Susan Walsh/AP Photo
U.S. Trade Representative Katherine Tai, left, talks with Japan’s Minister for Economy, Trade, and Industry Yasutoshi Nishimura, January 6, 2023, in Washington.
When Congress passed the Inflation Reduction Act (IRA), aimed at attracting green production to the U.S., allies and competitors alike howled. The world’s largest consumer market was proposing to manufacture its own technology in key growth sectors, potentially rendering many foreign suppliers redundant.
South Korea called the IRA a “betrayal.” France’s Emmanuel Macron spoke of “fragmenting the West.” Amitabh Kant, the official leading this year’s G20 summit in India, deemed the law “the most protectionist act ever drafted in the world.”
None of this should have come as a surprise. By offering uncapped tax credits to U.S.-based businesses, Congress was firing a starting gun on the race for green investment. Yet after an indignant Macron visited Washington and Japan threatened retaliation, President Biden backpedaled, softening its stance—at least for rich allies in Europe and the Pacific.
On Tuesday, the White House announced a deal to make Japanese producers eligible for key IRA tax credits. The announcement is likely to help along negotiations for a similar agreement with the European Union, which is expected soon.
The Biden administration has dubbed recent efforts “friendshoring” agreements, part of a push to build supply chains with allies. The White House has brokered these deals unilaterally, bypassing Congress to determine where it should bend the law with creative interpretations of the IRA.
Announcing this week’s agreement, the Office of the U.S. Trade Representative said that the deal would “promote fair competition and market-oriented conditions for trade in critical minerals [and] advance robust labor and environmental standards,” including in countries that are not parties to the deal, where minerals are sourced.
The deal has angered high-ranking lawmakers on trade policy like Sen. Ron Wyden (D-OR) and Rep. Richard Neal (D-MA). “The administration’s argument that the Japan critical minerals agreement is going to encourage better labor standards in third countries is laughable,” a Wyden spokesperson told the Prospect on Thursday. “The United States would be better off strategically identifying our current and future needs, rather than just reacting to which trading partner can get the most press coverage of their complaints.”
Emerging markets, meanwhile, are taking it as a signal that the White House’s priorities lie with rich allies. Alienating these countries could undermine another top priority of the IRA: competition with China. Several experts said it gives emerging markets greater reason to enter a competitor trade bloc.
THE NEW U.S.-JAPAN TRADE DEAL on critical minerals has little content of its own. The hastily developed accord, which is time-limited, is mostly intended to make Japan qualify for the IRA’s electric-car subsidies.
In order to qualify for the new $7,500 tax credit for electric cars, automakers must source a set percentage of battery materials from the U.S. or its free-trade agreement partners.
Despite pressure from automakers to include more countries in the supply chain, Congress restricted the rule to free-trade partners, a list that includes major metal producers Canada, Chile, and Australia, but excludes metal-rich countries like Indonesia, Brazil, and Argentina. The point was to stand up a mostly domestic supply chain for metals, as the U.S. pursues mining projects in California and Nevada. The new deal with Japan is not a free-trade deal, but the Treasury Department, which is preparing to issue guidance on the tax credits, thinks it’s enough to qualify.
Alienating these countries could undermine another top priority of the IRA: competition with China.
Japan currently relies almost entirely on imports for battery metals like lithium, cobalt, and nickel. It does have some battery-processing capacity, a legacy of a 2010 territorial dispute with China, when Beijing blocked rare earth element exports to Japan in order to force it to release the detained captain of a Chinese fishing trawler. Since then, it has looked to diversify its supply of rare earths and is even exploring deep-sea mining of rare earth elements off its coast.
But Japan still depends on China for the majority of its minerals, raising the question of why the U.S. has chosen to partner with the country for a trade deal explicitly geared at decoupling from Beijing.
Given the lack of scrutiny on the agreement, which was led by the executive branch, the civil society group Public Citizen argued that the deal could make it “possible for dangerous, dirty mining corporations that violate human rights to ‘launder’ their minerals in Japan before shipping to the United States.”
ON TUESDAY, AS JAPAN SIGNED its new critical minerals agreement in Washington, more than 200 Brazilian officials and businessmen descended on Beijing.
Brazilian President Luiz Inácio Lula da Silva had postponed a personal visit last minute, due to a bout of pneumonia. But Lula hopes to expand Brazil’s exports of both corn and cotton to China, its top trade partner, tightening already close ties in agribusiness between the two countries. His office called the trip, which will be rescheduled, “the most significant state visit—so far—of his third term as president.”
That meeting follows a bitter summit last month with the White House, where Lula was offered just $50 million for Brazil’s fund to protect the Amazon rain forest—a trifling sum that Biden went on to say he could not actually guarantee. Brazil’s strengthened ties with China come as many emerging markets express frustration with America’s protectionism with exceptions for rich allies.
“The world is becoming more fragmented, and the advanced economies are closing in on themselves, whether that’s friendshoring or these deals that they’re now hatching on an ad hoc basis,” said Richard Kozul-Wright, director of globalization and development at the U.N. Conference on Trade and Development (UNCTAD).
Faten Aggad, a senior adviser at the African Climate Foundation, said that for developing countries, the U.S.’s new friendshoring regime is “extremely risky.”
“What this will do is force countries who want to export their raw materials into choosing an ideological line that is either the U.S. or China, at a time when countries are very adamant that they actually don’t want to play that game,” Aggad said. “And I’m not sure whether that choice would be in favor of the U.S.”
Given the projected global decline in growth, and since growth over the last decade has skewed toward developing countries, many emerging markets are eager to join forces as part of the BRICS group, rather than fastening themselves to the West. Originally an informal grouping of Brazil, Russia, India, and China, BRICS countries have organized and are increasing their coordination on trade and development strategy.
Indonesia, Saudi Arabia, Argentina, and the United Arab Emirates are among the countries interested in joining up. Even Mexico, long part of the North American free-trade bloc, has reportedly looked into becoming a member, in what would be an affront to strained U.S.-Mexico relations.
AS EUROPE PREPARES ITS OWN SPECIAL DEAL with the U.S. to access IRA subsidies for electric cars, it has simultaneously ramped up competition with American companies. Earlier this month, the European Commission announced what amounts to a best-price guarantee: It will match subsidies offered anywhere else in the world to prevent a company from leaving Europe.
Despite these extraordinary subsidies, companies are still pressing for fatter carrots from Europe, telling Bloomberg that there is too much bureaucratic red tape in obtaining subsidies, so they may leave for the U.S. anyway.
Many developing countries would like to pass their own domestic subsidy programs to accelerate green-energy deployment, but lack the capital. That leaves them dependent on foreign direct investment, and acts as a deterrent from joining the BRICS.
“We don’t have capacity to borrow money like the U.S. So what is the option? The only option for us is to cooperate,” Fabby Tumiwa, an energy expert based in Jakarta, told the Prospect. Indonesia is rich in nickel, copper, and cobalt.
Tumiwa is also eyeing greater trade with nearby Australia and India, which has just discovered major lithium reserves in the geopolitically fraught region of Jammu and Kashmir. Indonesia has floated the idea of a new OPEC-style cartel for battery metals. Despite the IRA’s protectionism, Tumiwa stressed the need to work with the U.S. on building a global supply chain.
But developing countries are increasingly wary of Americans, and Europeans have sought to capitalize on that skepticism. Pierre Leturcq of the Jacques Delors Institute, a European think tank, cast the EU’s industrial policy as more cooperative. “The U.S. approach is more sanctions-based, it’s more coercive. Either you comply or you don’t enter.”
In a recent article, Macron adviser and former WTO chief Pascal Lamy proposed that Europe “rebuild with several countries a North–South coalition promoting open trade while respecting various collective preferences, the most common of which is now environmental protection. Such a coalition would start from what already exists, but without the Americans, hoping to create a disadvantage for them that would make them change their position.”
BACK IN THE U.S., some are claiming the new Japan deal as a win for a new style of nimbler trade.
Todd Tucker, an industrial-policy expert at the Roosevelt Institute and a close adviser to the Biden administration, pointed to America’s stasis on trade deals.
“Treating every international negotiation as a constitutional moment led to: (a) not as many deals as there was deal space; (b) an inflation of the stakes of individual deals that they created credibility problems for the U.S. when it failed to close; and (c) a sense that the solidity of the rules-based order was more important than thoughtful and periodic recalibration to ensure legitimacy and effectiveness,” he told the Prospect.
Plus, the U.S.-Japan deal marks a beginning, not an end, Tucker added. Other countries could build on the agreement. “That’s the beauty of sectoral, à la carte deals,” he said.
The Biden administration has largely given up on big trade deals like the Trans-Pacific Partnership (TPP), and on routing trade deals through a fractious Congress. In emphasizing the failures of TPP, Tucker, a top voice on U.S. industrial policy, is at one with Alan Beattie, a leading advocate of globalization, who argues in today’s Financial Times that the “US Congress shares the blame for its own impotence over trade.”
“Sen. Wyden stands ready to work with the administration on getting approval for such efforts and continues to ask the administration to have in-depth discussions with him on these issues, but so far they have refused to even answer his letter on the topic,” Wyden’s spokesperson told the Prospect.
Some advocates of friendshoring, like USTR senior adviser Beth Baltzan, maintain that it merely recognizes the reality that the world has never had a free-trade system.
But representatives of emerging markets say the rules-based order wasn’t all cant—it provided real access to consumer markets in rich countries, which is rapidly shrinking.
And it was quite recently, Aggad said, that the U.S. was happy to cite free trade and WTO rules when denying vaccines to African countries during the pandemic.
“People died because they were not able to access vaccines—because of free trade,” Aggad said. The new friendshoring regime, she added, is “counter to every single principle that countries like the U.S. have been arguing for.”
