It wasn’t just U.S. watchers who were surprised and intrigued last week when West Virginia Sen. Joe Manchin recalled his hitherto largely nominal party affiliation and struck a constructive deal with management. of the Democratic Senate on climate and clean energy policy.
Seen from abroad, the deal is also notable for offering one of the first seemingly genuine examples of “friendshoring” – favoring strategic allies when building supply chains – seen in the wild. He delighted Canadian automakers by extending a tax credit to electric vehicles assembled in North America, not just the United States. It also favors battery minerals processed by economies with which the United States already has preferential trade agreements.
Manchin isn’t exactly considered a knee-jerk internationalist, but discussions of energy security and cross-border pipelines with Canadian businesses and politicians seem to have convinced him of the broader strategic imperative to build supply chains that exclude China.
The appeal of friendhoring (also known as ally-shoring) has risen sharply. It was first exacerbated by U.S. geopolitical tension with China, then accelerated by sanctions and trade blockades that followed Russia’s invasion of Ukraine. But the concept remains strewn with multiple pitfalls.
First of all, it’s not always clear who your friends are and how you should choose them – and in fact choose between them. Fireworks may light up the skies over Ontario during the Manchin affair. But the EU, Japan and South Korea could also indignantly claim to be considered geopolitical allies, or even friends, of the United States. Brussels has already complained about the discriminatory nature of an existing proposed EV credit and limited to products made in the United States. He is highly unlikely to be encouraged – or convinced that the tax credits are in line with World Trade Organization law – by the magic circle that is widening to include only Canada and Mexico. .
The other provision of the agreement, aimed at favoring battery minerals produced or recycled in countries with which the United States has a preferential trade agreement, is also problematic. The list includes South Korea but not the EU, despite years of painful negotiations over a trade deal between Brussels and Washington, nor Japan.
Second, making an instant decision about political reliability more generally is quite difficult, but trying to determine which friendships are likely to last is nearly impossible. This also applies to other countries that assess US loyalty. Another presidential term for Donald Trump, or another economic nationalist in the same vein, and supply chains built according to Joe Biden’s foreign policy preferences could quickly be shattered in another crisis of blind protectionism.
In any case, few countries will want to be part of a gang of American friends if it exposes them to strategic and commercial retaliation from Beijing. It is not only emerging markets such as Vietnam and Brazil that have good strategic relations with the United States, but are also closely linked to supply networks involving China. EU governments have also resisted being automatically dragged into the US corner, for example by refusing to institute a blanket ban on Huawei’s participation in 5G networks.
Third, the tools available to authorities to reshape supply chains along strategic lines are clumsy and expensive. On the export side, governments can restrict sales of sensitive technologies, as the US and EU have done for semiconductors and other products destined for Russia and China. But with imports, companies will opt for cheap inputs and it will take serious fiscal or regulatory efforts to force them to switch suppliers on a large scale. This has implications for public finances or commodity prices, or both.
Unless the electric vehicle tax credit improbably promotes a North American supply chain so incredibly efficient that it will be able to outperform all competitors even when removed, American consumers will end up by paying more for their cars. It might be hard to argue that the public should pay higher taxes or buy more expensive goods because of a controversial official assessment of political risk, itself subject to self-interested lobbying by domestic producers.
Finally, disruption of supply for political reasons is not necessarily the greatest threat to vital imports in all cases. To be sure, there are sometimes very obvious impacts of government interference for strategic purposes, such as the current food and fertilizer shortages caused by Russia’s blocking of Black Sea exports. But even before the war in Ukraine, the global economy had suffered a crisis in many supply chains.
These reflected shocks to manufacturing production and demand and the global shipping industry rather than malicious interventions by hostile governments. It will mean another awkward conversation if voters see supply chains painstakingly redesigned by state intervention and not working anyway.
Assuming the Manchin deal survives, the tax credit provisions will be a valuable test of the ability of governments in general and the United States in particular to shape supply chains based on strategic considerations. The questions on the proposals are clear. Are they legal? Are they affordable? Will they work? It is up to the supporters of friendship to show that the answer is yes.