Trade war over green subsidies looms large over EU-US tech summit

The shadow of an imminent trade war over green subsidies is looming large at a high-level EU-US summit taking place on Monday.

Two vice presidents of the European Commission – Margrethe Vestager and Valdis Dombrovskis – are meeting at the University of Maryland with their US counterparts to discuss and deepen cooperation on economic matters of common interest.

The format, known as Trade and Technology Council (TTC), was launched last year to reset transatlantic relations after the fraught Trump years, which saw both sides slapping commercial tariffs on each other.

Although not a main item on the official agenda, one contentious topic threatens to overshadow the whole occasion: the Inflation Reduction Act (IRA), a landmark piece of legislation spearheaded by the administration of US President Joe Biden that contains $369 billion worth of investments to fight climate change and speed up the deployment of green energy.

Why have EU officials criticised the act?

Among its provisions, the IRA features 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.

This has led a growing choir of EU leaders to blast the legislation as a blatant protectionist tool to promote American cars to the detriment of the European industry.

“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.”

With the act scheduled to 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.

Subsidy race

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.

The strict principle dates back to the origins of European integration but has in recent years come under scrutiny as the global race between the US and China heats up.

“The Inflation Reduction Act should make us reflect on how we can improve our state aid frameworks, and adapt them to a new global environment,” said von der Leyen.

“We are very careful to avoid distortions in our single market. But we must also be responsive to the increasing global competition on clean tech.”

Von der Leyen then added that a “common European industrial policy requires common European funding,” referring to the COVID-19 recovery fund and REPowerEU, two initiatives that are being bankrolled through the issuance of common EU debt.

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.

The bloc has long maintained a “cautious approach” to subsidies, while the US has chosen to use them for “geopolitical aims,” said Niclas Poitiers, a research fellow at Bruegel, a Brussels-based economic think tank.

The Inflation Reduction Act places restrictions on minerals coming from “foreign entities of concern,” a thinly-veiled reference to China.

“It’s a political question because a lot of it is about avoiding a subsidy race where basically the EU and US (are) competing over subsidies and the winners are individual companies in the right sectors that can then ask for big handouts from the public purse,” Poitiers told Euronews.

“And that’s something, of course, that is in no one’s interest. At the same time, it is not in the EU’s interest to be discriminated against by the United States.”

Addressing this sort of trade friction was the prime objective of the Trade and Technology Council, but no major breakthrough around the IRA is expected to emerge from the Maryland meeting. 

Standards for trust-worthy artificial intelligence (AI), supply chains for semiconductors, quantum technology, digital infrastructure and connectivity will be instead the main subjects at the gathering.

In fact, EU officials are reluctant to make the Biden-led legislation a big topic of discussion in the council, fearing it could imperil agreement in other fields.

“We need cooperation, not confrontation,” Margrethe Vestager tweeted ahead of the meeting.

In a bid to separate the formats, the EU and the US launched in October a joint task force on the Inflation Reduction Act to tackle “specific concerns” raised by the bloc.

The task force has held “regular” meetings since then, said a European Commission spokesperson, without providing any more details on the progress made – or lack thereof.