G7 countries borrow Chinese economic strategy

In the middle of a face-to-face meeting with President Biden in Indonesia last fall, Chinese leader Xi Jinping gave an unsolicited warning.

In previous months, Biden signed a series of bills designed to boost America’s industrial capacity and imposed new restrictions on technology exports to China, hoping to dominate the race for advanced energy technologies that could help combat climate change. For months, he and his associates had been working to recruit allied countries to impose their own restrictions on sending technology to China.

This effort mirrored the type of industrial policy that China followed to become a world leader in manufacturing. In Bali, Mr. Xi urged Mr. Biden to drop it.

The president was not convinced. According to a person familiar with the stock market, Mr. Xi’s protests have only further convinced Mr. Biden that America’s new approach to industry is the right one.

As Biden and other Group of Seven leaders meet this weekend in Hiroshima, Japan, the focus of their discussions will be how to quickly accelerate what has become an internationally coordinated round of massive public investment. For these wealthy democracies, the goal is both to reduce dependence on Chinese manufacturing and to help their own companies compete in the new energy economy.

Mr. Biden’s legislative agenda, including the Semiconductor, Infrastructure and Low Carbon Energy Bills, has begun spurring government and private investment that could amount to trillions of dollars in American industry. This includes subsidies for electric vehicles, batteries, wind farms, solar power plants and much more.

The spending – the largest US intervention in industrial policy in decades – has galvanized many of America’s top allies in Europe and Asia, including key Group 7 leaders. European countries, South Korea, Japan, Canada and others are pushing for increased access to US clean energy subsidies while making its own accompanying efforts.

“This cleantech race is an opportunity to go faster and further together,” said Ursula von der Leyen, President of the European Commission, after an economic meeting at the Group of 7 Summit on Friday.

“Now that the G7 is in this race together, our competition should create additional production capacity, not at the expense of others,” she said.

Biden and his Group 7 colleagues launched a project with two ambitious goals: to accelerate demand, even by decades, for the technologies needed to reduce emissions and fight climate change, and to give workers in the United States and allied countries an advantage over Chinese workers in meeting this demand.

Much of this project has come to life since the G7 leaders met last year in the German Alps. The recent wave of Group 7 actions on supply chains, semiconductors and other measures to counter China is based on “economic security, national security and energy security,” Rahm Emanuel, the US ambassador to Japan, told reporters this week in Tokyo.

He added: “This is a turning point for a new and more relevant G7.”

Mr Emanuel said the effort reflects growing impatience among Group 7 leaders over what they call Beijing’s use of economic measures to punish and rein in behavior by foreign governments and companies that displeases Chinese officials.

But more than anything else, this shift was driven by the urgent need for climate action and by two bills that Mr. Biden signed into law last summer: a bipartisan bill to shower the semiconductor industry with tens of billions of dollars in government subsidies, and climate legislation the so-called about reducing inflation, which companies jumped on to make a profit.

These bills sparked a wave of newly announced battery factories, solar panel factories and other projects. They also launched an international subsidy race that developed after deep controversy in the immediate aftermath of the signing of the climate law.

The lucrative US support for clean energy and semiconductors – along with stricter requirements for companies and government agencies to buy US-made steel, vehicles and equipment – has put unwelcome pressure on competing industries in allied countries.

Some of these fears have been quelled in recent months. The United States signed an agreement with Japan in March that will make Japanese-made battery materials eligible for the benefits of the Inflation Reduction Act. The European Union is seeking a similar deal and has proposed its own $270 billion program to subsidize green industries. Canada has passed its own version of Biden’s climate law, and the UK, Indonesia and other countries are vying for their own contracts for critical minerals.

Administration officials say former allies in the hierarchy have bought the potential benefits of rich democracy’s coordinated industrial strategy.

At the Group of 7 meeting, “you will see a degree of convergence on this issue that, from our perspective, may continue to transform the Inflation Reduction Act from a source of friction into a source of cooperation and strength between the United States and our G7 partners,” Jake Sullivan, a security adviser, told reporters. national on Air Force One when Biden was flying to Japan.

Some Group 7 officials say the alliance has much more to do to ensure that fast-growing economies such as India benefit from increased investment in the new energy economy. “It’s important that the acceleration this will bring doesn’t deter investors from investing around the world,” said Kirsten Hillman, Canada’s ambassador to the United States, in an interview.

One country they don’t want to see benefits is China. The US has placed severe restrictions on China’s access to US technology, namely advanced chips and the machinery used to produce them. And it relies on its allies to try to enforce global limits on technology sharing with Russia as well as China. All these efforts are aimed at hindering China’s further development in advanced manufacturing.

Biden officials have urged allied countries not to interfere in supplying China with chips and other products they can no longer obtain from the United States. The US is also considering further restrictions on certain types of Chinese chip technology, including a likely ban on venture capital investments, which US officials are expected to discuss with their counterparts in Hiroshima.

While many Group 7 governments agree that China poses a growing economic and security threat, there is disagreement over what to do about it.

Japanese officials have been relatively eager to discuss coordinated responses to China’s economic coercion after Beijing cut off Japan’s supply of rare-earth minerals in a clash more than a decade ago.

By contrast, European officials were more divided over whether to risk close and lucrative business ties with China. Some, like French President Emmanuel Macron, have rejected US plans to separate supply chains from China.

Ms von der Leyen, President of the European Commission, pushes for “risk reduction” with China, which includes recognizing China’s growing economic and security ambitions while reducing Europe’s dependence on China for its industry and defense in a targeted manner base. European officials said in Hiroshima that they were pleased to see American leaders coming closer to their approach, at least rhetorically.

Still, the allies’ industrial policy threatens to complicate an already difficult relationship with China. Consulting and advisory firms with ties to foreign countries have been the subject of raids, detentions and arrests in China in recent months. Chinese officials have made it clear they see export controls as a threat. Embracing a phase used by US officials to criticize Beijing, the Chinese embassy in Washington warned the Group of 7 this week against so-called “economic coercion.”

Mr. Xi issued a similar rebuke to Mr. Biden in Bali last fall. He pointed to the late 1950s, when the Soviet Union withdrew support for the Chinese nuclear program.

China continued nuclear research, Xi said, and four years later detonated its first atomic bomb.

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