Published on 2 February 2023
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Why the EU should not worry about US industrial subsidies – but the UK should

Tensions are high at present over US subsidies for domestic manufacturing, particularly those in support of new green industries. But Prof Andy Westwood says it's the UK that needs to worry, having no sustained policy either on trade or on place-based economic development.

Tensions are high at present over US (United States) subsidies for domestic manufacturing, particularly those in support of new green industries. The EU (European Union) has been vocal about the potential for unfair competition and trade. But policymakers on the European side of the Atlantic should recognise the mutual benefit that can come from directing assistance to deprived regions, offsetting concerns about impacts on trade. It is the UK that needs to worry, having no sustained policy either on trade or on place-based economic development.

The suite of policies championed by President Biden and passed by Congress include the American Rescue Plan Act (ARP), Infrastructure Investment and Jobs Act (IIJA), CHIPS and Science Act, and Inflation Reduction Act (IRA). Collectively worth some $3.8 trillion, these interventions were described by Mark Muro at Brookings as doubly remarkable – not just for the eye-watering level of investment, but also because the money is being spent largely on place-based industrial policy. As Muro says, these are, ‘Direct investments in underdeveloped places and regions’ whilst also seeking, ‘To advance national goals such as strengthening domestic supply chains, promoting international economic competitiveness, and mitigating the impacts of climate change.’ Thus the US policy explicitly links national economic success to the revival of less prosperous communities.

But the US and its trade partners, particularly the EU, are increasingly engaged in a war of words over these investments and subsidies – with EU Commission President Ursula von der Leyen’s announcements, reaffirming the EU’s preference that, ‘Competition on net zero must be based on a level playing field’. The UK Trade Secretary Kemi Badenoch claimed that the US plan would, “harm multiple economies across the world and impact global supply chains in batteries, electric vehicles and wider renewables.”  Although she welcomed efforts by the US to address climate change, Badenoch warned that both sides should stick to rules of the international trading system. But on the European side of the Atlantic there has been little mention of the importance of these investments in national priorities in helping to rebuild local economies in struggling, industrial regions.

This is an odd omission, given the EU’s long history of providing regional assistance and cohesion funding and the UK’s rhetorical commitments to industrial strategy and ‘levelling up’. For example, The US – UK ‘Atlantic Charter’  signed by Boris Johnson and Joe Biden in the margins of the Cornwall G7 meeting in 2021  promised a joint ‘Commitment to spur economic regeneration and build back better in a way that benefits all communities that have experienced the pain of economic change and advances equality for all – not just in cities, but also small towns and post-industrial areas,’ and a trading relationship that ‘When done right, can support our mutual interest in sustainable and green growth, good jobs for our workers’. There are practical policy links to be made between trade, ‘net zero’ and ‘levelling up’.

There will be many in the US noting that both the EU and individual member states have been bolder than their American counterparts on such measures as well as on active industrial or place-based policy for many decades. And on both sides of the Atlantic policymakers are working out how best to renew economic growth in ‘left behind’ places, fearing the consequences if they fail. As pointed out by Andres Rodriguez-Pose, London School of Economics (LSE), the collective “revenge of the places that don’t matter” has political consequences, not just in ‘left behind’ places but ultimately in international relations, institutions and on the global economy.

Many US communities – such as the Midwest Rust Belt – have a similar economic trajectory to former industrial regions in the UK and Europe. In these places, federal investment in ‘place-based’ policies including from ARP, IIJA, CHIPS and IRA are helping regenerate former industrial cities such as Pittsburgh, Pennsylvania and Detroit, Michigan. Mill 19 in Hazlewood Green, near Pittsburgh, a former WW2 munitions factory, was awarded ARP and other federal and state funding to help develop new research facilities and spin-outs in robotics, advanced manufacturing and electric vehicles in conjunction with Carnegie Mellon University. In Detroit, the historic Michigan Central Station, abandoned for years and an icon of the city is now being remade as a Ford centre for new mobility engineering and innovation, hiring thousands of new workers and rehabilitating the ‘hollowed-out’ Corktown neighbourhood.

The Inflation Reduction Act explicitly targets additional spending on so-called ‘energy communities’, defined as those with significant brownfield sites, coalfield communities, high fossil fuel employment and with higher than average unemployment rates, in order to support a ‘just transition’ to new green technologies and industries. In its introduction, the act describes ‘Parts of the United States that are too often overlooked and underserved’ or as US Treasury Secretary Janet Yellen said in Dearborn, Michigan, “We expect to see dollars catalyze innovative investments across cities and towns that haven’t seen such investment in years.”

On the ground, it is clear as you travel through the Midwest – or similarly parts of Northern England – that this is going to take the kinds of long-term investment and intervention that programmes like ARP, IRA and CHIPs are designed to deliver. Perhaps the best example of the scale of these geographical and economic challenges is to look at Germany and its long-term approach to the East after reunification. And yet despite its ‘levelling up’ agenda, the UK chose not to build in a similar approach in its 2022 Subsidy Control Act nor even in its commitment to spend £20 billion annually on Research and Development.

So, there should be much common ground to explore as US and European allies approach these issues. Investing in new industries and job creation in struggling local economies might be just as important for future prosperity and transatlantic partnership as a level playing field in trade and subsidies. There are potentially some complex trade-offs here but the two policy agendas, trade and internal regeneration need to be considered together. And there are additional international benefits if these local and regional ‘place based’ policies are successful: creating better jobs and supporting firms and industries in former industrial heartlands not only helps rebuild local economies, reducing disaffection in the ‘geographies of discontent’, it also makes for more stable national governments as actors in the global economy and in the institutions that govern it. The debate needs to expand beyond the focus on trade competition and unfair domestic subsidies.

Where does that leave the UK? Whatever the merits of projects in the recent round of ‘levelling up’ funding, they can hardly be described as targeted industrial strategy. Furthermore, the collapse of British Volt in Blyth Northumberland shows that the Conservative Government still defaults to market rather than state-coordinated solutions. The UK has never really embraced the idea of state aid control or the opportunity to offer domestic subsidies, despite it becoming the issue holding up agreement on Boris Johnson’s UK – EU trade deal. Nor have we had much sustained interest in national or regional industrial policy. So now the UK faces the prospect of the US and EU competing to offer subsidies for new green industries and jobs, while the UK watches and moans. The Government might like the rest of the world to be free trading buccaneers like some of its MPs, but that vision has scant resonance anywhere else.  And this time it’s the whole of the UK that’s getting ‘left behind’.

The views and opinions expressed in this post are those of the author(s) and not necessarily those of the Bennett Institute for Public Policy.


Professor Andy Westwood

Andy Westwood is Professor of Government Practice at the University of Manchester and a Director of the ESRC funded Productivity Institute. He has worked as an expert adviser to the...

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