US and Europe fight for electric vehicles

Europe and the United States want more of the electric vehicle supply chain at home. Car factories, battery plans and refineries create jobs and useful know-how that countries want for themselves. Factories at home are also less likely to get caught up in trade wars.

But there’s a finite number of car factories, battery plants and refineries. Everyone wants them. Not everyone can have them.

To encourage manufacturers to choose Alabama over Aalborg, the US is giving lots of money to companies who build electric vehicle factories. It’s working!

From a FT story about how Volkswagen is prioritising a new EV factory in the US:

Another executive said: “We’ve been contacted by many US states and they all highlight the IRA. When we put the figures together, the conditions they offer are much more interesting than the conditions they offer in Europe.”
VW said no decisions had been made on the locations of its plants in North America or Europe and it was committed to its plan to build more cell factories in Europe. “But for this we need the right framework conditions.

“Right framework conditions” is a fun way to say “more money please”

Industrial policy like this is full of clever rules to force companies to use subsidies wisely instead of growing fat and slow on the government teat: Half the money upfront, half on completion; government share in the profits; more money if the company exports lots and proves to be internationally competitive. There might also be rules so companies who take subsidies commit to government priorities, say paying workers fairly or offering child care.

But there’s only so many factories! Will competition cause governments to lower standards? A race to the bottom on industrial policy? At the very least governments are likely to pay up. Let’s see how many framework conditions the EU offers.

Fiscal policy and industrial policy – new bedfellows?

In the north of Sweden, the EU is part-funding a new battery ‘gigafactory.’ When finished, it will be larger than Tesla’s factory in Nevada. The project is part of the EU’s investment in a new battery industry, its answer to competition from the US and China in the industries of the future.

Across the West, this kind of industrial policy has been making a comeback in the last decade. Industrial policy is a big tent that includes everything from coordinating private actors and funding basic research, to subsidies, long-term investments or public guarantees.

Does the rehabilitation of fiscal policy strengthen the case for it?

One of the factors driving the rehabilitation of fiscal policy has been the reduced risk of crowding out private investment. Low interest rates and slack supply for the foreseeable future mean crowding out through higher interest rates is unlikely. The low productivity of capital means the productivity differential between public and private investment might be diminished. Then there is the list seemingly worthwhile public investments like decarbonisation.

To date, advocates have focused on the classic areas for government spending like infrastructure, health, and education, areas which are often underfunded by the private sector, but are also likely to increase the nation’s long-term productive capacity.

To what degree should this logic be applied to industrial policy?

It seems to me there is no in principle reason not to make industrial policy part of fiscal expansion – whether through tax credits or even direct spending funneled through state investment banks. We can all agree that “wasteful and poorly designed spending programs” must be avoided, but what constitutes that is an empirical question which should be examined.

To date, much of the research has focused on industrial policy in the context of developing countries. For the developed world, a 2014 report by the OECD was cautiously optimistic, but said more research is required.

The simultaneous rehabilitation of fiscal spending and industrial policy offers left-wing politicians a way to resolve tensions between their socially liberal and working class supporters by encouraging job creation in a renewed and sustainable industrial base.