Domestic Investments Can Aid All Democracies

Last summer’s Inflation Reduction Act (IRA) was a huge win for America’s “green” game, but it also provoked worries among U.S. allies about the protectionism underlying the domestic content and sourcing requirements of the act. While moving vulnerable and next-generation supply chains out of China and other authoritarian countries is critical, these provisions needlessly undermined the resurgent spirit of collaboration among the U.S. and its allies, sparked by Russia’s invasion of Ukraine. Rather than harness that growing alliance of democracies, the IRA risked alienating our global partners without creating a clear alternative to China’s green technology dominance.

The act did include provisions that allowed sourcing from countries that support the open, rules-based international order—through features that included extending incentives to countries with which the U.S. had a free trade agreement. But it should have gone further. The U.S. could have bolstered the economic security of a democratic alliance of nations by swapping (as we argued before) “domestic” content provisions for “democratic” content provisions.

The Treasury Department and IRS recently released guidance interpreting some of the provisions of the act, including which electric vehicles will qualify for the clean-vehicle tax credit, based on where key materials are sourced, and where batteries and other components are manufactured. In so doing they sought to thread the needle between U.S. decision-makers like West Virginia Senator Joe Manchin (a key architect of the legislation), who want to push for exclusive domestic manufacturing, and U.S. friends and allies in Europe and elsewhere who don’t want their companies and components boxed out of this growing U.S. market.

The guidance on the IRA leaves it somewhat ambiguous how free trading partners will ultimately be defined. Further interpretation of the legislation, as well as the CHIPS and Science Act and other significant domestic investment plays, provide excellent opportunities to enhance the ally-shoring potential of federal legislation by setting definitions and rules that allow the U.S. to continue to build global democratic supply chains while strategically cutting out China and other bad actors. Further rule-making around U.S. domestic investments can be turned into creative tools to strengthen democracy and undermine increasingly aggressive authoritarians that are seeking to replace the open, free, rules-based international order.

One such solution could be to tier the incentives for firms and consumers for buying electric vehicles, producing clean energy, and other “green” technologies—with the biggest rewards for those made at home, but significant rewards for any made in a genuine democracy.

The U.S. could also seek to reward companies and countries collaborating on sanctions against Russia or companies that exited Russia voluntarily after its invasion. Similarly, the U.S. could extend incentives to others willing to join Washington in blocking the export of highly sensitive technologies to China. Rewards could also be extended to countries that implement UN sanctions regimes or hold human rights abusers to account.

The U.S. has gotten creative in its trade agreements before to accomplish other goals. For example, the United States-Mexico-Canada free trade agreement (USMCA) includes provisions for 75 percent “regional” domestic content (meaning made in North America), as well as provisions requiring that more than 40 percent of an auto’s content be made by workers earning at least $16 an hour.

There certainly is popular support and a good case to be made for more U.S. production of next-generation energy technology. There’s also a legitimate argument that enhanced U.S. investment in domestic R&D, manufacturing, and job training to produce more semiconductors and electric vehicles is a good thing—creating new good-paying jobs in these emerging sectors and breaking over-reliance on any one overseas supplier.

But growth in these emerging industries will benefit from a selective deepening of strategic international alliances. Even if we wanted to “go it alone” on all fronts, it’s simply not possible. For example, we do not have the domestic natural resources or processing capacity to meet the surging demand for lithium, an essential mineral in electric vehicle batteries. China controls more than 60 percent of lithium processing worldwide, creating a bottleneck dependency for the U.S. and many other countries that must rely on Chinese intermediaries to turn raw materials into usable products. Sourcing and processing enough lithium to meet demand offers an opportunity for deeper partnerships with Australia, Chile, Bolivia, Argentina, and potentially Mexico.

Tailoring the rules for implementing the IRA, the CHIPS and Science Act (which seeks to boost domestic semiconductor production), and any other economy-building legislation to do more ally-shoring offers a better path than “on-shoring” for the health of our economy, the economies of our allies, and for the long-term survival of democracies around the world.

It is also a better way to check China and other authoritarians’ bad behavior by strengthening the economic and geopolitical hand of our friends and partners, who should increasingly work with us against our mutual adversaries.

The senseless invasion of Ukraine has rekindled global appreciation for the importance of preserving democracy and building alliances of democracies working together. An economic alliance of democracies is the logical next step—protecting America at home and supporting our values worldwide.

John Austin directs the Michigan Economic Center and is a Nonresident Senior Fellow with the Brookings Institution and the Chicago Council on Global Affairs. Elaine Dezenski is Senior Director and Head of the Center on Economic and Financial Power at the Foundation for Defense of Democracies. FDD is a Washington, DC-based, nonpartisan research institute focusing on national security and foreign policy.