The global economy is entrenched in a subsidy arms race. Over the past year, world leaders have been howling at the moon over two pieces of landmark legislation launched by the Joe Biden administration -- the Inflation Reduction Act and CHIPS and Science Act -- that hand out billions of taxpayer dollars to those large villainous corporations in the name of going green. Foreign countries are griping that the United States is engaging in unfair trade practices by using subsidies to entice companies, forcing them to adopt comparable policies to attract or maintain businesses inside their borders. The economic version of mutual destruction will result in a trail of more profits for big business, bloated budgets for governments, and extra fleecing of cash-strapped taxpayers.
Joe Biden Hurts Canadians’ Wallets
Volkswagen posted $275 billion in revenues in 2021 and enjoys a market cap of $70.21 billion. Since going public in February 1994, shares have soared more than 560%. With exceptional books, why would one of the largest automakers in the world require government subsidies? Canadians are asking this $13 billion question right now after Prime Minister Justin Trudeau offered the German company this astronomical amount of loonies and toonies over the next ten years to construct a battery-manufacturing plant in southwestern Ontario. Despite criticism from Conservatives and the New Democrats, the Liberal government hinted that more of these agreements could be established.
But political observers purport that Ottawa made this deal in response to growing pressure from south of the border. Because Washington ostensibly possesses an eternal money tree on the White House lawn, the Great White North had to act with more than a Double-Double, a box of Timbits, and a Toronto Maple Leafs jersey. If Canada is participating in an expensive tit-for-tat game to combat the hundreds of billions of dollars in corporate welfare emanating from the Joe Biden administration, other governments are likely to be flirting with similar schemes, too. Some leaders feel like they almost have to at this stage of the game. Just ask the United Kingdom or France.
Keep Calm and Subsidy On
The Institute of Directors, an association of business leaders, thinks there needs to be a British version of the Inflation Reduction Act to compete against President Biden's clean energy subsidies, arguing that the White House is incentivizing companies worldwide to choose the US over the UK for green-related investments. The group surveyed nearly 900 businesses and found that about 80% concurred with approving subsidies to compete with the United States.
French President Emmanuel Macron hammered his American counterpart, complaining that exorbitant US subsidies encourage European industry to invest across the pond rather than within the trade bloc. French Economy Minister Bruno Le Maire announced earlier this year that Paris would launch a green subsidies package to counter Washington’s taxpayer-funded handouts and prevent further draining of regional investment. It is not surprising that France is cozying up to China.
Cases in point, Kontrolmatik Technologies, Northvolt, and Holcim AG. Kontrolmatik is a Turkish company constructing a battery plant in Colleton County, SC. The foreign entity wants to take advantage of up to $1 billion in federal tax credits over the next decade by investing in a $279 million facility that is expected to create nearly 600 jobs. Northvolt is a Swedish battery producer that confirmed it would prioritize expansion efforts in the United States over Europe to receive almost $1 billion in US government assistance to establish a factory for electric-vehicle batteries. Finally, Holcim, a building material manufacturer headquartered in Switzerland, plans to bolster its presence in North America to garner some of that delicious Inflation Reduction Act money.
What is the difference between European countries and Washington? The US administration has the Federal Reserve that can indefinitely monetize the ballooning budget deficits. And, based on a recent estimate from Goldman Sachs, the Inflation Reduction Act will cost a lot more than what Joe Biden and the Democrats initially touted. The uncapped tax credits that businesses are taking advantage of will potentially result in the legislation costing taxpayers north of $1.2 trillion, which is in addition to states embracing comparable taxpayer- and inflation-fueled measures.
Poor Economics
State-funded subsidies have taught the public a lot over the years. First, public-works mechanisms distort the marketplace by producing malinvestment. Second, they allocate much-needed labor from other sectors, particularly in a full-employment economy. Third, once corporations become addicted to this free money, they inevitably threaten to leave the jurisdiction at the end of the contract unless this stream of taxpayer cash continues to flow, forcing politicians to agree to these demands to keep the jobs. In the end, a global subsidy arms race has consequences for everyone except for corporate welfare recipients and ribbon ceremony-loving politicians.
