Joe Biden’s arrival in the White House heralded a period of stability in US-EU trade relations following the turmoil of Donald Trump’s presidency. Now that detente is at serious risk of breaking down.
At issue is a landmark piece of US legislation called the Inflation Reduction Act (IRA), which includes $369bn of subsidies for green technologies aimed at luring investment to the US. Brussels says the regime is damaging to the EU’s industrial base and breaches World Trade Organization rules.
The two sides have set up a joint task force to resolve their differences but officials are downbeat about the prospect of significant changes. Absent a rethink in Washington, what can the EU do to mitigate the damage?
Why is the EU complaining?
Biden signed the IRA into law in August, hailing it as the most “aggressive action” the country had taken to confront the climate crisis. While the EU has welcomed the efforts to curb carbon emissions, it has complained bitterly about measures it says would give US-based enterprises an unfair advantage.
The incentives “discriminate against EU automotive, renewables, battery and energy-intensive industries”, EU trade commissioner Valdis Dombrovskis said. For example, a $7,500 subsidy for purchases of electric vehicles would now be restricted to those substantially made with parts from North America and assembled there.
The European Commission has argued that five measures in the legislation create tax credits and subsidies with “clearly discriminatory domestic content requirements”, claiming this breaches WTO rules. The EU also wants to get the same preferential terms the US has extended to Canada and Mexico when it comes to electric vehicles.
“We fear . . . we’ll see a negative impact on trade and investment in the EU,” Xiana Mendéz, Spain’s state secretary for trade, told the Financial Times. “We also fear that the access to the US market will be negatively impacted for our products.”
Will the joint task force find a solution?
Not so far. Congress passed the act by the narrowest of margins — with US vice-president Kamala Harris using her casting Senate vote — and there is little prospect of significant amendments. “There’s no appetite to take it back [to Congress],” said one EU diplomat. “Biden’s very pleased with this legislation.”
The Biden administration now has to draft rules to implement the measures but those with knowledge of the talks say it has not outlined specific changes it could make before the act takes effect on January 1.
Nor have the two sides discussed all the problem areas, with talks focusing on the electric vehicles issues. One hope for the EU is a possible loophole in the subsidy provisions: commercial vehicles do not have to be assembled in the US to qualify for a $7,500 consumer tax credit.
EU trade ministers meeting in Brussels on Friday said they wanted concrete solutions by December 5, when the US and EU will hold the next session of their regular trade and technology council.
Will the WTO get involved?
The commission has signalled that it could take the issue to the WTO if the talks fail to bear fruit. This would open the door wider to the EU taking retaliatory action such as tariffs against the US, said Sam Lowe, a partner at consultancy Flint Global.
But the process would take at least a year. And many EU members are reluctant to open a trade war over the issue given the recent progress that Europe and the US have made in other areas, pausing earlier disputes over aircraft subsidies and the Trump-era steel and aluminium tariffs.
The EU wants to maintain transatlantic unity in the face of the Russian invasion of Ukraine and the huge financial and military support that the Biden administration has extended to Kyiv. Allowing anger about the IRA to boil over into a major US-EU rift would carry a price.
“I don’t think the EU has a magic weapon. That’s why they have to talk,” said Lourdes Catrain, a trade lawyer at Hogan Lovells in Brussels.
Will the EU respond with its own subsidies?
The US subsidies are “an incredible amount of money,” one EU diplomat said. But that does not mean the bloc is unable to bring its own resources to bear.
The union is already disbursing its €800bn NextGenerationEU programme, which requires every member state to dedicate at least 37 per cent of national recovery spending on climate-related investments and reforms.
The EU is also devoting cash to green projects from its regional aid scheme, as well as backing initiatives in areas such as hydrogen and batteries. And it is seeking to boost the firepower of its RepowerEU energy plan, which aims to wean the EU off Russian fossil fuels and improve energy infrastructure.
Some EU politicians want to go further. French president Emmanuel Macron, who is visiting Washington this week, has mooted a “buy European act” that would channel support to domestic companies.
Robert Habeck, German economy minister, has called for a “strong European response” that could include subsidies. “We have to give our companies the ability to hold their own against global competition, especially when it comes to leadership in technology,” he told Handelsblatt.
Can Europe do its own Inflation Reduction Act?
The EU is constrained on two key fronts. Firstly, it is reluctant to replicate the local content provisions in the US legislation as lawyers say this breaches WTO rules. Doing so could open the EU up to challenges from other trade partners, who are also aggrieved about the US legislation.
What is more, the resources available for subsidies at the EU level are extremely limited. And at member state level too public finances remain under strain following the pandemic, with public debt hovering above 93 per cent of GDP this year in the euro area.
Some member states, including Germany, have the public money to offer more subsidies, but the risk is that this further imbalances the single market. The EU’s state aid rules, which aim to preserve a level playing field, have already been relaxed under a series of temporary measures aimed at responding to the Covid-19 crisis and more recently the energy price surge.
Additional reporting from Guy Chazan in Berlin