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America’s Next Revolution
President Andrew Jackson dubbed Samuel Slater the “Father of the American Industrial Revolution” for introducing advanced textile technology to the US. But Brits back home had a much less glowing epithet for the first American industrialist — they called him “Slater the Traitor.” It turns out that he had copied the designs of British machinery and brought them to America, which the English saw as the ultimate economic betrayal.

Today, the world is on the cusp of yet another industrial revolution, this one Green. And as was the case 200 or so years ago, the US is making economic moves that have Europeans up in arms. With hundreds of billions of dollars allocated in the Inflation Reduction Act, the US hopes to become the leading producer of electric vehicles, solar panels, and computer chips — arenas increasingly dominated by the Far East. But Europeans and others fear that it will do so at the expense of their own companies.

That’s what we’ll be exploring today, the mechanics of the IRA and the plan for pumping enormous funds into pivotal industries (lowering inflation is an optimistic byproduct, but there’s no denying that including the “I” word in the name was smart politics). We’ll unpack how this unabashedly industrial policy ambition is amplifying tensions with core US trading partners, some of whom still haven’t gotten over Slater the Traitor. So fetch yourself some Earl Gray in old Samuel’s honor and dig in.

What’s in the Bill?
First, let’s unpack the details of the IRA.

The goal of the monumental bill is simple enough — make it easier to afford living in America, and reach net-zero carbon emissions by 2050. And as a bonus, the IRA helps America close its yawning green technology gap with China, which produces the most EVs, chips, and solar panels in the world:

• The bill is a sweeping plan to raise $737 billion to combat the ever-increasing federal fiscal deficit. Initiatives include a 15% alternative minimum tax on corporations who deftly avoid the tax man despite generating significant financial statement income, hiring scores of IRS agents to ramp up collection enforcement and audits (your Venmo transfers aren’t safe), a 1% surcharge on stock buybacks, and a prescription drug pricing revamp that will allow Medicaid to negotiate drug prices for the first time ever.
• Part of the bill, $369 billion, will go toward fighting climate change by investing in US-made and manufactured green technologies and renewable energies. Capital Hill is incentivizing both domestic and foreign businesses to set up shop on US soil, create new American jobs, and produce environmentally-friendly tech and machinery from locally sourced materials.

The IRA was signed into law in August, and has already become cat-nip for foreign producers.

Power of the Sun
In 2019, Qcells, a division of South Korea’s Hanwha Group, built the western hemisphere’s largest solar panel factory in Dalton, Georgia – the Carpet Capital of the World. The factory employs more than 750 workers and produces 12,000 panels a day.

In May, as Congress inched closer to passing the IRA, Qcells announced it was building another $1.8 billion plant right next door and is expected to receive plenty of subsidies from the new legislation.

Most Dalton locals don’t actually use solar panels themselves, but they have appreciated the influx of jobs and the additional economic diversity. “We need something new — something besides carpet,” resident Diane Smith told Bloomberg.

Holding All the Chips
Remember the height of the pandemic when literally everything was on backorder? Delays have calmed down a bit, but some of us are still waiting on a PlayStation 5, and it’s all due to the global semiconductor chip shortage.

Cars, computers, smart TVs, medical equipment, almost every modern day electronic device depends on chips only a few nanometers in size. And it wasn’t just COVID outbreaks halting production at factories. At every turn, microchip manufactures were running into bad luck:

• In February 2021, a blizzard forced three factories in Austin, Texas, to shut down, pushing production back months.
• The Taiwan Semiconductor Manufacturing Company is the largest chip producer in the world by market share, and its plants need 150,000 tons of water a day to operate. But in spring of 2021 Taiwan suffered its worst drought in half a century, and the company had to put aside roughly $30 million to ship in water via tanker trucks.
• An increase in the demand for cryptocurrency mining drives reduced the access to chips for other uses.

Earlier this month, President Joe Biden and Apple CEO Tim Cook visited the sites of two future TSMC plants in Phoenix, Arizona, which will cost roughly $40 billion. Biden called the factories a “game changer” for supply chain woes, and Cook announced starting in 2024, Apple will purchase some microchips from the Arizona plants to power its iPhones, iPads, and Macs.

Besides the IRA, Congress also passed the $280 billion Chips and Science Act to ease supply chain issues by boosting chip production in the US. Applications for the grants haven’t gone out yet, but companies like Micron, Intel, and Samsung are expected to request funding. This, too, has US trade partners crying foul.

The Dogs of Trade War
Companies want to come to America and do business which would hypothetically create more jobs, especially in rural America. If those jobs are green, carbon emissions are expected to go down.

This all sounds good for the US, but not so much for the rest of the world, at least in terms of dollars and cents. Take electric vehicles, for example. The demand for EVs is rising, and companies like Bentley, Cadillac, Volvo, and Mercedes-Benz all plan to go fully electric by 2030.

Under the IRA, buyers can receive up to $7,500 in tax credits for purchasing an EV. But there are a few caveats:

• The car’s final assembly must be done in North America, and the components used in EV batteries must not have been “extracted, processed, or recycled by a foreign entity of concern,” i.e. China and Russia.
• With so few models already fitting that criteria, companies and entire countries are concerned their car sales will nosedive. Domestic exclusive subsidies are also prohibited under the World Trade Organization, but the Biden administration doesn’t seem to mind.

In November, the South Korean government sent a letter to the Biden administration saying the IRA would damage Hyundai and Kia sales in the US and cause the brands to lose market share. Industry Minister Lee Chang-yang said he hopes his country and the US can resolve the matter via political discussion, but also said legal action based on the nations’ free trade agreement could be a last resort.

The EU, for its part, is borderline apoplectic about the IRA. The bloc is already experiencing an energy crisis and high inflation likely to stick around after America’s has cooled down, and the last thing it needs is domestic manufacturers packing for greener, subsidized pastures in the US. To blunt the IRA’s potential impact, the EU devised its own $49 billion plan to boost chip production. But experts like NXP Semiconductors CEO Kurt Siever of the Netherlands said that’s not nearly enough to supercharge the industry and enable Europe to reach its stated goal of winning 20% of the global chip market by 2030.

For European countries to hit those numbers, they can’t have their businesses shipping off to the US.

“Competition is good … but this competition must respect a level playing field,” European Commission President Ursula von der Leyen said in Belgium this month.

On Dec. 1, Biden met with French President Emmanuel Macron to discuss the IRA, and let’s just say their press conference at least appeared friendly.

Biden said the bill could contain “glitches” and be “tweaked,” but he didn’t announce specific plans for changes. In fact, he said, “The United States makes no apology and I make no apology” for the IRA.

Only a few days later, the bloc fired back, equally unapologetically. The EU finally passed its tax on carbon intensive imports like aluminum, steel, cement, and fertilizers, which the US argues will make them less competitive. Clearly, green means never having to say your sorry.

This past week, when EU leaders met in Brussels, Macron said Europe needs to catch up quickly if it stands any chance at competing with the US.

He told reporters, “We must go faster, simplify our rules, and provide a macroeconomic answer and a level of aid at the national and European levels that allows us to match what the Americans have done.”

And they want to make sure the carbon-neutral 21st Century version of Samuel Slater resists the siren call of the IRA and remains on European shores.

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