The double-edged sword of the American Inflation Reduction Act: a critical step towards net-zero or another self-limiting step in a world of neoliberal climate governance?
If you’ve ever made the (un)fortunate succession of life choices that brings you into a macroeconomics class at university, you’ll know that there’s a particular narrative about free trade that is widely taught.
Sandwiched into some strangely angled lecture theatre alongside your peers, you’ll have heard about the theory of comparative advantage, originally developed by David Ricardo. This theory states that a country has a comparative advantage over others in producing a particular good or service if they can produce that good or service more cheaply than other countries (at lower marginal cost). Given the assumptions of perfect competition and forever-equilibrating markets, by specialising where they have comparative advantage and then engaging in trade, different countries can maximise their consumption (utility), assumed to be the core driver of social welfare.
This model provides the basis for much of mainstream economic trade theory, justifying the promotion of free trade and the economic liberalisation programmes that support it. Accordingly, free trade is enthusiastically credited with a range of benefits, from cheaper imports and lower inflation, to higher economic growth, improved efficiency, and innovation. Meanwhile, any mention of protectionism, where various quotas, tariffs or other regulations are used to restrict trade between countries, is generally met with a generalised horror.
Although in recent years we have begun to see the free trade narrative lose some of its previous lustre, it remains fundamental to our current model of growth-oriented capitalism.
The neoclassical economics that provides the academic foundations for the pro-free trade argument in turn undergirds the processes of neoliberal globalisation, which has emerged since the 1970s; demanding the creation of a bold new global order of rapid capital movements, flows of international trade, greater complexity and technological-interconnectedness, and economic deregulation, pro-market regulatory reform, and liberalisation.
At the same time, there are vastly powerful and wealthy interests that benefit from the extension of free trade through these processes. Around the world, private capital interests and multi-national corporations have long sought to promote free trade and the economic liberalisation it entails, as this expands their frontiers for accumulation in a capitalist system.
The power of these interests has been reflected at the highest level; in the international trade treaties (e.g. TRIPS, TTIP, etc.) and supranational institutions (e.g. WTO, IMF, etc.) that shape the world economy. The result is a dominant narrative that says, whatever its truth, free trade and globalisation is beneficial for (basically) everyone, while protectionism is basically always bad.
Yet as the recent case of Biden’s Inflation Reduction Act (IRA) shows, this isn’t always the case.
American politics is absurd in its limitations — both profoundly neoliberalised so everything must be delivered through some higher cost lower efficiency private actor, and where influence, money and power mingle so that politicians can be bought with ease by lobbyists. Nonetheless, Bidens’ bill offers firms a huge array of tax and subsidy incentives to promote American renewable energy infrastructure and technology development, so long as those products and parts are made in the US. As the Financial Times writes, the “IRA will provide about $370bn of subsidies for clean energy, marking America’s most ambitious effort to tackle climate change”. Already, over twenty expanded or new clean manufacturing plants have been announced, including BMW spending $1.7bn on a new EV and battery manufacturing capacity in South Carolina, and South Korea’s Hanwha Q-Cells announcing a $2.5bn solar factory expansion in Georgia.
Overall, the IRA is expected to make a significant contribution to America’s effort to reduce its impact on the natural world, potentially reducing total GHG emissions some 40% below 2005 levels by 2030, and by 50–52% if additional actions are taken up. At the same time, over the next decade the bill will help create one million jobs domestically, while reducing electricity costs, supporting the shift from petrol to electric vehicles, and promoting cleaner air and better health, all after decades of the US stalling on climate action.
While this bill may not get the all-American oil-guzzling hegemon to net-zero by 2050 on its own, it’s a lot more than we might have expected, given recent flirtations with certain (ahem, fascist) leaders and the general American enthusiasm for fossil fuel lobbyist ‘campaign contributions’ (ahem, legitimised corruption).
American net-zero efforts aside, in response America’s trading partners in the EU have responded with furious criticism at these ‘protectionist’ measures, which they say discriminate against EU countries. The EU commission has warned of retaliatory measures that might include a complaint to the WTO. And there is talk of the EU loosening state aid rules, enabling quicker and bigger government support to green industries, increasing the speed of subsidies, accelerating new project permits, pumping capital into climate-friendly firms, and promoting green-focused public procurement.
On the issue of achieving net-zero, it seems that a bit of protectionism is just what the world needed.
Although divisions within the EU bloc might be challenging to navigate, with some members opposed to such measures, in a world where we’ve been rapidly sliding into climate catastrophe, it seems that a bit of ‘protectionism’ has provided a jolt of energy to two of the biggest polluting blocs in the world.
The introduction of the IRA by Biden’s administration has stirred up some inter-state, inter-regulatory regime competition; where different countries and regional blocks are now trying to out-compete each other in offering a space for investment in green infrastructure. As a result, on both sides of the Atlantic we may see a rush of investment into green technology and infrastructure. It may not be enough on its own to reach global climate goals, but it’s a start.
Of course, this isn’t to say that protectionism is always some panacea of socio-economic ills. Protectionist measures have been blamed for major economic crises, like the Great Depression. Trade wars, at the extreme end of protectionism, have long been shown to have significant negative consequences for participant countries and those beyond through their impacts on world trade. Short of depression or trade wars, the global monetary costs of increases in protectionist measures like trade tariffs can be dramatic. Instead, this episode serves to highlight that the impacts of different trade policies, whether open or closed, are complex and nuanced in their outcomes; they reflect the complex, globalised and deeply intertwined nature of modern economies, and necessarily, whatever the policy, there are some who gain and some who lose out.
Throughout history, protectionist measures in different forms have long had an important role in economic development strategies.
By providing some breathing room away from the dominance of the free trade agenda, the example of the IRA serves as a helpful reminder of this. For example, even after their violent and imperialistic dependence on resource, wealth and labour extraction from colonial territories in the hundreds of years prior, early industrialising countries like the US and UK critically relied on trade protections and heavy government intervention for their infant industrial sectors during the Industrial Revolution, indirectly and directly assisting in supporting capital accumulation, the development of institutions and infrastructure, and supporting training, research and development. Still today, the US and EU both continue to maintain significant protections and subsidies for their agricultural sectors, among others.
Elsewhere, the deployment of such policies by developmentalist states has been an important part of the East Asian success story (e.g. South Korea, Japan, Taiwan, among others) in recent years. Developmentalism is where the state intervenes in the economy, shaping industrial policy and capital towards national policy goals and economic development. State-led developmentalism might lean on policies that could be called protectionist, like controlling capital movements, active credit allocation policies, import restrictions or tariffs, but neither does this need to be equated with protectionism (rather, its state-led industrialisation) and such policies would likely loosen, for instance, once a target sector was adequately developed. Most recently, China has found significant success in using such practises, where for instance, it is now a leader in high-technology sectors like wind turbine manufacturing.
The accomplishments of China and others serve as an interesting counterpoint to the case of the IRA.
While green infrastructure and technology development have desperately been needed as part of the green transition, the way these programmes look to be delivered in the US (and probably the EU) reflects a certain tendency in neoliberal financialised capitalism.
Under such programmes, the American state has been enlisted to derisk the process of investment into green projects, ensuring reliable cash-flow for investors in return for their capital, as the frontiers of market-based finance are expanded into green infrastructure and technology development. Yet by so doing, this has narrowed the governance options available to the state.
While in a developmentalist regime the state typically seeks to direct capital towards national policy priorities, in market-based America, prioritising the accommodation of private capital places limits on the ability of the state to deliver such programmes outside of the hegemony of market-based governance regimes; eschewing the option of building a genuinely mission-oriented state that could implement a green transition that is sustainable, just, and equitable.
In this way, the US approach to building green infrastructure poses risks to the very green transition it hopes to address. By extending the reach of the market into new realms, exposing new frontiers to profit-seeking interests, it not only limits itself to a world of neoliberal climate governance but it risks displacing the problem of the climate crisis. While we need to reduce GHG emissions, and replacing fossil fuel infrastructure with green energy infrastructure is critical to doing this, the incentives of private actors have never been aligned with doing this (or anything) in a sustainable way.
For example, renewable energy technologies require large volumes of rare earth minerals to be manufactured. Yet the industrial mining practises required to produce such minerals are deeply damaging to the natural world. As demand for such materials increases, especially when driven by the incentives of capital, little care may be given to the impacts on the natural world. The urgency of responding to one planetary boundary, that of climate change, given over to the imperatives of the market, could impact others like that of the freshwater cycle, triggered by the push to mine minerals in even more unsustainable ways.
All of this means to say: the American IRA and what follows in Europe should be viewed with caution.
At first glance, we’ve seen here something of the falsehood of the neoclassical proposition that free trade is always better. Instead, American protectionism has spurred a necessary dose of international competition, pushing two of the worlds’ biggest historic emitters closer to a clean energy transition. Although not enough on its own, this feels like a small win from a climate perspective, whatever the rhetorical barbs.
Yet the way these proposals are likely to be delivered, in the old centres of historic capitalism, may instead only represent a new frontier for capitalist accumulation; limiting the capacity of the state to the toxicity of neoliberal governance, displacing the problem of the climate crisis even as they hope to solve it.
In this way, the IRA could be taken as a double-edged sword, at once perilous to all; a capitalist attempt to resolve a crisis of its own making, which poses a threat by its very intervention.
