1. What is the dispute about?
The Inflation Reduction Act passed in the US last year offers subsidies and tax credits for the production of electric vehicles, renewable electricity, sustainable aviation fuel and hydrogen. Solar and other green industries are creating thousands of US jobs as the economy recovers from the pandemic, and a solid economy would help Biden if he seeks reelection in 2024. Policymakers in Europe, Japan and South Korea are concerned that the law could lure investment to the US that might otherwise flow to their regions.
Japan said the measures are “discriminatory” and could make its giant automakers more hesitant to invest in the US shift to EVs. South Korea’s Hyundai Motor Co. and its affiliate Kia Corp. said the law puts them at a disadvantage because they don’t have any EV plants in the US yet but soon will). The loudest complaints have come from Europe. Industrial subsidies have been at the core of some of the thorniest disagreements between the US and the EU, including a multi-decade dispute over support for aircraft makers Boeing Co. and Airbus SE that led to tariffs on tens of billions of dollars worth of trade in 2019. These stand-offs can result in additional costs for companies, leading to higher prices and weaker growth. That’s the last thing either side needs right now, with governments keen to foster industries that can help them meet binding climate commitments.
3. What are the EU’s main objections?
The European Commission, which handles international trade matters on behalf of the EU’s 27 member states, says the US measures include local content, production and assembly requirements that discriminate against non-US companies. Specifically, the law offers consumers a $7,500 tax credit for electric vehicles as long as 40% of raw materials in their batteries are extracted and processed in the US or in countries that have a free-trade agreement with the US. That means US partners — such as Canada and Mexico — are exempt from the law’s content restrictions, while other foreign car producers are not.
4. Has the US addressed the concerns?
Biden is unapologetic about the law, saying it benefits US workers and helps fight climate change. Nevertheless, he acknowledged that the law has some “glitches” and told reporters in late 2022 that there’s room for tweaks to “make it easier for European countries to participate.” Separately, the US Treasury Department has signaled that some imported cars will qualify for electric-vehicle tax credits, which assuaged some concerns.
5. How has the EU responded?
Its member states have yet to agree on a common stance on the US law. The commission and EU leaders such as France’s Emmanuel Macron have called on Washington to change the rules. The commission filed a direct appeal to the US Treasury Department with its concerns. The head of the European Parliament’s Trade Committee, Bernd Lange, called on the commission to file a complaint at the World Trade Organization. If the EU lodges a dispute with the global trade body and wins, the US might have to change its rules or face trade retaliation, but that would take several years to play out.
6. How is this fight related to China?
The dispute risks undermining Biden’s effort to build a coalition of western allies to confront alleged trade abuses by China. Their readiness to offer financial support to their local industries makes it harder for them to complain about China doling out its own subsidies on a range of critical goods. As recently as last year, Washington and Brussels were negotiating a deal to set new international rules aimed at curbing trade-distorting Chinese subsidies. The new US law represents a change of tactics — aiming to redirect global supply chains for clean-energy products away from China so that Beijing can’t abuse its dominant position in some key raw materials. Any resulting supply-chain disruption could affect the EU disproportionately as it relies on China for 98% of its rare-earth minerals and magnets, which are used in car batteries, solar panels, power generators and hydrogen storage equipment.
7. What does the WTO say?
Nothing formally, as the EU hasn’t filed a dispute. But WTO Director-General Ngozi Okonjo-Iweala urged the US and EU to try to settle the disagreement amicably to prevent a “race to the bottom” on subsidies.
8. Could the EU match Biden’s green subsidies?
Yes. The Biden administration has encouraged the EU to offer green subsidies of its own. In January, European Commission President Ursula von der Leyen announced a “Net-Zero Industry Act” aimed at increasing funding for green technologies in response to the impending US climate law. If the US and EU can successfully align their green subsidy plans, it could even accelerate global decarbonization efforts and become a model for other nations to emulate.
9. Could there be another transatlantic trade war?
It’s too early to say. Biden says he’s committed to addressing the EU’s concerns and the Treasury Department’s implementation work is ongoing. German Chancellor Olaf Scholz says he’s convinced there won’t be a trade war and expects the US and EU to reach a deal to resolve Europe’s concerns.
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