EU countries say action needed against US subsidies but options are limited

European trade ministers are gathering in Brussels on Friday to discuss the “discriminatory” US Inflation Reduction Act but with just over a month to go before the legislation comes into force, there appears to be no concrete solution on the table yet.

The main issue for Europe is to ensure it doesn’t enter into a trade war with the US which could splinter western unity in the face of Russia’s illegal war on Ukraine.

“The Inflation Reduction Act as it stands now is quite worrisome, very worrisome, to be honest,” Liesje Schreinemacher, the Dutch Minister for Foreign Trade and Development Cooperation, said upon her arrival at the Foreign Affairs Council.

“We have to take it step by step. I want to avoid a trade war by any means, because it hurts the US economy, it hurts the European economy. So no one benefits from any trade war.”

Her Irish counterpart, Leo Varadkar, meanwhile said that the US legislation has “put a spanner in the works” in trade relations between the US and EU. 

‘Need for action’

Washinton’s $430 billion anti-inflation bill includes state aid to boost US manufacturing and incentives for consumers to buy American products including cars, batteries and renewable energies. It was signed into law in August and will come into force next year. 

EU officials say that the bill risks unfairly discriminating against its own products and that it goes against international trade rules. 

“There are $367 billion of US subsidies, of which $200 billion are actually not WTO (World Trade Organisation) compliant,” Olivier Becht, French Minister for Foreign Trade and Attractiveness told reporters.

And with energy prices much higher in Europe than in the US as a result of the war in Ukraine, there is an added fear that many flagship European industries could relocate across the Atlantic to take advantage of local state aid and lower energy costs.

A joint EU-US Task Force to resolve the issue has been set up and two meetings have now taken place. A third is to be held soon.  The bloc’s position is that its manufacturers should be granted the same access to the US market as those from Mexico and Canada.

“I think the need for action will be pretty soon,” Johan Forssell, Sweden’s Minister for Foreign Trade and International Development Cooperation said.

“The Task Force has another couple of weeks to go, very forced time schedule here,” he went on. “I think we cannot wait too long until we make a decision because I mean, the IRA, the decision has already been made in the US and this has started happening now.”

Varadkar also said that Ireland hopes that a solution can be found at the negotiating table but also emphasised that “I think it’s fair to say that absent that, there will have to be a response from the European Union”

“Nobody wants to get into a tit-for-tat or a subsidy race. But what the US has done really isn’t consistent with the principles of free trade and fair competition,” he added.

A Buy European Act?

The options however are limited. 

Taking the matter to the WTO is largely deemed a dead-end as efforts to reform the organisation have been stalled for years. The main issue is its dispute settlement system which the US has more-or-less abandoned, turning instead to a bilateral approach to resolve its issues with other countries. 

“We also know that taking the dispute to the WTO if the Dispute Settlement Body is not changed, well that is also a risk,” France’s Becht noted.

The solutions he mentioned “could be either coercive or obviously support our own companies, here on European soil.”

France has publicly supported a so-called “Buy European Act” to counter the Inflation Reduction Act and the large subsidies the Chinese state gives to its own companies. 

President Emmanuel Macron is largely expected to address the topic with US President Joe Biden when he visits Washington next week.