G7 Countries Borrow China’s Economic Strategy

G7 Countries Borrow China’s Economic Strategy

In the midst of his face-to-face meeting with President Biden in Indonesia last fall, Chinese leader Xi Jinping issued an unsolicited warning.

Mr. Biden had in previous months signed a raft of legislation aimed at boosting America’s industrial capacity and introduced new restrictions on technology exports to China, hoping to dominate the race for advanced energy technologies aimed at combating the could contribute to climate change. For months, he and his associates had worked to recruit allied countries to enforce their own restrictions on technology shipments to China.

The effort reflected the kind of industrial policies China had pursued to become the world manufacturing leader. In Bali, Mr Xi urged Mr Biden to back off.

The President was not persuaded. Mr. Xi’s protests only further convinced Mr. Biden that America’s new industrial approach is the right one, according to a person familiar with the exchange.

As Mr. Biden and other G7 leaders meet this weekend in Hiroshima, Japan, a key focus of their discussions will be how to rapidly accelerate what is now an internationally coordinated round of large-scale public investment. For these prosperous democracies, the goal is both to reduce their dependence on Chinese manufacturing and to help their own companies compete in a new energy economy.

Mr. Biden’s legislative agenda, which includes bills focused on semiconductors, infrastructure and low-carbon energy sources, has begun to spur potentially trillions of dollars in government and private investment in America’s industrial capacity. These include subsidies for electric vehicles, batteries, wind farms, solar systems and much more.

The spending — the most significant US intervention in industrial policy in decades — has shaken many of America’s key allies in Europe and Asia, including key leaders of the Group of Seven. European nations, South Korea, Japan, Canada and others are pushing for greater access to America’s clean energy subsidies while launching accompanying initiatives of their own.

“This race for clean technologies is an opportunity to move faster and further together,” said Ursula von der Leyen, President of the European Commission, after a meeting on the economy at the Group of Seven summit on Friday.

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

Mr. Biden and his colleagues of 7 have embarked on a project with two ambitious goals: to increase demand for technologies needed to reduce emissions and combat climate change, even by decades, and to create workers in the United States and in Allied countries have an advantage over Chinese workers in meeting this demand.

Much of this project has been launched since the G7 leaders met in the German Alps last year. The wave of the Group of Seven’s recent actions on supply chains, semiconductors and other countermeasures against China are based on “economic security, national security and energy security,” Rahm Emanuel, the US ambassador to Japan, told reporters in Tokyo this week.

He added: “This is a game changer for a new and more relevant G7.”

Mr Emanuel said the effort reflected growing impatience among leaders of the Group of Seven, in what they describe as Beijing’s use of economic measures to punish and deter behavior by foreign governments and companies that China officials don’t like.

But most importantly, the change has been driven by the urgency of climate action and by two laws Mr. Biden signed into law last summer: a bipartisan bill designed to shower the semiconductor industry with tens of billions of dollars in government subsidies, and the climate provisions of the Inflation Reduction Act , from which companies benefit immediately.

These bills have sparked a wave of newly announced battery factories, solar panel factories and other projects. They have also sparked an international subsidy race that developed after controversy erupted immediately after the climate law was signed.

Lush US subsidies for clean energy and semiconductors — along with stricter requirements for companies and government agencies to buy US-made steel, vehicles and equipment — have put unwelcome pressure on competing industries in allied countries.

Some of these concerns have been dispelled in recent months. The United States signed an agreement with Japan in March that allows battery materials made in Japan to reap 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 the Biden climate law, and the UK, Indonesia and other countries are vying for their own key minerals deals.

Government officials say once disgruntled allies have accepted the potential benefits of a concerted industrial strategy between wealthy and Democratic parties.

At the Group of Seven meeting, “you will see a degree of convergence in this regard, which we believe will continue the transformation of the Inflation Reduction Act from a source of friction into a source of cooperation and strength between the United States and our countries G7 partners,” Jake Sullivan, the national security adviser, told reporters on Air Force One as Mr. Biden flew to Japan.

Some in the Group of Seven say the Alliance needs to do much more to ensure fast-growing economies like India benefit from increased investment in a new energy economy. “It’s important that the acceleration this creates doesn’t discourage investment around the world,” Kirsten Hillman, Canada’s ambassador to the United States, said in an interview.

One country they don’t want to see benefit from is China. The United States has imposed sweeping restrictions on China’s access to American technology, particularly advanced chips and the machinery used to manufacture them. And it has leaned on its allies as it seeks to impose global restrictions on technology exchanges with Russia and China. All of these efforts aim to hamper China’s further development in advanced manufacturing.

Biden officials have urged allied countries not to intervene to supply China with chips and other products that the country can no longer source from the United States. The United States 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 of Seven governments agree that China poses a growing economic and security threat, there is little consensus on what to do about it.

Japanese officials have been relatively eager to discuss coordinated responses to economic coercion from China after Beijing tried to cut off rare-earth metal supplies to Japan in a clash more than a decade ago.

In contrast, European officials have been more divided on whether to risk close and lucrative business ties with China. Some, like French President Emmanuel Macron, have dismissed US plans to decouple supply chains from China.

Ms von der Leyen, the President of the European Commission, is pushing for a “de-risking” of relations with China, which includes recognizing China’s growing economic and security ambitions while purposefully reducing Europe’s dependence on China in its industrial and defense base. European officials in Hiroshima said they were pleased that American leaders were becoming more aligned with their approach, at least rhetorically.

Nevertheless, the allies’ industrial policy push threatens to complicate the already difficult relations with China. Consultancy and consulting firms with foreign ties have been the target of raids, detentions and arrests in China in recent months. Chinese officials have made it clear they view export controls as a threat. Echoing the policy of American officials in criticizing Beijing, the Chinese embassy in Washington warned the Group of Seven this week about what it described as “economic coercion.”

Mr Xi delivered a similar rebuke to Mr Biden in Bali last fall. He pointed to the late 1950s when the Soviet Union withdrew its support for China’s nuclear program.

China’s nuclear research continues, Mr Xi said, and four years later the country detonated its first nuclear bomb.