US laws to promote home-grown industries will hurt African economies

Johannesburg: The Biden administration has ratcheted up protectionism and industrial policy amid surging economic tensions with China. Legislation passed in 2022 unlocked hundreds of billions of dollars in subsidies to spur domestic production of renewable energy and electric vehicles, and to support other decarbonisation goals.

The legislation is also designed to support homegrown strategic industries such as high-end semiconductors while constraining China’s access to such technologies.

Having watched global trade patterns since the second world war, I’m concerned that we are now entering a new and more dangerous period.

Washington’s protectionist industrial policy started with the US-China trade war under the Trump administration.

It is exacerbating economic fragmentation of the global economy fuelled by the war in Ukraine and economic sanctions imposed on Russia. It is doing so by fracturing trade and investment flows based on geopolitical considerations. As a result, global economic integration is being reversed. Over the past three decades, global economic integration raised productivity growth, lifted living standards and reduced extreme poverty.

We can see this happening as US allies respond with inward looking protection measures of their own and align with the US to create a global supply chain less reliant on China. Cases in point are the EU, Japan and Korea.

This could have far-reaching negative consequences for countries in Africa. Some will be hit harder than others. For example the 19 African countries facing debt distress have scarcer fiscal resources to manage costs of the fallout.

But nearly all will feel the impact of higher inflation due to reduced global output in a less productive world. Many will also feel the impact of a brake on regional integration efforts as importers lose ready access to competitively priced inputs needed for value addition. And fragmentation of investment flows could restrict access to investment.

This would have adverse impacts on growth and plans to boost green investments on the continent.

US moves on protection and industrial policy

Last year, the US Congress approved the Chips and Science Act and the Inflation Reduction Act. They offer hundreds of billions of dollars in funding to encourage domestic production of chips and clean energy technologies. They are also aimed at barring exports of high-end semiconductors and equipment to China, and pushing allies to do the same.

These acts, together with the infrastructure bill Biden signed in 2021 to boost iron and steel made in the US with more federal spending, have combined to shape America’s current protectionist industrial strategy.

This has unsettled policy makers in Europe and Asia, where the laws are seen as unfairly benefiting American companies and moving away from free trade. They have also sparked worries that companies and investment from their regions will be lured to the US. Those worries foreshadowed German-based Volkswagen AG’s move in March to build a USD 2 billion car factory for a new electric brand in South Carolina.

Also, Swedish battery maker Northvolt AB has stated that expansion into the US market is now among its top priorities. For its part, Samsung intends to use chip subsidies for an advanced plant it’s building in Texas.

Unnerved by these moves, the EU has responded with its own massive subsidy plans to support businesses paving the way to a low-carbon economy. It also passed a Chips Act in April to support semiconductor manufacturing within the region with billions of dollars in subsidies.

Other US allies are following suit. Japan’s government has negotiated a deal with Washington that allows critical minerals shipped from its companies to qualify for US subsidies.

The EU is also interested in securing a similar deal. South Korea plans to spend hundreds of billions of dollars for investments in chips, batteries, electric vehicles and other green technologies.

The US-led subsidy push and export controls are fragmenting the global economy by redirecting supply chains from China. They are also alienating non-EU and Asian allies that can’t support their companies with similar subsidies.

African countries will be hit hard

These shifts will ultimately reduce gains that have been made in increasing integration of international goods and investment markets. These have included higher global output growth, the opportunity to take advantage of new technologies and lower costs for businesses and consumers.

This means that countries with larger economies like Nigeria, South Africa, Ethiopia and Kenya which demand more imports are likely to be hit harder by rising domestic costs and higher international prices of imported goods. These will both feed into higher inflation, to the detriment of businesses and households.

In another blow, regional trade integration efforts including expansion of the digital economy, infrastructure improvements, enhanced regional trade logistics and delivery of financial services will be affected by the higher cost of intermediate inputs and lack of access to new technologies. Both are critical for building regional value chains and diversifying production.

Also, companies in most African countries will lose out because they don’t have the backing of deep-pocketed governments able to provide huge subsidies and other incentives to exploit green investment opportunities on a scale that comes close to that of the US and its rich allies.

The International Monetary Fund has flagged that the continent stands to lose the most from global economic fragmentation. In a recent assessment it said that the cost to the median African country could be as high as 4 per cent of GDP.

Mitigating measures

The US Strategy Towards Sub-Saharan Africa unveiled by the Biden administration last year seems to be the ideal platform to address concerns about America’s protectionist industrial policy.

That’s because its key objectives include helping Africa navigate the energy transition and enhancing US trade and investment with the continent.

On the basis of this strategy, Washington and African policy makers should prioritise the following:

1. Forge public-private partnerships for the production and domestic processing of minerals that are key ingredients for the green energy transition. These include nickel in Tanzania, palladium and manganese in South Africa, copper in Zambia, cobalt in Congo and lithium in Zimbabwe.
2. Promote investments to build strong regional supply chains. This should include enabling Africa to take advantage of technologies like digitalisation, which can boost trade through e-commerce.
3. Capitalise on any positive effects to drive growth and diversification of trade with Africa under the African Growth and Opportunity Act.(The Conversation)