09 January 2023

The Economist: What America’s protectionist turn means for the world

Step for a moment into the ancient past. The year is 2016. Michael Froman, the United States Trade Representative, is making a stirring call to arms. American workers and businesses are competing against firms that get subsidies and other favours from their governments. “The question”, he says, “is what do we do about it? Do we accept this status quo, or do we actively work to change it?” Mr Froman’s choice, in line with decades of his country’s trade policies, is the latter: try to tear down the subsidies hurting American exporters and gumming up global trade.

Now, return to the present—with a thud. America’s answer to Mr Froman’s question has been flipped. Rather than trying to get other countries to cut subsidies, the Biden administration’s unabashed focus is on building a subsidy architecture of its own, complete with the kinds of local-content rules that American officials once railed against. Thanks to landmark legislation passed last year, the government is poised to shower cash—potentially more than $1trn over the next decade—on semiconductors, renewable energy and other green technologies. Officials have started getting into the nitty-gritty of how to distribute the cash; some of the new rules went into effect on January 1st.

For many in Washington—both Democrats and Republicans—this new approach is common sense. It is, they believe, the only way that America can protect its industrial base, fend off the challenge from a rising China and re-orient the economy towards greener growth. But for America’s allies, from Europe to Asia, it is a startling shift. A country that they had counted on as the stalwart of an open-trading world is instead taking a big step towards protectionism. They, in turn, must decide whether to fight money with money, boosting their subsidies to counter America’s. If the result is a global subsidy race, the downsides could include a fractured international trading system, higher costs for consumers, more hurdles to innovation and new threats to political co-operation.

The first big crack in America’s commitment to free trade came when Donald Trump levied tariffs on products from around the world. In some ways, though, it is this second crack—the present ratcheting up of subsidies—that hurts more. “Free trade is dead”, is the blunt assessment of a senior Asian diplomat in Washington. “It’s basic game theory. When one side breaks the rules, others soon break the rules, too. If you stand still, you will lose the most.”...

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