trade war A new one between Europe and the US is heating up on a small fire these days. It does not have the ranting statements of the former US president Donald Trump (“Europe is our greatest enemy”), the presidential orders imposing tariffs and tariffs on European steel overnight, or the mutual lawsuits at the World Trade Organization (WTO) tribunal. But it includes heavy European concern for the loss of jobs and factories, hundreds of billions in government subsidies on both sides of the ocean and a fight over the industrial future of the European bloc against the American one.
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What ignited the war is the American law with the somewhat misleading name – the “Inflation Reduction Act (IRA)”. The new law already entered into force at the beginning of the year and includes not only measures against price increases in the US, but also the allocation of 369 billion dollars as government subsidies to entire industrial sectors such as battery production, electric vehicles, renewable energies and the hydrogen industry.
These subsidies, as well as the low energy prices in the US due to its energy independence, beckon companies from all over the world, who will also receive generous tax benefits that will last for at least a decade as part of the program.
This law is the reason, for example, that the German car company Volkswagen announced that it would consider opening a new plant in Tennessee; that the Swedish battery company Northwalt plans to move to Arizona; that the Spanish energy company Iberdola will consider building a plant to produce green hydrogen in the US; and that the French engine manufacturer Safran has suspended a decision to build a new plant in Europe. It will grant a $7,500 subsidy to electric vehicles whose “most components” were produced in the country. In order to build a battery factory for electric vehicles, The Swedish company said that it will receive funding of between 600 and 800 million dollars if it moves to the US.
This law is also the main reason for the panic that gripped the European decision-makers in recent months, when they realized how much it was going to destroy the ground behind European industrial production, and perhaps even “steal” from the Europeans the vision of the green industry that the continent was the pioneer in adopting, at least from a statement point of view.
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At first, the Europeans mostly complained. French President Emmanuel Macron warned about two months ago that “we must wake up”, and the German Economy Minister defined him as an “existential threat” to European industry. They then threatened to go to the World Trade Organization to complain about what they called “unfair government assistance.”
But now, Europe has begun formulating a response plan to the law, which includes two main parts: an attempt to grant “equality of opportunity” to European companies that will operate in the US, and a parallel attempt to formulate an “appropriate European response” in terms of subsidies.
The first part included discussions that took place in recent days at the World Economic Forum in Davos. The European Union complained to the Americans that companies in Canada and Mexico would gain access to American subsidies, while Europeans would be deprived of them. In this aspect, “great progress has been made” – so reported German Chancellor Olaf Schulz and French President Emmanuel Macron in a joint meeting held at the beginning of the week.
But the other necessary response will probably be reaching into the European pocket and offering a similar subsidy of the European countries to these areas, to “level the playing field”.
However, the fundamental differences between the US – the world’s largest economic power – and an economically divided and divided European Union, may play a role in this. While Germany can afford to subsidize with a generous hand, debt-ridden Italy cannot, and France also faces heavy debts.
Germany objects to the establishment of a common fund for Europe
If the EU allows countries to loosen the reins and start subsidizing industries freely, this will create an advantage for the wealthier at the expense of others. “Such a situation should be avoided,” warned the competition commissioner in the Union, Margaretha Wester.
Therefore, the idea came up again and again to create – for the second time in the history of the European Union – a kind of common fund for the countries of the Union that would be financed through a loan as a single body, and that would invest in the same areas in which the Americans invest, and under the same conditions.
Germany is considered the main obstacle to the establishment of such a fund (due to the fact that it would actually finance the debts of less successful countries in the union), and Chancellor Schulz was unclear about the issue. A few weeks ago he expressed support, but in recent weeks he said that the issue “is not yet the chapter”.
Meanwhile, the rhetoric is escalating. “Protectionism prevents competition and innovation,” Schulz warned the Americans during his speech in Davos. British Economy Minister Grant Shapps was sharper, describing the American law as “dangerous”.
The Americans have meanwhile responded to some of the European demands by counter-offering to increase their subsidies, if Europe is able to do so. “The basis of this legislation is exactly what we need,” said US climate envoy John Kerry, in a message that the US is not that flexible to change.
“The current law is more extreme than Trump’s measures”
Charles Michel, the president of the European Council – the umbrella organization of the leaders of the member states – said this week in an interview with the German media that the Europeans are now considering what steps to take in response, and that “the continent must take its destiny into its own hands.” This year, he added, “will be critical in terms of the impact on the trajectory of the entire coming decade.”
“The USA is adopting a system of massive government subsidies”, Michel criticized the American move. The leaders of the European Union announced a summit meeting to be held in less than two weeks, in which they will discuss the European response.
“It is no secret that some of the elements contained in the law to reduce inflation have raised concerns due to some of the incentives it offers to companies,” said the President of the European Commission, Ursula von der Leyen, at the forum in Davos, where the issue was one of the main topics on the agenda.
Others pointed out that the American motivation to “turn around” the balance of trade between the blocs has not changed since the days of Trump. The American president reportedly said that he “doesn’t want to see German luxury cars on Fifth Avenue”, while now, the law initiated by the Biden administration will definitely provide a generous subsidy to “Made in the USA” electric cars. An executive at the McKinsey consulting firm told The New York Times that the current law is “probably more extreme … in terms of protectionism” than Trump’s measures against the European Union.
The ultimate goal of the law, however, is acceptable to both economic blocs. It is designed to promote green industries, reduce greenhouse gas emissions and create the basis for an industrial world where emissions will be zeroed out by 2050 to curb the world’s sharp warming trend.
“In my opinion,” said the head of the International Energy Agency, Patty Birol, “the American law is the most important climate legislation since the Paris Agreement to limit greenhouse gas emissions in 2015.”