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The New Green Industrial Strategies and Development Prospects for Africa
Volume 3, May 2023 Part 2
Mzukisi Qobo
The New Era of Green Industrial Policies in the EU and the US
Under Joe Biden’s Administration, America is undertaking a large-scale green energy transition through the Inflation Reduction Act, signed into law in August 2022. This Act entails tax credits and subsidies valued at $369 billion for clean energy projects. Goldman Sachs estimates that the US government budget cost could rise three-fold to $1.2 trillion, yielding $3 trillion worth of investments across the renewable energy sectors, including solar, electric vehicles, carbon capture, and hydrogen.
Recently I came across a piece featuring Jake Sullivan, the US National Security Advisor, who spoke at the Brookings Institution in May this year. In his presentation, Sullivan underlined the new cornerstone of America’s international economic policy. Let me summarise his points as they are relevant to the theme of this newsletter.
The Biden Administration seeks to reclaim its place as a leading global economic power, especially after its economic vitality was undermined by the global financial crisis and lost ground to China in the competition to dominate clean tech and semiconductors. According to Sullivan, the US government will pursue a modern industrial and innovation strategy that could compete with China.
As Sullivan suggested, America will no longer depend on markets alone to allocate capital productively and efficiently; it will not put blind faith in trade liberalisation as a basis for building international competitiveness. Although the US has been faithful to liberal markets in word only, the public pronouncement by Sullivan is remarkable for its baldness.
Unlike in the past where the US had been cagey about its embrace of industrial policy, under the Biden’s Administration America is openly championing an industrial strategy that integrates growth imperatives and national security considerations, as well as combine private sector ingenuity and public investment in infrastructure.
Finally, the American government will be pursuing modern trade agreements that support the country’s international economic policy, especially to build diversified and resilient supply chains for clean energy. In addition, it will seek higher labour and environmental standards, push for tax fairness, set standards for technology, and tackle corruption through trade deals.
Let me return to the Inflation Reduction Act as one key instrument to achieve some of these objectives.
America intends to build global dominance in clean technologies using direct state support. Even though the US is committed to decarbonization, its ultimate goal is to benefit its economy, boost its competitiveness in clean technologies relative to China, and create jobs domestically.
Hence local content requirement is a feature of the Inflation Reduction Act. So, this is not just about doing “whatever it takes to limit damage” to the environment, as Paul Krugman suggests in his recent blog. This new industrial policy thrust is both an environmental play, and an industrial capacity and global dominance play.
The EU’s Response
In the EU, the green industrial policy has been in the making for some time. It picked up pace in the wake of disruptions occasioned by Russia’s war on Ukraine and Russia’s subsequent weaponization of energy to retaliate against Europe’s support of Ukraine.
The EU’s answer to America’s Inflation Reduction Act takes the form of a Green Industrial Plan, which the bloc unveiled in March 2023. This Plan is aimed at promoting upstream research, innovation, and strategic industrial projects, which it hopes to finance through the revised emissions trading system.
The core elements of this programme are to achieve an improved regulatory environment to enable greater participation by companies, promote human capital development, and create well-paid quality jobs in Europe.
The flagship funding instrument, the EU Sovereignty Fund, will see the mobilization of resources to 700 billion Euros by 2030 to support companies investing in clean tech. For this purpose, the EU has suspended its market-based rules on state aid in order to provide fiscal support to private companies investing in green energy projects.
According to the EU’s competition policy, the state is prohibited from giving fiscal support to companies on a selective basis. The EU’s new industrial policy, however, signifies a change in state aid rules.
The EU seeks to enable a flow of fiscal support to private companies in the clean sector in ways that were not possible under the state aid rules before. What we are witnessing is the emergence of a new form of state-supported capitalism on both sides of the Atlantic to compete with China’s state capitalism.
There are other additional measures that are integral to the EU’s green industrial plan to build its industrial capacity in clean tech value chains. These include the Critical Raw Materials Act and Carbon Border Adjustment Mechanism (CBAM). These trade policy instruments target global supply chains and cross-border flows of carbon-intensive products.
The former seeks to enable the EU to have unfettered access to critical raw materials supplies on a diversified basis. The latter, however, will discipline carbon-intensive imports, possibly with the exception of critical raw materials, by applying higher tariffs. The EU and America’s industrial policy approaches will have far-reaching implications for the global trading system and developing countries’ participation in global supply chains.
Compounding the difficulties for developing countries are the EU and the US announcements of indicative dates for halting the production and trade of vehicles that use internal combustion engines. The Biden Administration has set 2035 as the end date for procuring vehicles that have internal combustion engines as part of his Administration’s goal to reduce total federal government emissions by 65 percent by 2030, with net zero emissions achieved by 2050. California has already signalled a ban on gas-powered cars by 2035. These proposed bans are part of a drive to promote the production of electric cars domestically to compete with China’s burgeoning clean auto sector.
The European Parliament voted in February 2023 to ban all sales of petrol and diesel cars by 2035.
Developing countries like South Africa, which are exporting vehicles to the US and the EU, must urgently diversify export markets while redirecting incentives towards producing electric vehicles and components at home. Success requires that government coordinates closely with the private sector to co-create new green industries.
Transatlantic Alliance on Clean Energy
President Biden and the President of the European Commission, Ursula van der Leyen, issued a joint statement in April 2023 expressing their commitment to cooperate on building clean energy supply chains by aligning their respective strategies. Diversifying critical minerals and battery supply chains is vital to this cooperation. The European Union is particularly concerned about access to raw materials in general, and more so of those inputs that are part of the supply chains for clean energy.
Raw materials are used across industries, including in modern technologies such as cell phones and computers; they are also used in heavy manufacturing, for example, the aerospace and defence industries. But those deployed in clean technologies – “critical raw materials” - are linked to producing solar panels, wind turbines, electric vehicles, and energy-efficient lighting.
For the European Union, securing unhindered access to raw materials is a strategic priority for its trade and industrial policies.
We will recall that the EU forced the African sub-regional groups with which it negotiated the Economic Partnership Agreements between 2005 and 2007 to eliminate export taxes. It also prohibited them from introducing new export taxes. These negotiations were a classic case of the EU applying its economic muscle to constrain African countries from using export taxes for industrial development.
Export taxes enable countries with comparative advantage in certain commodities to restrict the exports of those commodities. Such restrictions ensure that designated primary products are available for domestic beneficiation or value addition.
Beneficiation helps to create additional jobs along the value chain. Countries like China have built local processing capacity and competitiveness in the electric vehicle sector by using export taxes to restrict the sale of critical raw materials abroad.
The rationale for securing access to raw materials will be even more urgent given the geostrategic rivalry between China and the US over trade and technology supremacy. We may likely see another surge in the scramble for Africa’s raw materials by great powers.
African Agency
African countries that are rich in natural resources must be allowed a reasonable window and policy flexibility to use their comparative advantage in raw materials as levers for achieving development outcomes.
Africa has a high share of the world’s mineral reserves in critical minerals such as the platinum metals group, cobalt, chromium, vanadium, and titanium. Countries such as Zimbabwe have lithium in abundance.
As such, the continent must use its natural resources strategically for leverage in bilateral trade deals.
Africans must not be satisfied with promises of greater market access for unprocessed products. Instead, Africans should insist on value addition and better terms of trade and participation in global supply chains.
Also, Africans must resist any new attempts by the EU to prohibit export taxes on critical raw materials. WTO rules allow the use of export taxes, and Africans must defend these in bilateral trade deals. They should press for more investment-driven bilateral trade deals so that they can build manufacturing value chains.
