nickel producers outside of Indonesia are reluctant to confront major buyers like the United States and China. Similar ideas of an OPEC-like organization of lithium producers have also been floated by leftist leaders in Latin America, but have not yet been implemented.

Indonesia and Zimbabwe have introduced export restrictions on minerals such as nickel, bauxite and lithium, along with a requirement that foreign companies build processing facilities in the country as a condition of export. Simon Evenett, Professor of Economic Development and International Trade at St. Gallen (Switzerland) confirms these policies are gaining popularity. "Obviously it's going to push prices up and increase volatility," he said.