Unilateralism is no answer to friendshoring

By Song Kyung-jin

Unilateralism tends to create more problems than solutions. The U.S. Inflation Reduction Act (IRA) is a good case in point. Enacted on Aug. 16, the IRA is meant to deal with challenges the U.S. economy is faced with ― to fight high inflation, combat climate change and create a 15 percent minimum corporate tax rate.

The causes are noble; however, it is centered on investments and jobs in the U.S. at the expense of its trading partners and friends. Unilateralism imbued in the Act with little concerns for its global impact is hurting carmakers and workers of its friends and partners in global supply chains and the U.S.' global leadership.

While there are differing views and estimates, with regards to its possible effect on inflation and confidence of its friends and partners, the U.S. global leadership is undoubtedly likely to weaken further as it stands. The estimated impact does not look big enough to offset the damaged confidence of friends and partners. The Penn Wharton Budget Model at the University of Pennsylvania estimated a low impact on inflation. The U.S. Congressional Budget Office is also skeptical of the IRA's effect on reducing inflation at least until 2023.

The U.S.' global leadership was instrumental to the world's peace and prosperity in the post-World War II era characterized by democracy, free trade, globalization, and multilateralism. Deepened economic interdependence and economic successes such as Korea and China are the products of the U.S.-led world order that is now almost in tatters due to increasingly permeating nationalism, protectionism and unilateralism.

With just 55 days left as of Sept.14 until the midterm elections U.S. politicians are a distinct group of people more positive about the IRA's impact on inflation, clean energy transition, and employment.

The main provisions of the IRA include subsidies up to $7,500 to be given to buyers of electric vehicles (EVs) of which final assembly is conducted in North America. It is expected to affect negatively several carmakers in the European Union, Japan and Korea whose final assembly takes place outside the United States. It is clearly discriminating against EVs manufactured outside the United States in a breach of the rules of the World Trade Organization (WTO) and the KORUS FTA. More importantly, the countries concerned are all critical friends and partners in its friendshoring and allyshoring endeavor.

The Korean automakers, Hyundai and Kia. Hyundai and Kia, are expected to be hit particularly hard, given its growing share in the US market. Their share combined accounts for 9 percent in the US EV market, trailing Tesla whose U.S. market share exceeds 75 percent.

Quickly after the IRA was put in place, the Korean Ministry of Trade, Industry and Energy expressed its intention to explore the possibility of lodging a complaint with the WTO over the issue, while continuing its negotiations with the Biden administration to minimize losses. Some pundits argue against the idea of filing a complaint with the WTO, which they say will be a long and complicated process.

One should be advised that the WTO has never been a place for a quick fix even when it functioned fairly well and the symbolism it carries transcends the long, complicated procedures even now when it functions less efficiently. I am of the view that it is a right approach to give a clear signal to the world that unilateralism, especially to its friends and partners, would be refuted and rejected.

One official after another is flying to Washington, D.C. to find the best possible solution. The Biden administration promised to review the IRA's impact on Korean EV manufacturers. Nonetheless, given the U.S. political schedule, any immediate action is unlikely ahead of the mid-term elections to change course out of fear that it may give the wrong signal to U.S. voters.

In the meantime, another useful and more neutral venue to put the issue on the negotiating table and seek assistance would be the Indo-Pacific Economic Framework (IPEF). Its core objective is to advance resilient, broad-based economic connectivity and integration in the Indo-Pacific region. Moreover, the IPEF's four main pillars ― trade, supply chains, clean economy and fair economy ― have direct relevance to the IRA's impact on the member countries. If the United States wishes to keep its IPEF initiative intact, concrete mutual benefits should be developed for all 14 members.

Also, the outcome documents of the IPEF ministerial meeting held on Sept.8-9 in Los Angeles laid the groundwork conducive to including discussions on the IRA. The ministerial statements repeatedly emphasized respecting and observing the ILO's Fundamental Principles and Rights at Work that stresses the importance of workers' rights and decent jobs. Workers' rights and decent jobs do not stop at the U.S. workers. The Fundamental Principles and Rights at Work apply to all workers.

It is time for the United States to move from a talk-the-talk mode to a walk-the-walk mode.

Dr. Song Kyung-jin (kj_song@hotmail.com) led the Institute for Global Economics (IGE), based in Seoul, and served as special adviser to the chairman of the Presidential Committee for the Seoul G20 Summit in the Office of the President. Now, she is executive director of the Innovative Economy Forum.