Time For World To Pivot Away From The US Economy

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While Biden signed a truce with Europe on tariffs, it started a perhaps even more damaging battle by launching a subsidy race.

The US Inflation Reduction Act for instance contains US$369 billion of subsidies in areas such as electric vehicles or renewable energy. And the Chips Act committed $52 billion to subsidize the production of semiconductors and computer chips.

China, Europe and the rest of the world

This US industrial policy might have been inward-looking, but it has clear consequences for the rest of the world. China, after decades of mostly export-based growth, must now deal with massive problems of industrial overcapacity .

The country is now trying to encourage more domestic consumption and to diversify its trading partners .

Europe, despite a very tight budget constraint, spends a lot of money in the subsidy race . Germany, a country facing sluggish growth and big doubts about its industrial model , is committed to matching US subsidies, offering, for instance, €900 million ($950 million) to Swedish battery makers Northvolt to continue producing in the country.

All those subsidies are hurting the world economy and could have easily financed urgent needs such as the electrification of the entire African continent with solar panels and batteries. Meanwhile, China has replaced the US and Europe as the largest investor in Africa, following its own interest for natural resources.

The incoming Trump mandate might be a chance to fix ideas.

One might, for instance, argue that the full-scale invasion of Ukraine, and the thousands of deaths and the energy crisis that followed, could have been avoided had the Biden administration been clearer to Russian president Vladimir Putin about the consequences of an invasion, and provided modern weapons to Kyiv before the war.

But the blame is mostly on Europe. Credit where it's due, the strategic problem of becoming too dependent on Russian gas is something Trump had clearly warned Germany about during his first mandate.

There is a clear path forward: Europe could help China fix its overcapacity problems by negotiating an end to its own tariff war on Chinese technology such as solar panels and electric cars .

In exchange, Europe would regain some sovereignty by producing more of its own clean energy instead of importing record amounts of liquid gas from the US. It could also learn a few things from producing with Chinese companies, and China could use its immense leverage on Russia to end the invasion of Ukraine.

The European Union could also work harder on what it does best: signing trade deals , and using them as a way to reduce carbon emissions around the world. This is not only about Europe and China. After decades of continuous improvement in all major dimensions of human life, the world is moving backward.