With the European officials describing the green subsidies as protectionist, the prospects of EU-US trade war are increasing as the multibillion dollar Inflation Reduction Act has become a flashing point for transatlantic relations.
The two sides are scheduled to have talks deepen cooperation on economic matters of common interest in New Jersey under a format known as Trade and Technology Council (TTC), which was launched last year. Its aim was to reset transatlantic relations after the fraught Trump years, which saw both sides slapping commercial tariffs on each other.
It is the $430 billion Inflation Reduction Act (IRA) which is the point of contention. It contains $369 billion worth of investments to fight climate change and speed up the deployment of green energy.
The IRA provides tax credits for electric vehicles – up to $7,500 for new purchases – that will only apply if the product is assembled in the US and the majority of components are sourced domestically or from a free trade partner.
Unlike Canada and Mexico, the EU doesn’t have a free trade deal with the US, which means EU-made cars will be automatically excluded from the generous subsidies.
Solar panels, batteries, heat pumps, biomass stoves, sustainable fuels and clean hydrogen will also be eligible for some form of tax credit under the IRA.
“There is a striking symmetry between the Inflation Reduction Act and the European Green Deal. Both of them are simultaneously a climate strategy, and a strategy for investment and growth,” European Commission President Ursula von der Leyen said on Sunday.
“Yet, the Inflation Reduction Act is also raising concerns here in Europe, against a very particular backdrop for our industry and economy.”
As the IRA will take full effect in January, the EU is scrambling to negotiate a solution with Washington in order to avoid a full-blown trade war across the Atlantic.
For Brussels, the ideal breakthrough would be for the Biden Administration to add an exemption granting the EU and its manufacturers the same rights as those from Canada and Mexico.
“There are tweaks that we can make that can fundamentally make it easier for European countries to participate and/or be on their own,” Biden said last week while hosting President Emmanuel Macron of France. “I never intended to exclude folks who were cooperating with us.”
But the legislation was already approved by the US Congress with a hard-fought, razor-thin Democratic margin, making it more difficult to introduce further amendments.
The EU could also file a legal complaint before the World Trade Organization (WTO), although this option would entail a protracted process of uncertain resolution.
Macron had earlier warned that US choices threatened to “fragment the West.” Appearing alongside Biden, he said they had “an excellent discussion” on the legislation and had agreed “to resynchronize our approaches, our agendas,” because “we share the same vision” for more jobs and a secure supply chain. “The circumstances mean that we have no alternative but to work together,” he said.
A more aggressive solution, advocated by France, would see the EU counterattack with its own programme of green subsidies to benefit European companies.
Under EU law, industrial subsidies are closely examined by the European Commission, which has the power to reject them if they can damage the economic balance across the internal market. This precludes the biggest member states from stifling smaller competitors with massive state aid schemes.
But the idea of issuing fresh EU debt or spending billions on industrial subsidies is divisive among member states, with no clear consensus in sight.