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Speaking ahead of his meeting with President Joe Biden last Thursday, French President Emmanuel Macron warned that U.S. trade policy could "fragment the West." That might sound alarmist, but he was right. Biden's programs to subsidize clean-energy investment and high-tech manufacturing have much to recommend them — but, executed incautiously, they do pose a threat to international economic cooperation. The White House should heed Macron's message and guard against this risk.
A big expansion of investment in clean energy is crucial. But the Inflation Reduction Act, which Biden signed into law in August, channels much of its $369 billion outlay to U.S. producers. (For instance, electric cars made in America can get up to $7,500 in tax breaks; those made in Europe can't.) Wherever possible, the IRA's programs prioritize "Buy American" and, not incidentally, U.S. union labor. The CHIPS and Science Act, meant to support domestic makers of semiconductors, is a similar case. These policies set out to tilt the playing field for international trade, putting foreign producers at a big disadvantage.
Perhaps you're wondering why that's such a bad thing. Isn't Biden right to be looking out for U.S. firms and workers, favoring them as far as possible when directing public money toward vital investments? After all, other governments can subsidize domestic producers if they wish; if they follow the U.S. example, so much the better. This is the line Biden's officials are taking in response to Europe's complaints.
There are two big problems.
The first is that domestic preferences make public investment less cost-effective. Investment in clean energy matters because climate change is an existential risk, not because the U.S. needs to push wages higher or find new jobs for pools of idle labor. (At the moment, with the Federal Reserve struggling to control inflation, those are the least of its concerns.) The faster and cheaper the transition to clean energy, the better — even if, perish the thought, it means handing foreigners some of the business.
The other problem is that protectionism sets the U.S. at odds with its international commitments. Free-trade principles are embodied in the rules of the World Trade Organization. Governments long ago accepted that subsidies can introduce barriers to trade, and recognized their mutual interest in preventing this.
