Instead of lifting Donald Trump’s trade barriers, US President Joe Biden has fully embraced industrial policy, offering massive subsidies to domestic manufacturers. Although this might enhance manufacturing capacity in the short term, it also risks triggering a financially draining global subsidy war with no clear winners.
LONDON – To the dismay of many economists, US President Joe Biden’s administration has retained most of its predecessor’s tariffs and trade barriers. In fact, contrary to most analysts’ expectations, the United States has imposed additional protectionist measures, such as Biden’s “buy American” policies, resulting in higher costs for American consumers and taxpayers.
During Donald Trump’s presidency, the US imposed a 25% tariff on steel imports and a 10% tariff on imported aluminum. Trump’s administration initiated a trade war with China, withdrew from the Trans-Pacific Partnership (TPP) that former US Presidents George W. Bush and Barack Obama negotiated with 12 Pacific Rim countries, and “renegotiated” the North American Free Trade Agreement, rebranding it as the United States-Mexico-Canada Agreement.
Trump chose to take these and other actions unilaterally, even though pursuing a multilateral approach through the World Trade Organization would have been far more effective and less likely to harm US allies. The Biden administration, however, has gone even further, fully embracing industrial policy by enacting the $430 billion Inflation Reduction Act (IRA), which includes hundreds of billions of dollars in subsidies for green technologies and renewable energies, and the $280 billion CHIPS and Science Act, aimed at fostering a robust US semiconductor industry.
According to the White House, the CHIPS Act will bolster domestic semiconductor production and create “tens of thousands of good-paying, union construction jobs and thousands more high-skilled manufacturing jobs” while mobilizing hundreds of billions of dollars in additional private investments. To facilitate the reshoring of chip production, the act allocates $52 billion to research and development and workforce training and provides a 25% tax credit to domestic manufacturers. By subsidizing US-based companies, however, the bill effectively discriminates against foreign and overseas producers. Similarly, the IRA provides a $7,500 subsidy to purchasers of US-made electric vehicles (EVs), giving American-made models an advantage over their Chinese and Japanese rivals.
But studies have repeatedly shown that subsidies often harm the countries implementing them. Such measures tend to reduce competition, stifle innovation, raise costs, and disadvantage exporters who rely on imported inputs. Worse yet, when one country introduces subsidies to enhance the competitiveness of domestic producers, other countries typically counter with protectionist policies of their own. And retaliation and tit-for-tat escalation damages the economies of other countries and their trading partners.
It is already clear that the coming subsidy war will have no clear winners. Depending on the size of retaliatory foreign subsidies, they may nullify some (if not all) of the competitive gains that the initial subsidy aimed to provide.
At a time of escalating global turmoil, there is an urgent need for incisive, informed analysis of the issues and questions driving the news – just what PS has always provided.
Subscribe to Digital or Digital Plus now to secure your discount.
Subscribe Now
This dynamic is particularly evident in sectors such as semiconductors, batteries, and EVs. In response to Biden’s industrial policies, for example, the European Union has recently greenlit a €43 billion ($47 billion) plan to bolster its semiconductor industry, while South Korea and Japan have also rolled out plans to subsidize domestic chip production. Meanwhile, European, Japanese, and South Korean companies are establishing or investing in US facilities to qualify for IRA subsidies and tax credits.
While Biden’s subsidies might enhance domestic semiconductor manufacturing capacity, especially given America’s ability to out-subsidize most rivals, this will come at a cost. Morris Chang, founder of the Taiwan Semiconductor Manufacturing Company, has recently estimated that chip manufacturing is 50% more expensive in the US than in Taiwan, where more than 90% of the world’s high-end chips are currently produced. Chang is skeptical that the existing US subsidies would be enough to close this cost gap. But as Adam Posen of the Peterson Institute for International Economics notes, the true price of economic decoupling is “not so much trade barriers, bad as they are, but reduced productivity growth.”
Moreover, a significant portion of the money spent on industrial subsidies will likely go to waste, increasing the burden on all taxpayers. Redirecting these funds toward education, job training, research, and infrastructure would do far more to enhance industrial competitiveness, both domestically and globally. Regrettably, US Secretary of Commerce Gina Raimondo has recently touted the CHIPS Act as a blueprint for supporting other domestic sectors. Given that other countries will almost certainly respond in kind, it appears that Trump’s trade war with China has morphed into a budget-busting global subsidy war that no one can win.
To have unlimited access to our content including in-depth commentaries, book reviews, exclusive interviews, PS OnPoint and PS The Big Picture, please subscribe
With German voters clearly demanding comprehensive change, the far right has been capitalizing on the public's discontent and benefiting from broader global political trends. If the country's democratic parties cannot deliver, they may soon find that they are no longer the mainstream.
explains why the outcome may decide whether the political “firewall” against the far right can hold.
The Russian and (now) American vision of "peace" in Ukraine would be no peace at all. The immediate task for Europe is not only to navigate Donald’s Trump unilateral pursuit of a settlement, but also to ensure that any deal does not increase the likelihood of an even wider war.
sees a Korea-style armistice with security guarantees as the only viable option in Ukraine.
Rather than engage in lengthy discussions to pry concessions from Russia, US President Donald Trump seems committed to giving the Kremlin whatever it wants to end the Ukraine war. But rewarding the aggressor and punishing the victim would amount to setting the stage for the next war.
warns that by punishing the victim, the US is setting up Europe for another war.
Within his first month back in the White House, Donald Trump has upended US foreign policy and launched an all-out assault on the country’s constitutional order. With US institutions bowing or buckling as the administration takes executive power to unprecedented extremes, the establishment of an authoritarian regime cannot be ruled out.
The rapid advance of AI might create the illusion that we have created a form of algorithmic intelligence capable of understanding us as deeply as we understand one another. But these systems will always lack the essential qualities of human intelligence.
explains why even cutting-edge innovations are not immune to the world’s inherent unpredictability.
LONDON – To the dismay of many economists, US President Joe Biden’s administration has retained most of its predecessor’s tariffs and trade barriers. In fact, contrary to most analysts’ expectations, the United States has imposed additional protectionist measures, such as Biden’s “buy American” policies, resulting in higher costs for American consumers and taxpayers.
During Donald Trump’s presidency, the US imposed a 25% tariff on steel imports and a 10% tariff on imported aluminum. Trump’s administration initiated a trade war with China, withdrew from the Trans-Pacific Partnership (TPP) that former US Presidents George W. Bush and Barack Obama negotiated with 12 Pacific Rim countries, and “renegotiated” the North American Free Trade Agreement, rebranding it as the United States-Mexico-Canada Agreement.
Trump chose to take these and other actions unilaterally, even though pursuing a multilateral approach through the World Trade Organization would have been far more effective and less likely to harm US allies. The Biden administration, however, has gone even further, fully embracing industrial policy by enacting the $430 billion Inflation Reduction Act (IRA), which includes hundreds of billions of dollars in subsidies for green technologies and renewable energies, and the $280 billion CHIPS and Science Act, aimed at fostering a robust US semiconductor industry.
According to the White House, the CHIPS Act will bolster domestic semiconductor production and create “tens of thousands of good-paying, union construction jobs and thousands more high-skilled manufacturing jobs” while mobilizing hundreds of billions of dollars in additional private investments. To facilitate the reshoring of chip production, the act allocates $52 billion to research and development and workforce training and provides a 25% tax credit to domestic manufacturers. By subsidizing US-based companies, however, the bill effectively discriminates against foreign and overseas producers. Similarly, the IRA provides a $7,500 subsidy to purchasers of US-made electric vehicles (EVs), giving American-made models an advantage over their Chinese and Japanese rivals.
But studies have repeatedly shown that subsidies often harm the countries implementing them. Such measures tend to reduce competition, stifle innovation, raise costs, and disadvantage exporters who rely on imported inputs. Worse yet, when one country introduces subsidies to enhance the competitiveness of domestic producers, other countries typically counter with protectionist policies of their own. And retaliation and tit-for-tat escalation damages the economies of other countries and their trading partners.
It is already clear that the coming subsidy war will have no clear winners. Depending on the size of retaliatory foreign subsidies, they may nullify some (if not all) of the competitive gains that the initial subsidy aimed to provide.
Winter Sale: Save 40% on a new PS subscription
At a time of escalating global turmoil, there is an urgent need for incisive, informed analysis of the issues and questions driving the news – just what PS has always provided.
Subscribe to Digital or Digital Plus now to secure your discount.
Subscribe Now
This dynamic is particularly evident in sectors such as semiconductors, batteries, and EVs. In response to Biden’s industrial policies, for example, the European Union has recently greenlit a €43 billion ($47 billion) plan to bolster its semiconductor industry, while South Korea and Japan have also rolled out plans to subsidize domestic chip production. Meanwhile, European, Japanese, and South Korean companies are establishing or investing in US facilities to qualify for IRA subsidies and tax credits.
While Biden’s subsidies might enhance domestic semiconductor manufacturing capacity, especially given America’s ability to out-subsidize most rivals, this will come at a cost. Morris Chang, founder of the Taiwan Semiconductor Manufacturing Company, has recently estimated that chip manufacturing is 50% more expensive in the US than in Taiwan, where more than 90% of the world’s high-end chips are currently produced. Chang is skeptical that the existing US subsidies would be enough to close this cost gap. But as Adam Posen of the Peterson Institute for International Economics notes, the true price of economic decoupling is “not so much trade barriers, bad as they are, but reduced productivity growth.”
Moreover, a significant portion of the money spent on industrial subsidies will likely go to waste, increasing the burden on all taxpayers. Redirecting these funds toward education, job training, research, and infrastructure would do far more to enhance industrial competitiveness, both domestically and globally. Regrettably, US Secretary of Commerce Gina Raimondo has recently touted the CHIPS Act as a blueprint for supporting other domestic sectors. Given that other countries will almost certainly respond in kind, it appears that Trump’s trade war with China has morphed into a budget-busting global subsidy war that no one can win.