Erik Voeten — Green Industrial Policy and the Geopolitics of Investment in Critical Minerals
The U.S. and Europe view China’s dominance in critical minerals and the battery supply chain as a security threat, which motivates increasingly aggressive coercive policies. Yet, can industrial policies help diversify global supply chains through incentives? We study this question in the context of the U.S. Inflation Reduction Act (IRA) of 2022, which offered incentives for battery manufacturers to reduce reliance on China and gave preferential treatment to countries with a Free Trade Agreement (FTA). We argue that industrial policies can be effective but that they face strong credibility and distributive challenges. We first use an event study to show that major Chinese battery manufacturers and critical mineral companies suffered significant negative abnormal returns compared to firms in FTA countries in the days following the surprise IRA announcement. A difference-in-differences analysis of data on greenfield and brownfield investments then shows that since the IRA took effect, FDI in countries with an IRA-compliant FTA have increased significantly compared to those geopolitical allies of the US without an FTA. This investment effect is statistically and substantively significant, and driven entirely by non-Chinese investors. However, the effect disappeared in the second half of 2024 when the election of President Trump, who vowed to dismantle the IRA, became more likely. These findings thus demonstrate both the potential and limits of industrial policy as a foreign policy tool.Erik Voeten is the Peter F. Krogh Professor of Geopolitics and Justice in World Affairs at Georgetown University’s Edmund A. Walsh School of Foreign Service and Government Department. He is the director of the Mortara Center for International Studies. Professor Voeten’s research examines the role of international institutions and law in international affairs and, more recently, the political economy of the energy transition. He is a past editor of the academic journals International Organization and Research and Politics. He is one of the editors of the new site Good Authority and previously edited the Monkey Cage Washington Post blog. He teaches classes on international relations theory, international institutions, and statistical methods. His book, Ideology and International Institutions appeared with Princeton University Press in January 2021. Receive SMS online on sms24.me
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