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While many of the delegates at the World Economic Forum’s annual meeting this year used the event as an opportunity to encourage cooperation, driving home the theme of “Cooperation in a Fragmented World,” the issue of protectionism forced some difficult conversations in Davos, as the world’s biggest economies grapple with the question of how to address the climate and energy crises.
On the final day of the summit on Friday, during a panel on the economic outlook for the year ahead, International Monetary Fund chief Kristalina Georgieva urged delegates to “keep the global economy integrated for the benefit of all of us.” But while the spirit of working together was woven through the entire Alpine event this year, there was one major sticking point.
Tense conversations have been taking place over the past week about the U.S. Inflation Reduction Act. The climate, tax, and health bill has been viewed by some in Europe as a protectionist policy that threatens some European industries, due to incentives included in the plan, such as tax credits for American-built electric cars.
Earlier in the week, speaking on a panel, Sen. Joe Manchin defended the bill and sought to reassure European allies. “There’s been a lot of consternation and concerns about the IRA—the Inflation Reduction Act—thinking that it’s going to harm the E.U. There is no intent whatsoever to harm any of our allies,” he said, adding an assurance that “we’re always going to be there.”
Manchin couched progress on clean energy as a win-win for the U.S. and its partners across the pond. “If you really want a clean environment, a cleaner environment, and some calming of geopolitical unrest that we have, you better be able to do it quicker, faster, and better than any place in the world, and then share it with your friends,” he said. “That’s what we’re going to do.”
During Friday’s economic outlook panel, former U.S. Treasury Secretary Larry Summers drew a distinction between a trade war and a subsidy war, saying the latter was a “good thing” in the case of green subsidies.
“If we are all competing over who can accelerate a transition towards renewables more rapidly, who can be the biggest leader in storage and transmission technologies, that is a very healthy kind of competition, relative to all the kinds of competition the world has seen,” he said. “So yes, let’s compete on that.”
European Commission President Ursula von der Leyen set out the E.U.’s plans to attract green tech and climate-related investment on Tuesday, which many viewed as the bloc’s answer to the IRA. But she indicated that Europe and the U.S. should be working together and made it clear that she does not want the bloc to be too reliant on China in the energy transition. “For rare Earth [elements], which are vital for manufacturing key technologies, like wind power generation and hydrogen storage, Europe is today 98% dependent on one country: China,” she said. “We need to improve the refining of raw materials in Europe and, in parallel, we will work with our trade partners to cooperate on sourcing production and processing to overcome the existing monopoly.”
During Friday’s panel, French Finance Minister Bruno Le Maire took a strong stance on independence, but insisted that he wasn’t advocating protectionism. “The question is, where do we want to spend our European money? Do we want to buy foreign goods, foreign devices, foreign electric car batteries?” he asked. “We are fully convinced that there is a need to invest more in hydrogen, in semiconductors, in solar panels, in nuclear energy, in renewable energies, with the view of being more independent … while mixing growth and to fight against climate change.”
“The key question is not China first, or United States first, or Europe first. The key question for all of us, and for all the nations in the world, is climate first,” he added.
Policymakers struck a note of caution on the economy as the event drew to a close. While noting that things were “less bad than we feared a couple of months ago,” the IMF’s Georgieva warned of the triple threats in 2023 of a low growth rate, inflation and the continuation of the war in Ukraine.
She also indicated that the pain for households may still get worse. “Labor markets are holding firm so far, but interest rates are yet to bite and if they bite more severely, then we can see unemployment going up,” Georgieva said. “And it is very different for a consumer to have a cost of living crisis and a job than to have a cost of living crisis and no job.”
European Central Bank president Christine Lagarde said that 2022 had been a “weird, weird year” in terms of elasticity of supply. Lagarde hinted at her approach to policy in the eurozone this year, where inflation is close to 10%. “‘Stay the course’ is my mantra for monetary policy purposes. No question about that. But I think other players must also do the same thing. And they must do it in probably a more subtle way than they had in ’22.” The U.S. Federal Reserve took an aggressive approach to tackling inflation in 2022, with multiple rate hikes. “The fiscal support that was expanded in ‘22, for instance, must be better directed, better targeted, must be made such that it is not going to push the monetary policy actors to having to do a bit more,” Lagarde added.
While there was a lot to be concerned about, Summers also shared a bright spot. “I’ve been doing this for many years, and there has never been a moment where I have been so impressed by the potential of technology, whether it is green technology, biotechnology, artificial intelligence and information technology to make things better for all the world’s people,” he said. “But that will only happen with the right kind of political and financial foundation.”
— with reporting by Yasmeen Serhan