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To counter China, G7 countries borrow its economic playbook

President Joe Biden, right, with Xi Jinping, Chinas leader, in Bali, Indonesia, in this file photo. — The New York Times
President Joe Biden, right, with Xi Jinping, Chinas leader, in Bali, Indonesia, in this file photo. — The New York Times

Midway through his face-to-face meeting with President Joe Biden in Indonesia last fall, the Chinese leader, Xi Jinping, offered an unsolicited warning.

Biden had in the preceding months signed a series of laws aimed at supercharging US industrial capacity and imposed new limits on the export of technology to China, in hopes of dominating the race for advanced energy technologies that could help fight climate change. For months, he and his aides had worked to recruit allied countries to impose their own restrictions on sending technology to China.

The effort echoed the sort of industrial policy that China had employed to become the world’s manufacturing leader. In Bali, Xi urged Biden to abandon it.

The president was not persuaded. Xi’s protests only further convinced Biden that America’s new industrial approach was the right one, according to a person familiar with the exchange.

As Biden and fellow leaders of the Group of 7 nations meet this weekend in Hiroshima, a centerpiece of their discussions will be how to rapidly accelerate what has become an internationally coordinated round of vast public investment. For these wealthy democracies, the goal is both to reduce their reliance on Chinese manufacturing and to help their own companies compete in a new energy economy.

Biden’s legislative agenda, including bills focused on semiconductors, infrastructure and low-emission energy sources, has begun to spur what could be trillions of dollars in government and private investment in American industrial capacity. That includes subsidies for electric vehicles, batteries, wind farms, solar plants and much more.

The spending — the United States’ most significant intervention in industrial policy in decades — has galvanised many of America’s top allies in Europe and Asia, including key leaders of the G-7. European nations, South Korea, Japan, Canada and others are pushing for increased access to America’s clean-energy subsidies, while launching companion efforts of their own.

“This clean-tech race is an opportunity to go faster and further, together,” Ursula von der Leyen, the president of the European Commission, said after an economy-themed meeting at the G-7 summit Friday.

“Now that the G-7 are in this race together, our competition should create additional manufacturing capacity and not come at each other’s expense,” she said.

Biden and his G-7 counterparts have embarked on a project with two ambitious goals: to accelerate demand, even by decades, for the technologies needed to reduce emissions and fight climate change; and to give workers in the United States and in allied countries an advantage over Chinese workers in meeting that demand.

Much of that project has roared to life since the G-7 leaders met last year in the German Alps. The wave of recent G-7 actions on supply chains, semiconductors and other measures to counter China is based on “economic security, national security and energy security,” Rahm Emanuel, the US ambassador to Japan, told reporters this week in Tokyo.

He added: “This is an inflection point for a new and more relevant G-7.”

Emanuel said the effort reflected a growing impatience among G-7 leaders with what they call Beijing’s use of economic measures to punish and deter behavior by foreign governments and companies that China’s officials do not like.

But more than anything, the shift has been fueled by urgency over climate action and by two laws Biden signed last summer: a bipartisan bill to shower the semiconductor industry with tens of billions of dollars in government subsidies, and the climate provisions of the Inflation Reduction Act, which companies have jumped to cash in on.

Those bills have spurred a wave of newly announced battery plants, solar panel factories and other projects. They have also set off an international subsidy race, which has evolved after being deeply contentious in the immediate aftermath of the signing of the climate law.

The lucrative US supports for clean energy and semiconductors — along with stricter requirements for companies and government agencies to buy US-made steel, vehicles and equipment — have put unwelcome pressure on competing industries in allied countries.

Some of those concerns have been quelled in recent months. The United States signed a deal with Japan in March that will allow battery materials made in Japan to qualify for the benefits of the Inflation Reduction Act. The European Union is pursuing a similar agreement, and has proposed its own $270 billion program to subsidize green industries. Canada has passed its own version of the Biden climate law, and Britain, Indonesia and other countries are angling for their own critical mineral deals.

Administration officials say once-rankled allies have bought into the potential benefits of a concerted wealthy-democracy industrial strategy.

At the G-7 meeting, “you will see a degree of convergence on this that, from our perspective, can continue the conversion of the Inflation Reduction Act from a source of friction into a source of cooperation and strength between the United States and our G-7 partners,” Jake Sullivan, the national security adviser, told reporters on Air Force One as Biden flew to Japan.

Some G-7 officials say the alliance has much more work to do to ensure that fast-growing economies like India benefit from the increased investments in a new energy economy. “It is important that the acceleration that is going to be created by this doesn’t disincentivize investment around the world,” said Kirsten Hillman, the Canadian ambassador to the United States.

One country they don’t want to see benefit is China. The United States has issued sweeping restrictions on China’s ability to access American technology, namely advanced chips and the machinery used to make them. And it has leaned on its allies as it tries to enforce global restrictions on sharing technology with Russia, as well as China. All of those efforts are meant to hinder China’s continued development in advanced manufacturing.

Biden officials have urged allied countries not to step in to supply China with chips and other products it can no longer get from the United States. The United States is also weighing further restrictions on certain kinds of Chinese chip technology, including a likely ban on venture capital investments that US officials are expected to discuss with their counterparts in Hiroshima.

Although many of the G-7 governments agree that China poses an increasing economic and security threat, there is little consensus about what to do about it.

Japanese officials have been relatively eager to discuss coordinated responses to economic coercion from China, following Beijing’s move to cut Japan off from a supply of rare earth minerals during a clash more than a decade ago.

European officials, by contrast, have been more divided on whether to risk close and lucrative business ties with China. Some, such as French President Emmanuel Macron, have pushed back on US plans to decouple supply chains with China.

Von der Leyen has been pushing for a “de-risking” of relations with China that involves recognizing China’s growing economic and security ambitions while reducing, in targeted ways, European dependence on China for its industrial and defense base. European officials said in Hiroshima that they had been pleased to see US leaders moving more toward their approach, at least rhetorically.

Still, the allies’ industrial policy push threatens to complicate already difficult relations with China. Consulting and advisory firms with foreign ties have been subject to raids, detainments and arrests in China in recent months. Chinese officials have made clear that they see export controls as a threat. Adopting the phrase US officials use to criticize Beijing, the Chinese Embassy in Washington warned the G-7 this week against what it called “economic coercion.”

Xi issued a similar rebuke to Biden in Bali last fall. He pointed to the late 1950s, when the Soviet Union withdrew support for the Chinese nuclear program.

China’s nuclear research continued, Xi said, and four years later, it detonated its first atomic bomb. — The New York Times

Jim Tankersley is a White House correspondent for The New York Times, with a focus on economic policy.

Ana Swanson writes about trade and international economics for The New York Times

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