China Gets a Great Leap Forward From Congress The Inflation Reduction Act’s damage to American energy and innovation is a gift to Xi Jinping. by Allysia Finley
“Capitalism and free markets made the U.S. the world’s leading innovator, energy producer and economic superpower. Though alarms about China’s supplanting the U.S. in recent years have probably been overplayed, they could wind up being a self-fulfilling prophecy if Congress keeps passing self-defeating laws.”
China’s economy is limping under the weight of government-created market inefficiencies, draconian Covid lockdown policies, an imploding real-estate bubble, and an aging population. But Congress’s self-defeating Inflation Reduction Act gives President Xi Jinping something to celebrate this November at the Communist Party’s 20th National Congress.
With a single legislative act, Democrats have increased Beijing’s geopolitical leverage, reduced American living standards and global economic competitiveness, and assisted Mr. Xi’s ambitions to dominate biotech. The kicker is that Democrats have told Americans their bill will deal a blow to China. Americans will be in for a rude awakening when they discover the truth.
Take the legislation’s effect on American energy production. The U.S. has become the world’s top oil and natural-gas producer owing to its abundant natural resources, hydraulic shale fracturing and other technological advances. The Inflation Reduction Act, however, effectively concedes American energy supremacy to China by turbocharging the government’s green-energy transition with $370 billion in climate spending.
Renewable energy requires vast amounts of critical minerals such as cobalt, nickel, manganese, lithium and graphite. China controls a large share of the world’s supply of each and also maintains a chokehold on their refining. Its near-total global monopoly extends to the manufacturing of lithium-ion batteries, cells and components as well as solar cells.
Consider that Russia produces about 10% of the world’s crude oil and accounted for 40% of Europe’s natural-gas imports before Vladimir Putin’s February invasion of Ukraine. By comparison, China refines 68% of the world’s nickel, 73% of cobalt, 93% of manganese and 100% of the graphite in lithium-ion batteries. Imagine the supply-chain chaos that Beijing could inflict if it were to use China’s mineral resources as a political weapon the way Mr. Putin has Russia’s natural gas.
Renewable plant construction and electric-vehicle production would grind to a halt. While Americans might not face the immediate threat of freezing during winter, Beijing could freeze a large part of the U.S. economy.
Foreshadowing how the Chinese Communist Party could use its new leverage, Chinese battery juggernaut CATL reportedly held off announcing a multibillion-dollar factory in North America to supply U.S. auto makers such as Ford and Tesla after House Speaker Nancy Pelosi visited Taiwan in early August. No doubt U.S. reliance on China for its green-energy transition has contributed to the White House’s wariness of poking the panda.
Democrats might reply that their bill’s tax credits would encourage electric vehicle and renewable manufacturers to “on-shore” supply chains. But subsidies that encourage mineral extraction in the U.S. won’t help if the Biden administration continues to block projects such as a lithium mine in Nevada and a massive nickel, cobalt and copper mine in Minnesota.
Tax credits for U.S. green-energy manufacturing also won’t overcome China’s enormous cost advantage—a product of the country’s economies of scale, lower labor and energy costs, and government support. The U.S. has already tried—and failed—to beat China in a subsidy race to the bottom. President Obama’s 2009 stimulus also provided hefty government loans and grants to U.S. manufacturers of solar panels, lithium-ion batteries and other green technologies. Many recipients, such as Solyndra, A123 Systems, Abound Solar and Beacon Power, later ran into technical problems or were undercut by lower-cost Chinese competitors.
At the same time, the Inflation Reduction Act will set off a subsidy chase by renewable-energy developers that will raise U.S. electricity prices and make it even harder for American manufacturers to compete with China.
Look at Germany, whose industrial output has declined since 2017 amid rising electricity prices owing to the hundreds of billions of euros it has spent boosting renewables. These subsidies have led to an excessive build-out of solar and off-shore wind power, which must be backed up by coal and natural gas. Keeping fossil-fuel plants on idle to ramp up and down on demand is expensive—that’s why even before the Ukraine war Germany’s power prices were the second highest in Europe and about twice as high as those in the U.S. All this is making it harder for German manufacturers to compete globally, and some are planning to move production abroad.
Or consider California, which is further along in the green-energy transition than any state. Its electricity prices are double those in Arizona and Nevada and over the past year have grown twice as fast as the national average as grid operators have scrambled to procure fossil-fuel power at high cost to back up solar. California’s energy-efficiency standards and spending—another focus of the Inflation Reduction Act—have done little to help. Faced with soaring electric bills, the nonaffluent have no choice but to raise their thermostats and find other ways to reduce their electric consumption.
The Democrats’ generous tax credits for alternative energy will also encourage U.S. oil and gas producers to shift more capital investment to biofuels, hydrogen and carbon capture. The result could be rising fuel prices—another dead weight on the U.S. economy.
Finally, the act’s Medicare drug price negotiations—i.e., price controls—will take a $101 billion bite out of the pharmaceutical industry. More important, they’ll reduce the incentive to innovate while Beijing nurtures its home-grown biotech industry with the aim of surpassing U.S. and European drugmakers.
Capitalism and free markets made the U.S. the world’s leading innovator, energy producer and economic superpower. Though alarms about China’s supplanting the U.S. in recent years have probably been overplayed, they could wind up being a self-fulfilling prophecy if Congress keeps passing self-defeating laws.
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