August 8, 2023 • 24 mins
The Inflation Reduction Act has given the US an edge in future manufacturing, with billions of dollars in incentives to lure battery plants and chip makers to the US. But it’s also led to tension with close allies that can’t match the amounts the US is offering companies. Bloomberg’s Brian Platt, Gabrielle Coppola and Enda Curran join this episode to talk about how this competition—and the race to keep up with China—is reshaping the global green economy.
Read more: Subsidy Wars Heat Up With US Allies Forced to Pay Up or Lose Out
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:05):
All toll. Since I saw the Inflection Reduction Act and
the Chips and Science Act and the law, companies have
announced eleven billion dollars in manufacturing and clean energy investments
just in South Carolina, eleven billion dollars. Instead of exporting
jobs like we did for decades, we're now creating jobs
an exporting product.
Speaker 2 (00:27):
We've talked a few times on this show about how
Washington is spending billions of dollars to lure battery factories,
chip making plans, and other future tech manufacturing to the US.
But there's a less visible side to this story. Smaller
countries are losing out. They can't compete with the massive
(00:47):
subsidies the US and other rich nations can offer companies
to build on their shores. Bloomberg reporters Gabrielle Coppola and
a Current and Brian Platt report that this competition is
causing a lot of tension even among close allies like
the US and Canada, and it raises all kinds of
questions about winners and losers in an increasingly competitive global economy.
Speaker 3 (01:13):
I think the US is trying to almost build a
new global supply chain that does not rely on China.
Speaker 4 (01:19):
So governments are willing to dig in and say that
they've got to do this now to try and stay
in the game.
Speaker 5 (01:24):
These companies now walk into the room saying pay up,
or we're building it somewhere else.
Speaker 2 (01:31):
I'm West Kasova today on the big take. I'll see
your billion dollars and raise you fifteen, Brian. The story
starts with a factory in Windsor, Canada that gets caught
(01:51):
up in this global competition. Can you paint a picture
of what happened.
Speaker 5 (01:57):
Yeah, So this is a really huge battery factory being
built in the city of Windsor, which is just across
the US Canada border from Detroit. It's really in the
heart of Canada's auto manufacturing area of southern Ontario. In
March twenty twenty two, there was this big splashy announcement
where Stilantis, which is one of the world's biggest automakers.
(02:19):
It was number five in global sales last year. It
produces cheap Chrysler Ram That's what people would best know,
it asked, So, you know this major global auto company
was building a battery factory in Canada for its electric vehicles,
which was a huge deal for Canada to land one
of these big battery factories. It's the next generation of
auto manufacturing. Canada refers to these as anchor facilities, so
(02:43):
you know, to spin off a whole bunch of parts
suppliers around it. And so they announced it in March
twenty twenty two. It came with a subsidy package of
about a billion dollars and shovels hit the ground. They
started building it, and then a few months later the
US passed the inflation reduction at the IRA completely changed
(03:03):
the incentives, I mean, completely upended the whole regime. And
so when Canada had first announced this factory, it came
with about a billion dollars in Canadian capital incentives capital
grants for the factory, which was pretty typical for the
amount of subsidies that Canada would usually give a factory
like this. I mean it was maybe on the high end,
(03:23):
but it was a pretty typical grant really. And then
the IRA came along and suddenly this factory was if
it was built in the US instead, it could have
qualified for but one analyst told us is up to
nineteen billion in production subsidies, and so it kicked off
this huge problem for Canada of either it had to
match what the US was offering or it was going
(03:45):
to lose this factory that it had been so excited
about landing in the first place.
Speaker 2 (03:51):
And Gabrielle, that's really what this story is about, is
this race among countries to secure these factories by providing
huge amounts of money in incentives. And the US is
the biggest by far.
Speaker 3 (04:05):
Yes, I think you know, this is the biggest sort
of industrial policy push, the biggest amount of money spent
the US has really ventured into since the World War
two era, and it has sort of just completely shaken
up the way CEOs of car companies and I think
chip companies and everyone is thinking about how they want
to allocate capital around the world, where they want to
(04:27):
put their investments.
Speaker 2 (04:28):
And like Brian said, you know, billion dollars for the
government of Canada to build a new battery plan. A
couple of years ago, that would have been like a jackpot,
but now it's almost just like, yeah, talk to me later,
I can get more money from the US.
Speaker 4 (04:41):
Yeah. The concern is there's now a race to the
bottom and it's been unleashed by the US government. Remember,
it's complete opposite to what the US would have preached
in the decades postwar, like guy, we were saying there
it was all about the market. We'll find the solution,
companies will invest and get our ound two feet. Well,
what happened in the intervening decades is China took off,
especially in the EV space, and of course and of
course the chip production story slid away from the US.
(05:03):
And that's why the US is now putting this money
on the table to bring this production home and try
and get back in the race. It's doing two things.
Like you say, it's a rewiring of economic philosophy around
the world. It's aliening about US allies and of course
foes alike. And of course the concern is now set
office race whereby all the other countries have to come
to the table and put money on the table, and
(05:23):
the companies can choose. You can pick and choose where
they want to go, depending on what grants are enough for.
Speaker 2 (05:28):
And that's just what happened, Brian, with this battery plan
in Canada. All of a sudden it stopped the workers out.
They were going to lose their jobs. But then what
happened for Canada.
Speaker 5 (05:37):
It can't do what the US did right, which was
to say, anybody who builds a plant in the US
can get a subsidy for Canada. This is just an
enormous amount of money. It does not have the fiscal
firepower of the US, and so it's negotiating with each
one of these companies for each plant. It eventually got
resolved in July. They finally signed a subsidy deal worth
(05:58):
about fifteen billion Canadian dollars. And so it's just in
a whole other stratosphere now, and that's the game that
Canada has to play now if it wants to attract
these factories and Gabriell.
Speaker 2 (06:07):
It's not just Canada. But this has caused tensions among
the US and a lot of its allies, just because
the hundreds and hundreds of billions of dollars in the
US has to spend is way more than other countries
can spend. And if they do spend it, they're leveraging
themselves pretty deeply.
Speaker 3 (06:26):
Yeah, I think the US is trying to almost build
a new global supply chain that does not rely on China,
and so it's trying to build these supply chains with
its allies in EU, with Canada, Australia too. There already
was this sort of bidding war for ev plants at
the state level in the United States.
Speaker 2 (06:45):
Yeah, you hear about governors fighting with each other or
trying to steal companies from one state to another.
Speaker 3 (06:51):
Right, I mean, that is sadly a decade's old phenomenon
that's been going on a long time, but it's been
super charged by all this investment. I really think actually
that this started with the Trump administration when President Trump
started talking about bringing back manufacturing jobs and really taking
a sort of more hawkish stance against China. But so
now that we have a Democrat in the White House,
(07:11):
it's sort of that plus we're going to have a
lot of bigger government intervention and like, and I said,
that's really upending like almost half a century of like
economic thought in the United States, where we just let
the market solve everything. And you know, if you look
at the auto industry, it's a perfect example to kind
of question whether or not that really is always the
best philosophy, because it's fine, except that when you have
(07:34):
a global superpower like China with the biggest car market
in the world, is not playing by the same rules
as you. You know, how can you make sure that
you can compete if your companies are not subsidized by
the government, And we are of a decade behind China
now when it comes to electric vehicle technology. The Biden
administration believes that we did nothing for the last ten years,
(07:55):
and we saw China get a leg up on electric vehicles,
and now you see auto companies in Europe in the
US at risk because they have to compete with cheaper
Chinese evs. So really, all these investments are the Biding
administration trying to make sure that you know, obviously they're
very concerned about climate change, so they're comfortable picking battery
technology and using that as a way to reduce emissions
(08:15):
and electric vehicles. But yeah, they think that you need
the government involved to kind of get us where we
need to be.
Speaker 2 (08:23):
And this is a really interesting point, is that there
seems to be two kind of competing tensions. On the
one hand, the government has not always been very successful
at picking winners and losers in the economy, and yet
on the other hand, you write that the free market
itself hasn't been up to the job of figuring this out.
Speaker 4 (08:41):
Yeah, as Gabrella says, there is a case for the
defense in all of this when you speak to people,
the headline reaction will be, oh, my goodness, you know
there is a lot of money, there's a risk of
waste here. But they will also say to you, well,
China has stole in the march here, China, how do
you state aid in the way that the US has not.
There is a case now for government intervention with public money,
especially in the area of climate change. So for green energy,
(09:04):
for example, the market clearly is going to be sufficient
on its own to get to do what's needed there.
And then of course there's evs and the batteries and
everything else that Gabrielle was talking about, So there is
a case for the defense. However, I think what's unsettling
people is the manner of execution and this scale of it,
and its perception that the US has gone out on
its own a head of we'll say, key allies in that,
for example, with Canada, could there be a closer ally,
(09:26):
where about the US and Canada are competing over companies
for example. That's not a great look. And of course
there's also concerned that ultimately there will be waste, there
will be white elephants. You cannot throw public money at
something on this scale and there will not be waste.
And by the way, just to say, even the experts
are struggling to tally the numbers. And this because you
talk about it could be direct financial aid, could be
a cheap loan, it could be a grant, it could
(09:47):
be a tax break, it could be a tariff. Industrial
subsidy takes so many different shapes and forms that the
full tally of this might not be known for some time.
Speaker 2 (09:55):
Can you talk to us about how far ahead Chinese
has been what that means for the US to keep up.
Speaker 4 (10:01):
In broad terms, their industrial policy, which was once a
source of mockery for we'll say the broad West, has
now been saying, oh, hang on a second, this is
actually pretty good. But Jean is not alone. By the way,
the whole East Asian model was all about state sponsorship,
massive government intervention. It was the South Korea model, it
was Japan's model, Taiwan as well, don't forget. And by
the way, South Korea, for example, it's still very heavily
involved in that space. They are also sponsoring the chip
(10:23):
industry there in a significant way. But the no doubt,
the net result of China is far ahead of the
US when it comes to evs and batteries.
Speaker 3 (10:29):
I think people when they think about the United States,
they think about, you know, how robust our economy is
in you know, Silicon Valley and these cradles of innovation.
And it's true that we are really good at inventing
new technology. I think the challenge is that for the
last fifty years, we've been outsourcing the manufacturing of technology
and scaling it. And because we didn't, we thought that
was just commodity stuff and didn't matter. But what happened
(10:52):
is China started making all these goods and suddenly, you know,
days at oh, well, now we've been making this for
so long, we know how to make it better. Suddenly
we're innovating, we're improving. And meanwhile, the West was still
pretty married to combustion engine vehicles, and China knew they
could never leapfrog the West on the combustion engine because
we've been doing that for one hundred years. So they said, okay,
(11:12):
you know, we don't care if you won't tell us
your secrets on engines because we're going to build electric cars.
And so it's really the expertise they've gained in manufacturing,
which America thought was a commodity we didn't need to
worry about. That is what makes them so far ahead
of us. It's that they've got this massive scale and
the key to manufacturing and being profitable is you make
(11:33):
huge upfront investments billions of dollars, and then the way
that you make a profit off of that is you
make a lot of widgets or a lot of cars,
and so China has been doing that for longer. And
on top of that, they're subsidized by the government, these companies,
and they have sort of a command economy where the
government is basically saying, okay, you can only buy an
EV in this place, or you know, these buses are
all going to be electric now. So they've got this
(11:55):
perfect little snowball globe to make it all happen in
their economy. And that's why I think Biden and number
one is they're not worrying about upsetting their allies. They're
just going for speed. Because Biden's got four years at least,
he doesn't know if he's going to get re elected,
so he's trying to move the ball as far ahead
as he possibly can. But that's the thinking is, we've
got to build this in the United States. And we've
(12:16):
got to move fast.
Speaker 2 (12:18):
After the break. This competition isn't just impacting neighbors close
to home. So, Brian, we started out talking about Canada
in the US. What are some of the other countries
(12:38):
that have felt the same sort of sting when the
US came in and bigfooted them on a manufacturing project.
Speaker 5 (12:45):
Pretty much every country in Europe and some of the
key allies in Asia, South Korea and Japan, they're all
going through the same thing that Canada's going through right now,
which is they know that this is primarily a US
and China dynamic. Here, the US trying to protect its
own manufacturing base. There's a national security element of this
(13:06):
to bringing this manufacturing back into the US. That is
the primary dynamic. But it has this followut effect on
all of these US trade allies. Companies looking at investment
decisions in their countries suddenly look at the incentives on
offer in the US and decide to leave there. They
see this as generational decisions. Right, if you lose one
(13:27):
of these battery factories, for example, to the US, you're
not getting it back. That battery factory is gone.
Speaker 4 (13:35):
If you do look around the world, governments are responding
especially US allies, they are responding with packages on their own,
like in Germany, in normally in South Korea, the President
of South Korea explicitly called out the industrial subsidy rate
and they are backing a package there of tens of
billions of US dollars into chip space. All of these
key US allies are responding now. Of course, there are
(13:56):
some concessions also being meeted out of the US government
is coming to the table of these governments to try
and to lay some of their concerns. But I think,
as Gabriela was just mentioned there a few moments ago.
You know, as I say, I mentioned earlier the case
for the defense, there is a national security aspect to this.
So governments are willing to dig in and say that
they've got to do this now to try and stay
in the game on evs, on batteries, on climate change. So,
(14:17):
you know, I think we've gone past the point of
no return on this.
Speaker 3 (14:20):
I spoke with Carlos Tavares, who's the CEO of Stilantis,
and even he accepts the fact that there are certain
strategic areas where it even is in you know, the
national security interest to make sure we can make it ourselves.
I mean during the pandemic when you had all the
COVID shutdowns of plants around the world and nobody could
get any semiconductor chips out of Asia, that helped spark
(14:43):
terrible inflation in the United States. And it totally I mean,
the car companies were their hands were just tied. They
were helpless. So I think that was a really important
lesson that was not lost on them. And so even
though I think there's concern among the private sector about well,
where is this going to end, and are we going
to you know, demand that we make everything in our
home country, because there's something to be said for you know,
(15:04):
cheaper goods from lower cost countries. That's sort of been
the you know, mantra of the auto industry since the
seventies now, But even they acknowledge that there is this
point about strategic value and making things for the sake
of national security. I think that is accepted by a
lot of leaders in the auto industry. I think the
debate is like what is the right balance? And I
(15:25):
think that is a very tough question to answer with
a lot of people have long entrenched either political or
ideological or economic beliefs about how they think things should work,
and that is all being challenged by the rise of China.
Speaker 4 (15:40):
I think the Gabrielle's point, this is not about manufacturing
rich large right. The items that we buy in our
kitchen every day of the week, our TV sets, the
clothes we wear, the computers we have, all of that stuff.
That wholesale production is not going to be pulled out
of China anytimes. You an order rest of Asia and
come back to the so called Western world. Right, this
(16:02):
is about very specific areas. This industrial subsidy rates, that's
a whole other story. We will still be buying made
in China or made in East Asia for a long
time to come and.
Speaker 2 (16:11):
End in the story, there's this one very vivid example
of how it's the rich countries that can afford to
spend this kind of money.
Speaker 4 (16:19):
Oh yes, Germany, there is this very vivid example whereas
they came up a ten billion euro for Intel to
set up a battery plant there. That works out at
roughly one million euro for each of the ten thousand
jobs that they envisaged the plant will create. So that
tells you the extent that governments are willing to go
to this And by the way, This goes to another
(16:40):
part of this story that people that institutions like the
IMF and others are warning about. They're warning about something
called economic fragmentation, whereby the poorer countries you're going to
lose out. And remember, the poor countries, their whole elevator
pitches is cheap manufacturing. Come to us, we can do
this for you. Well, if the rich countries are now
in the game in such a significant way saying bring
these plants back to us, the concern is it will
(17:00):
have an impact on investment that would have gone to
those poor countries. Yes, they will always hold on to
the cheaper, lower value added manufacturing as I mentioned earlier,
but they certainly won't be in the game to get
some of this big, high tech, high value added stuff.
Speaker 2 (17:12):
When we come back. Why exactly does it matter where
these factories end up? And ultimately, why does it matter
that there are these huge subsidies in some countries and
(17:33):
not others. Are there big global knock on effects to
having this kind of imbalanced.
Speaker 4 (17:38):
Yeah, Well, for all the criticism and concerned about this
industrial subsidy race, there are no shortage of academics who
argue that every economy needs manufacturing at its core. A
manufacturing economy drives innovation, it leads to dynamism. It's all
about ensuring your economy remains at the cutting edge of
world class research and development. And if you want to
(17:59):
be a big industrial power, you have to have this
core manufacturing base. And that's part of the story in
the US where there was a concerns being hollered at
and losing out to big rivals, obviously China, and now
there are plenty who will say to US had to
make this intervention, not just the US, but Europe and others.
Speaker 5 (18:14):
Also there's a political element to these manufacturing jobs as well.
That Prime Minister Justin Trudeau and Canadian Finance Minister Christia
Freeland have both talked about this in their speeches.
Speaker 6 (18:24):
Because if we want small communities to be thriving, vibrant
places where people can be proud of their work, where
young families get to stay and grow, we need good
jobs and great careers.
Speaker 5 (18:40):
You need these manufacturing jobs. They're so important because they
provide well paid, stable work for thousands and thousands of people,
and when you don't have that in your country, you
start to get a voter base that becomes anti establishment
that feels detached from the economy that they're living in.
(19:00):
They don't have stable jobs, they're reliant on gig economy
and precarious labor. Even from a political perspective, the sheer
political perspective of just people feeling like they live in
a country that supports them and has a strong economy
and that they have stability in their own lives. These
manufacturing jobs are hugely important for that.
Speaker 2 (19:21):
And ender with so much at stake other backchannel communications
among leaders, those are all allies to kind of smooth
over anger resentment at the US and other big economies
essentially stealing factories away.
Speaker 4 (19:36):
They're clearly our communications going. You can already see that
the European Union have toned down our criticism from ready
ward start of the year because datamselves and are just
figuring out we'll wait a minute, how do we get
in the game and how do we respond? As I
mentioned earlier, there has been some meeting of ways with
South Korea and some of their concerns and where to
could be carve outs. Indonesia has also win talk, So
the US is certainly trying to placate some of these
(19:57):
concerns and as I say to you, there is a
kind of feeling with this debate that on a headline level,
there is like you first, you know you're breaking the
rules of the game, but honor the bonnet. You know,
in the same conversation, a lot of experts will say
to you, there's a case for doing this. Lots of
Gorbman's feel that they also need to do this. So
it's a reckoning moment for the world of manufacturing.
Speaker 2 (20:15):
Gabrielle, is it working? We talked about how China's march
ahead was one of the things that spurred these subsidies.
Is the US is the West closing that gap?
Speaker 3 (20:26):
I think it's going to be hard to really fully
close the gap, but I think if we can at
least satisfy some of our own demand, then that'll be
a big achievement. And to some degree, this was already happening.
I mean, the automakers were already investing in battery plants
in the United States before the IRA was passed, because
everyone can see the writing on the wall that we're
moving towards electrification, and auto companies in general they want
(20:48):
to localize, you know, they want to build where they sell.
So you have that the real key is are we
bringing in things like the other parts of the supply
chain to supply those batteries, because that's really where the
choke points are, where you know, China really has control
they process something like you're around ninety percent of these
critical minerals that go into batteries. And on that front,
that still remains to be seen because I think you know,
(21:11):
you see the Department of Energy here in the United
States giving out loans and grants to kind of jumpstart
some of this stuff, but we still need to see
the private sector kind of participate in that that. I
don't think the government can do that all by themselves.
And we're in a very high interest rate environment right now.
It's not the greatest time to invest. The impetus is there.
(21:32):
The incentives are certainly working. I mean in terms of
people are building battery plans, and the automakers and the
battery makers Tesla, gm Ford, whoever, Hundai, they're all very
excited about those subsidies because at another important point is
it's going to help them bring down the cost of
electric vehicles. You know, if evs are so much more
expensive than a gas car, nobody's going to buy them, and.
Speaker 2 (21:53):
Is all this sustainable. The Inflation Reduction Act was obviously
a giant amount of money, but it won't last forever,
creating expectations that can't be met in the future.
Speaker 4 (22:04):
Already happening at a time when government debt loads are
at records are close to records after what happened due
to the pandemic. Interest rates after high some decades, which
means to paying back all of that money is very expensive.
There's no doubt that this big shift if it happens, say,
fifteen years ago, when money was at rock bottom interest rates,
it might have been a smarter move, but it is
a more expensive time to make adjustment, no doubt about it.
(22:26):
But the defenders will tell you it's an economic multiplier.
It generates jobs under ground. These jobs generate activity in
their neighborhood, they spend money, they create other jobs along
the supply chain. So there's also an economic dividend that
goes with it, or at least that's the great hope
with industrial policy.
Speaker 5 (22:42):
Anyway, if we're.
Speaker 3 (22:44):
Forward looking, you think about how much is this going
to cost and whatnot? The diary does expire these battery provisions?
Do it start to run out? Around twenty twenty six,
twenty twenty seven, and they are dependent on how many
batteries these carmakers and battery producers make. So if evs
aren't selling and they're not going to make as much,
then it's not going to cost the governments as much money.
So there's a bit of sort of uncertainty there as
(23:06):
to what the final price tag will be. It's kind
of going to depend on the market. And another thing,
of course, is that in the United States, even though
there is a lot of bipartisanship around, you know, being
more hawkish on China, the Republican Party is not super
jazzed about this massive outlay of government spending in the market.
So if we have a Republican president, you know, after
twenty twenty four, they might not want to fund all
(23:26):
the provisions in the IRA or things could change. So
that's just as we look ahead, those are some sort
of you know, caveats to the picture of how it
might change.
Speaker 4 (23:35):
I bet we will all be driving electronic vehicles, say
five years from there.
Speaker 3 (23:40):
At least a hybrid. Well, we'll see.
Speaker 2 (23:43):
And Gabrielle Brian, thanks so much for coming on the show.
Thank you, thanks for listening to us here at The
Big Take. It's a daily podcast from Bloomberg and iHeartRadio.
For more shows from iHeartRadio, visit the iHeartRadio app, Apple Podcasts,
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Email us questions or comments to Big Take at Bloomberg
(24:03):
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mcili is our engineer. Our original music was composed by
Leo Sidrin. I'm West Kasova. We'll be back tomorrow with
(24:24):
another Big Take.
All toll. Since I saw the Inflection Reduction Act and
the Chips and Science Act and the law, companies have
announced eleven billion dollars in manufacturing and clean energy investments
just in South Carolina, eleven billion dollars. Instead of exporting
jobs like we did for decades, we're now creating jobs
an exporting product.
Speaker 2 (00:27):
We've talked a few times on this show about how
Washington is spending billions of dollars to lure battery factories,
chip making plans, and other future tech manufacturing to the US.
But there's a less visible side to this story. Smaller
countries are losing out. They can't compete with the massive
(00:47):
subsidies the US and other rich nations can offer companies
to build on their shores. Bloomberg reporters Gabrielle Coppola and
a Current and Brian Platt report that this competition is
causing a lot of tension even among close allies like
the US and Canada, and it raises all kinds of
questions about winners and losers in an increasingly competitive global economy.
Speaker 3 (01:13):
I think the US is trying to almost build a
new global supply chain that does not rely on China.
Speaker 4 (01:19):
So governments are willing to dig in and say that
they've got to do this now to try and stay
in the game.
Speaker 5 (01:24):
These companies now walk into the room saying pay up,
or we're building it somewhere else.
Speaker 2 (01:31):
I'm West Kasova today on the big take. I'll see
your billion dollars and raise you fifteen, Brian. The story
starts with a factory in Windsor, Canada that gets caught
(01:51):
up in this global competition. Can you paint a picture
of what happened.
Speaker 5 (01:57):
Yeah, So this is a really huge battery factory being
built in the city of Windsor, which is just across
the US Canada border from Detroit. It's really in the
heart of Canada's auto manufacturing area of southern Ontario. In
March twenty twenty two, there was this big splashy announcement
where Stilantis, which is one of the world's biggest automakers.
(02:19):
It was number five in global sales last year. It
produces cheap Chrysler Ram That's what people would best know,
it asked, So, you know this major global auto company
was building a battery factory in Canada for its electric vehicles,
which was a huge deal for Canada to land one
of these big battery factories. It's the next generation of
auto manufacturing. Canada refers to these as anchor facilities, so
(02:43):
you know, to spin off a whole bunch of parts
suppliers around it. And so they announced it in March
twenty twenty two. It came with a subsidy package of
about a billion dollars and shovels hit the ground. They
started building it, and then a few months later the
US passed the inflation reduction at the IRA completely changed
(03:03):
the incentives, I mean, completely upended the whole regime. And
so when Canada had first announced this factory, it came
with about a billion dollars in Canadian capital incentives capital
grants for the factory, which was pretty typical for the
amount of subsidies that Canada would usually give a factory
like this. I mean it was maybe on the high end,
(03:23):
but it was a pretty typical grant really. And then
the IRA came along and suddenly this factory was if
it was built in the US instead, it could have
qualified for but one analyst told us is up to
nineteen billion in production subsidies, and so it kicked off
this huge problem for Canada of either it had to
match what the US was offering or it was going
(03:45):
to lose this factory that it had been so excited
about landing in the first place.
Speaker 2 (03:51):
And Gabrielle, that's really what this story is about, is
this race among countries to secure these factories by providing
huge amounts of money in incentives. And the US is
the biggest by far.
Speaker 3 (04:05):
Yes, I think you know, this is the biggest sort
of industrial policy push, the biggest amount of money spent
the US has really ventured into since the World War
two era, and it has sort of just completely shaken
up the way CEOs of car companies and I think
chip companies and everyone is thinking about how they want
to allocate capital around the world, where they want to
(04:27):
put their investments.
Speaker 2 (04:28):
And like Brian said, you know, billion dollars for the
government of Canada to build a new battery plan. A
couple of years ago, that would have been like a jackpot,
but now it's almost just like, yeah, talk to me later,
I can get more money from the US.
Speaker 4 (04:41):
Yeah. The concern is there's now a race to the
bottom and it's been unleashed by the US government. Remember,
it's complete opposite to what the US would have preached
in the decades postwar, like guy, we were saying there
it was all about the market. We'll find the solution,
companies will invest and get our ound two feet. Well,
what happened in the intervening decades is China took off,
especially in the EV space, and of course and of
course the chip production story slid away from the US.
(05:03):
And that's why the US is now putting this money
on the table to bring this production home and try
and get back in the race. It's doing two things.
Like you say, it's a rewiring of economic philosophy around
the world. It's aliening about US allies and of course
foes alike. And of course the concern is now set
office race whereby all the other countries have to come
to the table and put money on the table, and
(05:23):
the companies can choose. You can pick and choose where
they want to go, depending on what grants are enough for.
Speaker 2 (05:28):
And that's just what happened, Brian, with this battery plan
in Canada. All of a sudden it stopped the workers out.
They were going to lose their jobs. But then what
happened for Canada.
Speaker 5 (05:37):
It can't do what the US did right, which was
to say, anybody who builds a plant in the US
can get a subsidy for Canada. This is just an
enormous amount of money. It does not have the fiscal
firepower of the US, and so it's negotiating with each
one of these companies for each plant. It eventually got
resolved in July. They finally signed a subsidy deal worth
(05:58):
about fifteen billion Canadian dollars. And so it's just in
a whole other stratosphere now, and that's the game that
Canada has to play now if it wants to attract
these factories and Gabriell.
Speaker 2 (06:07):
It's not just Canada. But this has caused tensions among
the US and a lot of its allies, just because
the hundreds and hundreds of billions of dollars in the
US has to spend is way more than other countries
can spend. And if they do spend it, they're leveraging
themselves pretty deeply.
Speaker 3 (06:26):
Yeah, I think the US is trying to almost build
a new global supply chain that does not rely on China,
and so it's trying to build these supply chains with
its allies in EU, with Canada, Australia too. There already
was this sort of bidding war for ev plants at
the state level in the United States.
Speaker 2 (06:45):
Yeah, you hear about governors fighting with each other or
trying to steal companies from one state to another.
Speaker 3 (06:51):
Right, I mean, that is sadly a decade's old phenomenon
that's been going on a long time, but it's been
super charged by all this investment. I really think actually
that this started with the Trump administration when President Trump
started talking about bringing back manufacturing jobs and really taking
a sort of more hawkish stance against China. But so
now that we have a Democrat in the White House,
(07:11):
it's sort of that plus we're going to have a
lot of bigger government intervention and like, and I said,
that's really upending like almost half a century of like
economic thought in the United States, where we just let
the market solve everything. And you know, if you look
at the auto industry, it's a perfect example to kind
of question whether or not that really is always the
best philosophy, because it's fine, except that when you have
(07:34):
a global superpower like China with the biggest car market
in the world, is not playing by the same rules
as you. You know, how can you make sure that
you can compete if your companies are not subsidized by
the government, And we are of a decade behind China
now when it comes to electric vehicle technology. The Biden
administration believes that we did nothing for the last ten years,
(07:55):
and we saw China get a leg up on electric vehicles,
and now you see auto companies in Europe in the
US at risk because they have to compete with cheaper
Chinese evs. So really, all these investments are the Biding
administration trying to make sure that you know, obviously they're
very concerned about climate change, so they're comfortable picking battery
technology and using that as a way to reduce emissions
(08:15):
and electric vehicles. But yeah, they think that you need
the government involved to kind of get us where we
need to be.
Speaker 2 (08:23):
And this is a really interesting point, is that there
seems to be two kind of competing tensions. On the
one hand, the government has not always been very successful
at picking winners and losers in the economy, and yet
on the other hand, you write that the free market
itself hasn't been up to the job of figuring this out.
Speaker 4 (08:41):
Yeah, as Gabrella says, there is a case for the
defense in all of this when you speak to people,
the headline reaction will be, oh, my goodness, you know
there is a lot of money, there's a risk of
waste here. But they will also say to you, well,
China has stole in the march here, China, how do
you state aid in the way that the US has not.
There is a case now for government intervention with public money,
especially in the area of climate change. So for green energy,
(09:04):
for example, the market clearly is going to be sufficient
on its own to get to do what's needed there.
And then of course there's evs and the batteries and
everything else that Gabrielle was talking about, So there is
a case for the defense. However, I think what's unsettling
people is the manner of execution and this scale of it,
and its perception that the US has gone out on
its own a head of we'll say, key allies in that,
for example, with Canada, could there be a closer ally,
(09:26):
where about the US and Canada are competing over companies
for example. That's not a great look. And of course
there's also concerned that ultimately there will be waste, there
will be white elephants. You cannot throw public money at
something on this scale and there will not be waste.
And by the way, just to say, even the experts
are struggling to tally the numbers. And this because you
talk about it could be direct financial aid, could be
a cheap loan, it could be a grant, it could
(09:47):
be a tax break, it could be a tariff. Industrial
subsidy takes so many different shapes and forms that the
full tally of this might not be known for some time.
Speaker 2 (09:55):
Can you talk to us about how far ahead Chinese
has been what that means for the US to keep up.
Speaker 4 (10:01):
In broad terms, their industrial policy, which was once a
source of mockery for we'll say the broad West, has
now been saying, oh, hang on a second, this is
actually pretty good. But Jean is not alone. By the way,
the whole East Asian model was all about state sponsorship,
massive government intervention. It was the South Korea model, it
was Japan's model, Taiwan as well, don't forget. And by
the way, South Korea, for example, it's still very heavily
involved in that space. They are also sponsoring the chip
(10:23):
industry there in a significant way. But the no doubt,
the net result of China is far ahead of the
US when it comes to evs and batteries.
Speaker 3 (10:29):
I think people when they think about the United States,
they think about, you know, how robust our economy is
in you know, Silicon Valley and these cradles of innovation.
And it's true that we are really good at inventing
new technology. I think the challenge is that for the
last fifty years, we've been outsourcing the manufacturing of technology
and scaling it. And because we didn't, we thought that
was just commodity stuff and didn't matter. But what happened
(10:52):
is China started making all these goods and suddenly, you know,
days at oh, well, now we've been making this for
so long, we know how to make it better. Suddenly
we're innovating, we're improving. And meanwhile, the West was still
pretty married to combustion engine vehicles, and China knew they
could never leapfrog the West on the combustion engine because
we've been doing that for one hundred years. So they said, okay,
(11:12):
you know, we don't care if you won't tell us
your secrets on engines because we're going to build electric cars.
And so it's really the expertise they've gained in manufacturing,
which America thought was a commodity we didn't need to
worry about. That is what makes them so far ahead
of us. It's that they've got this massive scale and
the key to manufacturing and being profitable is you make
(11:33):
huge upfront investments billions of dollars, and then the way
that you make a profit off of that is you
make a lot of widgets or a lot of cars,
and so China has been doing that for longer. And
on top of that, they're subsidized by the government, these companies,
and they have sort of a command economy where the
government is basically saying, okay, you can only buy an
EV in this place, or you know, these buses are
all going to be electric now. So they've got this
(11:55):
perfect little snowball globe to make it all happen in
their economy. And that's why I think Biden and number
one is they're not worrying about upsetting their allies. They're
just going for speed. Because Biden's got four years at least,
he doesn't know if he's going to get re elected,
so he's trying to move the ball as far ahead
as he possibly can. But that's the thinking is, we've
got to build this in the United States. And we've
(12:16):
got to move fast.
Speaker 2 (12:18):
After the break. This competition isn't just impacting neighbors close
to home. So, Brian, we started out talking about Canada
in the US. What are some of the other countries
(12:38):
that have felt the same sort of sting when the
US came in and bigfooted them on a manufacturing project.
Speaker 5 (12:45):
Pretty much every country in Europe and some of the
key allies in Asia, South Korea and Japan, they're all
going through the same thing that Canada's going through right now,
which is they know that this is primarily a US
and China dynamic. Here, the US trying to protect its
own manufacturing base. There's a national security element of this
(13:06):
to bringing this manufacturing back into the US. That is
the primary dynamic. But it has this followut effect on
all of these US trade allies. Companies looking at investment
decisions in their countries suddenly look at the incentives on
offer in the US and decide to leave there. They
see this as generational decisions. Right, if you lose one
(13:27):
of these battery factories, for example, to the US, you're
not getting it back. That battery factory is gone.
Speaker 4 (13:35):
If you do look around the world, governments are responding
especially US allies, they are responding with packages on their own,
like in Germany, in normally in South Korea, the President
of South Korea explicitly called out the industrial subsidy rate
and they are backing a package there of tens of
billions of US dollars into chip space. All of these
key US allies are responding now. Of course, there are
(13:56):
some concessions also being meeted out of the US government
is coming to the table of these governments to try
and to lay some of their concerns. But I think,
as Gabriela was just mentioned there a few moments ago.
You know, as I say, I mentioned earlier the case
for the defense, there is a national security aspect to this.
So governments are willing to dig in and say that
they've got to do this now to try and stay
in the game on evs, on batteries, on climate change. So,
(14:17):
you know, I think we've gone past the point of
no return on this.
Speaker 3 (14:20):
I spoke with Carlos Tavares, who's the CEO of Stilantis,
and even he accepts the fact that there are certain
strategic areas where it even is in you know, the
national security interest to make sure we can make it ourselves.
I mean during the pandemic when you had all the
COVID shutdowns of plants around the world and nobody could
get any semiconductor chips out of Asia, that helped spark
(14:43):
terrible inflation in the United States. And it totally I mean,
the car companies were their hands were just tied. They
were helpless. So I think that was a really important
lesson that was not lost on them. And so even
though I think there's concern among the private sector about well,
where is this going to end, and are we going
to you know, demand that we make everything in our
home country, because there's something to be said for you know,
(15:04):
cheaper goods from lower cost countries. That's sort of been
the you know, mantra of the auto industry since the
seventies now, But even they acknowledge that there is this
point about strategic value and making things for the sake
of national security. I think that is accepted by a
lot of leaders in the auto industry. I think the
debate is like what is the right balance? And I
(15:25):
think that is a very tough question to answer with
a lot of people have long entrenched either political or
ideological or economic beliefs about how they think things should work,
and that is all being challenged by the rise of China.
Speaker 4 (15:40):
I think the Gabrielle's point, this is not about manufacturing
rich large right. The items that we buy in our
kitchen every day of the week, our TV sets, the
clothes we wear, the computers we have, all of that stuff.
That wholesale production is not going to be pulled out
of China anytimes. You an order rest of Asia and
come back to the so called Western world. Right, this
(16:02):
is about very specific areas. This industrial subsidy rates, that's
a whole other story. We will still be buying made
in China or made in East Asia for a long
time to come and.
Speaker 2 (16:11):
End in the story, there's this one very vivid example
of how it's the rich countries that can afford to
spend this kind of money.
Speaker 4 (16:19):
Oh yes, Germany, there is this very vivid example whereas
they came up a ten billion euro for Intel to
set up a battery plant there. That works out at
roughly one million euro for each of the ten thousand
jobs that they envisaged the plant will create. So that
tells you the extent that governments are willing to go
to this And by the way, This goes to another
(16:40):
part of this story that people that institutions like the
IMF and others are warning about. They're warning about something
called economic fragmentation, whereby the poorer countries you're going to
lose out. And remember, the poor countries, their whole elevator
pitches is cheap manufacturing. Come to us, we can do
this for you. Well, if the rich countries are now
in the game in such a significant way saying bring
these plants back to us, the concern is it will
(17:00):
have an impact on investment that would have gone to
those poor countries. Yes, they will always hold on to
the cheaper, lower value added manufacturing as I mentioned earlier,
but they certainly won't be in the game to get
some of this big, high tech, high value added stuff.
Speaker 2 (17:12):
When we come back. Why exactly does it matter where
these factories end up? And ultimately, why does it matter
that there are these huge subsidies in some countries and
(17:33):
not others. Are there big global knock on effects to
having this kind of imbalanced.
Speaker 4 (17:38):
Yeah, Well, for all the criticism and concerned about this
industrial subsidy race, there are no shortage of academics who
argue that every economy needs manufacturing at its core. A
manufacturing economy drives innovation, it leads to dynamism. It's all
about ensuring your economy remains at the cutting edge of
world class research and development. And if you want to
(17:59):
be a big industrial power, you have to have this
core manufacturing base. And that's part of the story in
the US where there was a concerns being hollered at
and losing out to big rivals, obviously China, and now
there are plenty who will say to US had to
make this intervention, not just the US, but Europe and others.
Speaker 5 (18:14):
Also there's a political element to these manufacturing jobs as well.
That Prime Minister Justin Trudeau and Canadian Finance Minister Christia
Freeland have both talked about this in their speeches.
Speaker 6 (18:24):
Because if we want small communities to be thriving, vibrant
places where people can be proud of their work, where
young families get to stay and grow, we need good
jobs and great careers.
Speaker 5 (18:40):
You need these manufacturing jobs. They're so important because they
provide well paid, stable work for thousands and thousands of people,
and when you don't have that in your country, you
start to get a voter base that becomes anti establishment
that feels detached from the economy that they're living in.
(19:00):
They don't have stable jobs, they're reliant on gig economy
and precarious labor. Even from a political perspective, the sheer
political perspective of just people feeling like they live in
a country that supports them and has a strong economy
and that they have stability in their own lives. These
manufacturing jobs are hugely important for that.
Speaker 2 (19:21):
And ender with so much at stake other backchannel communications
among leaders, those are all allies to kind of smooth
over anger resentment at the US and other big economies
essentially stealing factories away.
Speaker 4 (19:36):
They're clearly our communications going. You can already see that
the European Union have toned down our criticism from ready
ward start of the year because datamselves and are just
figuring out we'll wait a minute, how do we get
in the game and how do we respond? As I
mentioned earlier, there has been some meeting of ways with
South Korea and some of their concerns and where to
could be carve outs. Indonesia has also win talk, So
the US is certainly trying to placate some of these
(19:57):
concerns and as I say to you, there is a
kind of feeling with this debate that on a headline level,
there is like you first, you know you're breaking the
rules of the game, but honor the bonnet. You know,
in the same conversation, a lot of experts will say
to you, there's a case for doing this. Lots of
Gorbman's feel that they also need to do this. So
it's a reckoning moment for the world of manufacturing.
Speaker 2 (20:15):
Gabrielle, is it working? We talked about how China's march
ahead was one of the things that spurred these subsidies.
Is the US is the West closing that gap?
Speaker 3 (20:26):
I think it's going to be hard to really fully
close the gap, but I think if we can at
least satisfy some of our own demand, then that'll be
a big achievement. And to some degree, this was already happening.
I mean, the automakers were already investing in battery plants
in the United States before the IRA was passed, because
everyone can see the writing on the wall that we're
moving towards electrification, and auto companies in general they want
(20:48):
to localize, you know, they want to build where they sell.
So you have that the real key is are we
bringing in things like the other parts of the supply
chain to supply those batteries, because that's really where the
choke points are, where you know, China really has control
they process something like you're around ninety percent of these
critical minerals that go into batteries. And on that front,
that still remains to be seen because I think you know,
(21:11):
you see the Department of Energy here in the United
States giving out loans and grants to kind of jumpstart
some of this stuff, but we still need to see
the private sector kind of participate in that that. I
don't think the government can do that all by themselves.
And we're in a very high interest rate environment right now.
It's not the greatest time to invest. The impetus is there.
(21:32):
The incentives are certainly working. I mean in terms of
people are building battery plans, and the automakers and the
battery makers Tesla, gm Ford, whoever, Hundai, they're all very
excited about those subsidies because at another important point is
it's going to help them bring down the cost of
electric vehicles. You know, if evs are so much more
expensive than a gas car, nobody's going to buy them, and.
Speaker 2 (21:53):
Is all this sustainable. The Inflation Reduction Act was obviously
a giant amount of money, but it won't last forever,
creating expectations that can't be met in the future.
Speaker 4 (22:04):
Already happening at a time when government debt loads are
at records are close to records after what happened due
to the pandemic. Interest rates after high some decades, which
means to paying back all of that money is very expensive.
There's no doubt that this big shift if it happens, say,
fifteen years ago, when money was at rock bottom interest rates,
it might have been a smarter move, but it is
a more expensive time to make adjustment, no doubt about it.
(22:26):
But the defenders will tell you it's an economic multiplier.
It generates jobs under ground. These jobs generate activity in
their neighborhood, they spend money, they create other jobs along
the supply chain. So there's also an economic dividend that
goes with it, or at least that's the great hope
with industrial policy.
Speaker 5 (22:42):
Anyway, if we're.
Speaker 3 (22:44):
Forward looking, you think about how much is this going
to cost and whatnot? The diary does expire these battery provisions?
Do it start to run out? Around twenty twenty six,
twenty twenty seven, and they are dependent on how many
batteries these carmakers and battery producers make. So if evs
aren't selling and they're not going to make as much,
then it's not going to cost the governments as much money.
So there's a bit of sort of uncertainty there as
(23:06):
to what the final price tag will be. It's kind
of going to depend on the market. And another thing,
of course, is that in the United States, even though
there is a lot of bipartisanship around, you know, being
more hawkish on China, the Republican Party is not super
jazzed about this massive outlay of government spending in the market.
So if we have a Republican president, you know, after
twenty twenty four, they might not want to fund all
(23:26):
the provisions in the IRA or things could change. So
that's just as we look ahead, those are some sort
of you know, caveats to the picture of how it
might change.
Speaker 4 (23:35):
I bet we will all be driving electronic vehicles, say
five years from there.
Speaker 3 (23:40):
At least a hybrid. Well, we'll see.
Speaker 2 (23:43):
And Gabrielle Brian, thanks so much for coming on the show.
Thank you, thanks for listening to us here at The
Big Take. It's a daily podcast from Bloomberg and iHeartRadio.
For more shows from iHeartRadio, visit the iHeartRadio app, Apple Podcasts,
or wherever you listen, and we'd love to hear from you.
Email us questions or comments to Big Take at Bloomberg
(24:03):
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Vicki Burgolina. Our senior producer is Catherine Fink. Rebecca Shasson
is our producer. Our associate producer is Sam Gobauer. Raphael
mcili is our engineer. Our original music was composed by
Leo Sidrin. I'm West Kasova. We'll be back tomorrow with
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