This blog post is the first of several to follow about the implications of the US move to industrial intervention and protectionism and this shift’s impact on US relations with key allies.

The agenda for last week’s US-EU Trade and Technology Council meeting contained a number of items, but all were overshadowed by the unresolved issues surrounding the US Inflation Reduction Act of 2022 (IRA). As noted previously, the IRA provides some $369 billion in subsidies and tax credits for electric vehicles and batteries, with the stipulation that final assembly must take place in the US and, at a future date, key battery components must also be American made. European leaders—and America’s Asian allies—have strongly condemned the subsidies and exclusionary local content restrictions in the IRA as against World Trade Organization (WTO) rules.

Administration officials, thus far, have stoutly defended the legislation (and the accompanying CHIPS and Science Act) as evidence of a new model for government intervention in technology and trade. On the broadest level, Brian Deese, director of the National Economic Council, boldly argues that the administration’s policy is a “marked departure from the economic philosophy that has governed for much of the last 40 years,” which stressed deregulation, tax cutting, and government nonintervention. In its place, “what you are seeing is now a dedicated industrial strategy; laying the foundations to crowd in private investment; at historic scale.” He also defended the America First provisions in the IRA:

We make no apology for the fact that [the Biden administration’s] economic strategy and the economic elements of these bills are designed to first and foremost build economic opportunity for communities across America.

More directly on point with the current debate over future technology and trade policy, US Trade Representative Katherine Tai, admittedly the administration’s most dirigiste official, has recently urged European leaders to replicate the US move to industrial policy and establish a “Buy Europe” policy.

All this forms the background to the highly publicized meetings between President Joe Biden and French President Emmanuel Macron 10 days ago. President Biden stoutly defended the new policies, averring that he makes no apologies for the IRA, which he has described as the “most aggressive action ever—ever, ever, ever—in confronting the climate crisis and strengthening our economic—our energy security.”

Macron, who has accused the US of gouging Europe on gas prices and “fragmenting the West” with the IRA, was initially not mollified. But then, attempting to rewrite history, Biden stated that there were “glitches” in the legislation and that he “never intended to exclude folks who were cooperating with us.” As a number of commentators have pointed out, however, Biden and his team knew the exact terms and effects of the IRA. What they seem not to have understood was the strong negative reaction among key US trading partners, particularly in Europe and Asia, while making no attempt to revise the local content provisions.

Biden promised Macron that the US and EU could “work out some of the differences,” suggesting specifically the exception for nations that had trade agreements with the US could be more broadly interpreted and not confined only to agreements that had formally received congressional approval. (Since the meeting, it has also been suggested that nations who had joined the WTO government procurement articles could form the basis for exceptions.)

There are two problems with Biden’s hoped-for solutions. First, Congress was explicit in the local content mandate. As Sen. Joe Manchin (D-WV), who was central to the passage of the legislation, stated flatly: “We did it to help the United States of America.” Thus, there is no chance the administration could get congressional approval for revisions.

Second, Biden’s proposal will cause complications almost immediately with non-European trading partners, particularly in Asia. This week, the US hosts a crucial negotiation meeting with the members of the high-priority Indo-Pacific Economic Forum. How does the US defend exceptions for Europe but not for Asian trading partners? Are France and Germany more vital to US interests than Indonesia, Japan, and South Korea? Those upcoming discussions will be interesting.

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