Letter IEDI n. 1251—Biden Plan and Latin America
Under Biden, the US has adopted a far-reaching strategy to improve national infrastructure, accelerate the green transition, and strengthen the country's technological and industrial skills. This in a context of solid technological catching up by China, with not only economic developments, but also geopolitical ones.
Three pieces of legislation passed by Congress structured this initiative: the Infrastructure, Investment and Jobs Act (IIJA), of November 2021, the Creating helpful incentives to produce semiconductors and Science Act (CHIPS), and the Inflation Reduction Act (IRA), both of August 2022. Together, these Acts mobilize about $2 trillion over a ten-year period and have given rise to 160 specific programs.
Today's Letter IEDI takes up this theme, which was already addressed on other occasions, as in Letters n. 1083 and n. 1154, but now with a perspective more focused on its implementation and consequences for other countries, such as Brazil. For this, we use the study recently released by ECLAC “From Legislation to Implementation: building a new industrial policy in the United States,” by Raquel Artecona, Helvia Velloso and Hoa Vo.
Through these initiatives, the US seeks to stimulate the development and diffusion of green technologies and strengthen production chains critical to future competitiveness, notably semiconductors and batteries, gaining an advantage over Chinese aspirations to become a global power in advanced technologies and reducing US dependence on goods and inputs produced by countries subject to geopolitical tensions.
The infrastructure investments provided for in the Biden plan, in addition to boosting less favored regions and creating resilience in the face of climate change, also act as potential sources of demand and have been closely linked to national industrial production. Local content requirements to access tax benefits and prioritization in government procurement are mechanisms that have been employed.
The authors of the study emphasize, however, that the execution of the plan is permeated by important challenges by requiring the coordination of numerous federal agencies, different government spheres, multiple technologies and intense involvement of the private sector. The difficulties are organized into five fronts in the study:
1. The scale of the Biden plan requires a massive supply of skilled and specialized labor in critical areas, which takes time to build; the interdependence of initiatives precludes isolated approaches and individualized program tracking; managing these interdependencies will require extensive documentation produced by the various federal agencies involved.
2. The complexity of the objectives demands tolerance with “learning curves” for each program and requires the implementation of appropriate incentives for private agents and a good understanding of the dynamics of the relevant markets; as the designed framework is based on collaboration, isolated postures need to be avoided.
3. For adequate accountability, there are difficulties in measuring the impact of the resources made available by the Acts and monitoring their execution, avoiding waste. Therefore, according to the ECLAC researchers, it will be important to clearly define the authorities responsible for each program and for decision-making, as well as to prioritize the objectives and create clear metrics for policy evaluation.
4. Regarding regional development, there is a risk that local governments will not be able to take full advantage of the Biden Plan; in addition, the IRA operates mainly through support for private actors, for whom investments in these regions may not be justified.
5. As the initiatives of the Biden plan have criteria of provenance of products and components (local content), they can generate conflicts with foreign policy (such as the reaction of the European Union), leading to retaliation and damaging economic dynamism in the short term. Harmonizing industrial policy, trade policy and external relations is a major challenge.
It should be noted that many of these challenges pointed out by the study for the US case are also frequently mentioned in the case of Brazil, whose Nova Indústria Brasil (Brazil's New Industry) strategy was recently announced (Jan'24).
Although they believe it is too early to measure potential impacts of the Biden plan (IRA's especially), the ECLAC researchers indicate some preliminary signs:
• Since the approval of the IRA and CHIPS Act, more than 110 large-scale industrial projects have been announced, according to a survey by the Financial Times cited in the ECLAC study.
• The projects identified are varied, with emphasis on electric vehicles, batteries and equipment for solar and wind energy, but those related to semiconductor production predominate (Intel, TSMC, IBM and Micron).
• New industrial hubs are emerging, due to the regional diversification of investments, with Georgia and South Carolina having received, so far, the largest number of projects.
• In relation to foreign direct investment (FDI), those from South Korean and European companies predominate.
• Regarding labor, analyses of companies or business associations indicate a shortage of engineers and computer scientists, but also of construction workers.
• From a trade perspective, the Center for Economic Policy Research (CEPR) estimates a loss of between -0.2% and -0.9% of global trade, but it may be much higher in some sectors, such as electrical and optical equipment, which includes batteries, ranging between -1% and -6%.
The ECLAC study identifies two vectors of impact of the Biden plan on Latin America and the Caribbean (LAC). The “green transition” and current geopolitical tensions favor a large increase in US demand for minerals and critical inputs that are abundant in the region.
In addition, stimulating the reconfiguration of global value chains (GVCs) in search of resilience, countries closer geographically to the US and more reliable from a geopolitical point of view appear as outstanding candidates to receive foreign investment not only from the US but from other countries considered to be more vulnerable to geopolitical conflicts.
As a result, the authors of the study emphasize the potential increase in investments in some LAC nations, as well as the expansion of imports of inputs produced in the region. This phenomenon will benefit, according to them, especially countries with which the US has free trade agreements, as is the case of many in the region, such as Mexico.