The Inflation Reduction Act (IRA), passed in the United States a year ago, has caused a lot of concern in Europe. This ambitious program in favor of the climate and the development of green industries is welcome, but its protectionist content appears threatening for the European economy.
By explicitly reserving public aid for local production, that is to say by promoting “made in USA” in violation of the principles of the World Trade Organization (WTO), it raises fears of relocations of European companies towards the United States, or even a race for subsidies between States which could make the green transition even more costly.
What should the European response be? To shed light on the debate, the Council of Franco-German Economic Experts examined this American program in detail and assessed its economic impacts.
Read the article: Article reserved for our subscribers Inflation Reduction Act: “Europe risks facing a lack of competitiveness in the production of key components of the energy transition”
While fears of an economic shock must be allayed, the IRA reminds us of the scale of the industrial challenge represented by decarbonizing our economies. A coordinated response, which pushes European programs faster and further, and which invests in a rapid energy transition based on renewables, but also on mutual support for French nuclear power and German hydrogen, seems to us to be the best strategy.
Avoiding an industrial war
Our first observation is that the importance of the IRA must be put into perspective. The total cost of the IRA, estimated in a wide range from 390 to 900 billion dollars (approximately 365 to 844 billion euros) for the period 2023-2031, is comparable to the overall financial volume of the various programs already launched by the European Union (EU) to achieve climate objectives and facilitate the green transition. Furthermore, our estimates indicate that IRA subsidies are expected to have minimal overall macroeconomic impact in both the US and EU. In this context, an open industrial war both with the United States and within the EU should be avoided.
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However, this new framework could encourage certain industries to invest more in the United States rather than in the EU; this is why we conducted a more in-depth review at a sectoral level.
With regard to the production of electric vehicles in particular, the expansion of the American market should not massively divert demand or production from Europe, which will remain, in 2030, a more important sales market than that of the United States. . The automobile market is in fact characterized by a continental aspect where transport costs and customs duties largely encourage the local establishment of production sites. More generally, the IRA does not pose significant economic security risks to the EU.
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