New Shores Toward a New Model For Global Trade

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This transcript is from a CSIS podcast published on October 26, 2023. Listen to the podcast here.

News Clip: Let's talk about globalization and whether the phenomenon is over.

News Clip: Is the Ukraine war the beginning of the end of globalization?

News Clip: We've heard it from a number of business leaders. Globalization has been crumpled up and thrown into the bin. Is it a little early to be dancing on the grave of globalization? 

Allegra Dawes: In the weeks following Russia's invasion of Ukraine, there was a flurry of articles, commentaries and videos predicting that the event signaled the end of globalization. Part of this prediction was based on policymakers and business leaders seeing the risks of global supply chains in countries with dissimilar political, economic and human rights alignments.

Throughout this podcast, we've seen how the Inflation Reduction Act has triggered a substantial amount of investment in deploying and manufacturing clean energy in the U.S. Across batteries, solar and offshore wind, the subsidies included in the IRA have launched a new wave of investment in domestic industry. Businesses have both moved to bring supply chains closer and to diversify supply chains dominated by China.

While the IRA is not a trade bill, the friendshoring and onshoring stipulations in the bill represent a dramatic shift in the way the U.S. approaches trade. Does this new policy experiment signal the end of globalization? Are we heading towards a world in which clean energy supply chains are fragmented? What if industrial policy, friendshoring and onshoring aren't the right path to take?

From the energy security and climate change team at CSIS, I'm Allegra Dawes, and this is News Shores, a podcast series on green industrial policy and the U.S.' effort to onshore and friendshore clean energy supply chains. In this episode, we'll be taking a closer look at what a more fragmented global economy means for the energy transition and how trade has become a new frontier in the effort to address climate change.

Industrial policy, and the U.S.' attempt to friendshore and onshore clean energy supply chains is a component of a new vision for global trade. Trade has a unique position in combating climate change and unleashing the energy transition. Ambassador Jayme White, the Deputy United States Trade Representative has seen a growing connection between climate and trade.

Jayme White: Having been around international trade for a long time, the newest issue among many is climate and trade, how they're connected, and it relates also to supply chains and durable supply chains. And so, when you think about trade, you think about what happens to the border. When you think about the 232 tariffs, for example, it's about excess capacity, but also, we're talking about products that are very carbon intensive.

And so, this question around carbon intensity and trade and border measures is one that has been percolating for quite a while, and it's not just the U.S. that's kind of grappling with climate change and their own economies, but also what happens to the border is the key aspect of managing a policy to try and get to net-zero

Allegra Dawes: The goods the U.S. imports that the border and who we import those goods from are critical for the energy transition. But as we've heard in previous episodes, onshoring can only go so far. The U.S. cannot produce every mineral and component that is needed for a net-zero future. Peter Rashish, the Vice President and Director of the Geoeconomics Program at the American German Institute sees this as a key reason trade can combat climate change.

Peter Rashish: I think that there is a sense that even still very large countries like the United States don't have all the resources that they need to successfully accomplish the green transition. And even if they did or try to acquire those all on their own would not be cost-effective. They have everything produced in the United States, so you need to look for those goods and services elsewhere. And so, trade can help ensure that supply chains for decarbonization are working efficiently.

And I think that's the main thing people think about when they think of trade having a particular role in the context of fighting climate change. But I think right now it's probably trade policies. I mean, I hesitate to use the word unique, but something close to unique ability to create rules. In other words, governments using all the resources they have at their disposal to influence who does what and how in the international economy and in this case, in the climate space, and I think it's that interaction of trade and climate in the rules area where things are getting quite interesting.

Allegra Dawes: Efficient supply chains are one of the most significant benefits of trade relationships. The U.S. onshoring push must balance the need for energy security and domestic economic benefits with the fact that global supply often results in lower costs and greater efficiency. We'll return to that concept a little later in the episode.

First, Peter mentioned the importance of trade policies and the rules that govern trade. In particular, the U.S. and Europe have seen a significant amount of activity in this area. Peter believes that the transatlantic relationship is essential for using trade to combat climate change.

Peter Rashish: Even though the U.S. and the EU aren't what they once were, they're still somewhere between 40 and 50% of the global economy and they have the most integrated relationship bilaterally. And I think the two of them sense that they should be responsible for setting the pace for decarbonization and that other countries can emulate.

And why trade policy, particularly between the U.S. and the EU? I think it has to do with providing a way to create incentives to up their game when it comes to climate change, right? I think that that is clearly the case with the EU's carbon border adjustment, which replace a tariff or attacks on imports of carbon intensive goods. But I think it's also something that's at the center of the ongoing negotiations between the U.S. and the EU for what is called a global agreement on sustainable steel and aluminum.

Allegra Dawes: Peter mentioned the EU’s carbon border adjustment, a policy that would impose a price on carbon intensive goods entering the EU. Unlike the IRA, this is explicitly a trade policy. However, both bills underscore a growing awareness and desire to protect domestic industries while accelerating clean energy deployment. To some degree, the EU and U.S. share similar goals for climate and trade.

Peter Rashish: I think they share a number of the same goals. I mean, they're quite similar economies and act in many similar ways in the global economy, so that's not completely surprising. I think they both have this goal of, we've been discussing of using trade to encourage other countries to decarbonize also in a bit more self-protected way to prevent their industries from migrating to other countries with lower environmental standards.

I think they both want to ensure that supply chains are providing inputs to manufacturing that are as green as possible, something that they've been discussing among other places in their joint trade and technology council. And I think they both agree that any reform of the WTO whose rules really haven't changed since its founding almost 30 years ago, should include some areas related to climate like subsidies.

Right now, the rules governing subsidies to fossil fuels are, it's fair to say, not strict enough, whereas they're not leaning enough towards subsidies of renewable energy. So, I think those are some areas where the U.S. and the EU really do take common approaches.

Allegra Dawes: Additionally, both the U.S. and EU see China's concentration of clean energy supply chains as a potential threat to energy security. Peter uses Germany as an example.

Peter Rashish: Germany has decided that it has no choice but to make its decarbonization agenda and its de-risking agenda work together. If you look at Germany's China strategy or its national security strategy issued a little before that, there is really a remarkable focus on avoiding unilateral dependencies of the kind that I think Germany thinks got itself into trouble in the energy area with Russia. And that's a big lesson.

This is probably on the economic side, the main element of that kind of rethinking of Germany's approach. So that is being carried over into other areas and it's being carried over into the relationship with China. I think specifically it's being carried over into industries related to the green transition because if you look right now, Germany imports huge amounts of inputs for solar energy, of critical minerals for wind power, and it's increasingly importing Chinese made electric vehicles.

And that's of course in a sector where Germany has traditionally been very strong and remains very strong. And I think that Germany is concerned to increase sort of its climate sovereignty and the EU's climate sovereignty.

Allegra Dawes: While there is alignment on the need to use trade as a tool to address climate change, the U.S. and its allies will likely take different paths to achieve this goal. The IRA, subsidies for industries and energy at home and the CBAM show how diverse this policy space is. Ambassador White frames it this way.

Jayme White: Top line is that countries are trying to address the climate crisis and the way we go about it might be different, but we're all rowing in the same direction. And so whether it's the CBAM or it's other measures that we can take, the point is that we're trying to address the climate crisis and we're working with our colleagues in Brussels on CBAM. They have a very different mechanism.

They've got kind of a cap and trade sort of system, and we have a different system here, but we're all trying to find ways in which we incentivize renewable energy and to decarbonize. And so the question is how we coordinate and cooperate to achieve what are the same goals? We just are going to end up doing it differently.

Allegra Dawes: This difference of approach is not without concerns and challenges. The IRA has at times been criticized by allies as protectionist.

News Clip: Brussels says those benefits for U.S. car makers put their European competitors at an unfair disadvantage.

News Clip: The European Union has once again stressed its concerns over discriminatory elements of Washington's Inflation Reduction Act and urged their need for action so that member states receive equal treatment.

News Clip: Ursula von der Leyen says the generous tax breaks in America's new Inflation Reduction Act could lure away EU businesses and disadvantage European companies.

Allegra Dawes: However, ambassador White thinks that more countries are beginning to see the IRA as a model for how they can stimulate domestic green industry and deployment.

Jayme White: When it comes to the IRA, at first there was concerns and questions. That seems to have subsided, and now it seems like other countries are looking at the IRA as a model for what they might be able to do. That's my feeling. But my experience so far is there are a lot of countries that are democracies, that have shared values as the U.S. and they look at friendshoring as a way to peel back investment in non-market economies and instead attract investment in their countries and countries that are like-minded in terms of market economics and democratic values.

Allegra Dawes: The IRA has a narrow definition of the friends included in green energy supply chains. Some of the domestic content requirements, particularly from minerals and components used in batteries require sourcing from the U.S. or from free trade agreement partners.

Some have argued that this is too narrow and risks limiting the growth of EVs down the road. Despite this, there is room to expand the U.S.' cooperation with FDA partners in clean energy supply chains. Ambassador White highlights some of the work the USTR has done surrounding FTAs and other trade instruments that address these concerns.

Jayme White: There's a lot of work that USTR does that doesn't show up in headlines. We have a lot of FTAs, especially in the Western hemisphere. Those FTAs, free trade agreements, they are not static. Within those FTAs there are work streams and committees that do work on the various chapters, and there are ways in which we're kind of updating those FTAs over time.

So that's important. And we have lessons learned, whether it's with Chile or Peru, Columbia or DR CAFTA, USMCA, another example, the newest FTA. So we do work through the FTAs. I was just in Mexico, as you mentioned. So I had by lapse with Mexico and Canada, and we work on issues and those issues relate to supply chains. But in addition to the FTA work, we have other work in the region, TFAs, we have TTCS, ATEX, et cetera.

They're basically agreements around rules which are really important. So we do continuous work and at every single meeting we talk about supply chains, not just the U.S. bringing it up, but everyone's talking about supply chains. And so that's an important conversation and we're using every tool in the trade toolbox we can use to deal with supply chains. And the same is true with Europe.

We've got the TTC where we have ministerial engagement, we have engagement at my level, and we talk about technology, we talk about chips and we talk about supply chains. And when it comes to Europe, there's nothing more acute than the pressure they have felt with being reliant, too reliant upon perhaps one country for inputs.

And so the two things that I want to just convey is over the last few years that the topics that have risen in the trade world is supply chains and climate. 20 years ago, the new issue was labor and environment. We've worked through that, and right now it's supply chains and climate.

Allegra Dawes: One tool in the trade toolbox or rather organization that could be particularly influential is the World Trade Organization. Peter believes that the WTO has begun to adapt to the confluence of trade and climate.

Peter Rashish: I think the key thing for the WTO is to continue doing what they're doing. They've made some innovations, they've created a new dialogue on the trade and climate, which among other things is looking at the very important issue of subsidies to different energy sources. But I think that ultimately there needs to be a clarification about the WTO's current rules.

And I think that specifically there needs to be a clarification of the exceptions that countries can call upon in Article 20, which includes some environmental exceptions. But the problem is that while there is this room in the existing WTO rules that allow countries to invoke the greater concern of the environment over other obligations that they have in the WTO, that same exception, Article 20 said, well, you can call on these exceptions, but they can't be exercised in a discriminatory way.

Anti-discrimination is kind of right at the core of the WTOs DNA, and you see that in Article one and Article two on the Most Favored Nation status and national treatment. So to me, there's kind of an ambiguity inherent in the WTO's rules, and I think a clarification of that would be important because that would give countries a much more solid basis when they consider national actions that would use trade to combat climate change.

Allegra Dawes: Reworking the institutions that govern international trade could provide a strong rules-based approach to addressing climate change and energy supply chains. For now, it is clear that green industrial policy is set to play a growing role in how nations approach climate change, energy security, and international trade.

This podcast has taken a relatively positive view of green industrial policy, but it is important to note that industrial policy can be divisive. Some see it as a necessary tool to achieve strategic goals like addressing climate change, ensuring energy security and improving resilience. Others see it as a potentially wasteful policy. David Victor, who we heard from in episode two, put it this way.

David Victor: Far right is concerned about ... libertarians are concerned about industrial policy, and the far left is excited about an industrial policy. And some of the far right is actually excited about industrial policy. Industrial policy, it's like a Rorschach test, whether you see a butterfly or a vampire, it's happening. So, we all have this incredible common interest in spending this money effectively.

Allegra Dawes: The IRA and the U.S.' embrace of green industrial policy is an experiment. And while we are aiming to unlock green energy and ensure energy security, the results of this experiment are still uncertain. In fact, assessing the success of onshoring and friendshoring is challenging according to Colin Grabow, research fellow at the Cato Institute.

Colin Grabow: This is one of the interesting exercises. How do you assess the success of industrial policy? I think some people may think it's pretty straightforward. Well, if a company does poorly, Solyndra a classic example, well, that's a failure. And then if a company takes hold and starts producing things, seems to have a market presence, is growing, well, that's obviously a success, but it's a little bit more complicated than that because we have to take into account opportunity costs.

If I give $10 billion to company X and they do something amazing, well, what else would've happened with that 10 billion if I had done something with that $10 billion? What's the opportunity cost? What else could have been done there? Would that have generated an even higher return? These things are very difficult to assess. So that's one of the issues with industrial policy and assessing the success.

Allegra Dawes: Additionally, subsidies do not solve every problem or challenge facing the deployment of these technologies. We heard previously about some of the macroeconomic challenges offshore wind is facing in the U.S. and some of the permitting and community relations challenges mines can face. Colin highlights the importance of solving some of these challenges that are not easily solved solely through subsidies.

Colin Grabow: So the question is, how do we best tackle these? I think a great starting point for these sorts of conversations would be to identify what are the barriers out there that prevent us from getting to this clean energy future? Are there things that we're doing that are counterproductive? And start with removing those rather than doling out new subsidies, starting new government programs.

Allegra Dawes: Beyond some of the roadblocks that cannot be solved by subsidies alone, there are also legitimate questions over whether onshoring actually delivers more resilient supply chains or accelerates the energy transition. Reworking supply systems takes time. Many companies are operating under tight timelines to comply with the IRA with little clarity over the exact implementation standards of onshoring and sourcing provisions.

Colin Grabow: Unfortunately, along with a federal funding comes federal conditions, protectionists, domestic content restrictions and requirements mandating that a certain percentage of the materials in these chargers be produced in the U.S. And people may think, well, that's great. I mean, I want to support American jobs and whatnot.

But if we're talking about climate change, if we subscribe to the idea, this is virtually an existential issue, this should be the issue above all others, we should do that as cheaply and efficiently as possible. And forget saving taxpayer money. It's all about just getting out there, making it attractive, making it competitive, and this hinders that.

And take the cost aside. If you talk to people that produce these things, they'll say, look, it's just going to make it more time-consuming to produce these. I've got to rearrange my supply chain. I have suppliers in place. I know where to get all the different components. Now I have to rethink this up and we're just going to delay things.

Allegra Dawes: And perhaps the most difficult challenge to the success or failure of onshoring and friendshoring is the role of China. Can these policies deliver a secure energy transition? What would be the proper role for China in clean energy supply chains? Colin believes that a narrower assessment of where energy security concerns may be in order.

Colin Grabow: I think about this to the extent that there are legitimate national security concerns. There are perhaps certain materials that say it's located in an unfriendly country. We don't want to be dependent on that one country if we find ourselves in a crisis situation, at a time of high tension and God forbid, an outright conflict. But I think we have to be very judicious about which materials we give that label.

Allegra Dawes: Few people, if any, would argue that the IRA is the perfect policy to achieve the wide-ranging goals of climate, energy security, and economic development. There are well-founded concerns that the requirements for domestic content or sourcing from free trade agreement partners leaves too many countries out of supply chains and hurts resilience.

Trade offers tools and rules that can help the U.S. and allies interact with one another. To support the energy transition globally, not only in the U.S. but in other countries as well, global trade remains essential. However, it will look different in a world where trade is used to address climate change. Ambassador White describes it this way.

Jayme White: When somebody says globalization, I know what they mean. I think back to when Tom Friedman was writing his first books and talking about globalization, but I think that today, globalization is not just economics only, not just trade only. It's about globalizing our values, globalizing the idea that our economies are linked, of course, but globalizing the goal to combat climate change, globalizing the goal to combat forced labor.

So globalization, I think is a broader issue from my point of view than just the economics of tariffs and tariff rate quotas, et cetera. So I think globalization is changing because we're trying to share our values generally and share those values in ways that make a difference for our supply chains and for our workers and for our farmers ranchers.

It's about being mindful of the supply chains and being more resilient so that when things happen, we're not overly reliant on one country or two countries or three countries, but we have friends that are producing inputs that we need and buying our products too. Define friend in nearshoring, friendshoring, our logical trading partners are in the Western hemisphere, Canada, Mexico, South America, our FTA partners, and of course to Europe.

So let's concentrate our efforts on showing up, if you will, those relationships. And it's the private sector ultimately, but we as policymakers can find ways in which we can work with countries through our FTAs or the other acronyms that we've talked about to make it easier for our producers to have diverse choices when it comes to inputs.

Allegra Dawes: Industrial policy and the related efforts of onshoring and friendshoring have come to define the Biden administration's approach to addressing climate. Climate and the energy transition is now an industrial matter. How much of these supply chains should the U.S. look to onshore? Can we become a significant producer of critical minerals and other key inputs for batteries, solar panels, wind turbines, and more?

Can we reach net-zero in a secure and affordable way? Over the coming years, these questions will be answered. For now, it is clear that industrial policy is here to stay. Now the U.S. needs to clarify its role in the global challenge of addressing climate change and building secure and sustainable supply chains for clean energy.

The first year of the IRA has seen a significant increase in investments in domestic clean energy. Green industrial policy shows a lot of promise in kickstarting the U.S.’ approach toward climate change. Questions remain. In the coming years, the role of onshoring and friend shoring supply chains to ensure energy and geopolitical security and to support global climate action will become critical. Whether this policy experiment will work in the long run remains an open question.

We’ll continue to assess clean energy supply chains and the U.S. energy transition strategy on our podcast, Energy 360.