How to head off a new transatlantic trade war
If you’re nostalgically looking forward to the glory days of the Airbus-Boeing bust — with the transatlantic fight over plane subsidies suspended after 17 years of litigation with the World Trade Organization — a row over green tech has ambitions to bridge the gap.
Joe Biden’s Inflation Reduction Act (IRA), which emerged from the morass of Congress and went into effect in August, has the EU concerned. It contains patently discriminatory measures that offer US consumers tax credits for the purchase of electric vehicles only if they are assembled in North America. It also requires critical minerals and batteries to be increasingly purchased from North America or a country with which the US has a preferential trade deal, and discourages sourcing from high-risk countries like China.
In the subsidy race, this might be more politically awkward than Airbus-Boeing, which was essentially about competition between planes produced in their companies’ home countries in a mature industry. The EV loans could directly shift jobs, encouraging European and Asian auto companies to locate in the US in a fast-developing sector with an early-bird advantage.
This would come at a very awkward time for Europe, which is already threatened with rapid deindustrialization from its particularly severe version of the energy price shock in Ukraine. It’s not an isolated case either: EU officials note that there are other worrying programs in the IRA, such as government support for green hydrogen, not to mention the potential transatlantic subsidy race in semiconductor production.
Brussels has complained about the loans since an earlier iteration was discussed last year, and South Korea has also been garrulous. But Margrethe Vestager, the EU’s competition watchdog, told the Financial Times in an interview last week that Brussels was not immediately considering filing a WTO case.
While it may be unwise for Vestager to belittle the value of a bargaining chip so explicitly, it seems reasonable to leave the slow and cumbersome instrument of WTO dispute settlement on the shelf for now. The EU strategy at the moment is to try to influence the drafting of regulations to implement the IRA. The precise details of qualifications, waivers, and so on, sometimes mitigate the protectionist bite of US trade legislation greatly compared to its rhetorical bark. Valdis Dombrovskis, the EU trade commissioner and a man of details if ever there was one, is in Washington this week to offer his views.
But even if it is toned down in practice, the underlying direction of US industrial policy remains worrying. EU officials are pleased that Washington is taking climate change seriously, but they don’t see much sign of the Biden administration’s stated desire to work with allies to build green and resilient supply grids.
Unlike aircraft subsidies, the context for the US EV tax credit reduces reliance on China. Given Beijing’s penchant for manipulating the supply of commodities where they dominate global production, such as B. rare earth minerals, this is a perfectly reasonable goal. But Washington’s discriminatory methods suggest that domestic lobbying plays an outsized role.
The shifting of production by Korean and European automakers to the US is not about “ally shoring” that aligns supply networks with strategic alliances, but about simple protectionism. Some slick lobbying by Canada meant cars built in Canada and Mexico were also eligible for preferential tax treatment, but that makes it a regional deal, not a strategic one.
Even without a formal transatlantic trade agreement, there are mechanisms designed to deal with such irritants. The Trade and Technology Council, a cooperation forum set up by Brussels and Washington last year, is not supposed to deal with the tax issue for electric vehicles, but it is undoubtedly discussed there.
There should be some potential for a deal on climate and industrial policy, including the EU and US taking a slightly kinder view of each other’s potentially trade-distorting interventions. The EU has its own industrial policy ambitions: the Battery Alliance, a public-private partnership set up by the European Commission in 2017, is one of the more successful attempts to boost a new generation sector in Europe.
Brussels also wants the US to accept its attempt to offset the cost of carbon emissions between domestically produced goods and imports with its carbon border adjustment mechanism. For its part, the US, which is imposing a wide range of new export controls on chip technology on China, wants European governments to treat Beijing, in the EU’s own formulation, as a rival and competitor rather than a partner.
Any transatlantic deal will require a more constructive attitude, especially from the US. On trade and building a resilient supply ecosystem, the Biden administration has spoken of strategic cooperation, but has often acted unilaterally. The last thing a transatlantic partnership needs, while struggling for binding cooperation, is another drawn-out subsidy dispute to distract and divide it.