Analysis | Why Biden’s green grants are infuriating US allies

1. What is the dispute about?

The Inflation Reduction Act passed last year in the US provides subsidies and tax credits for the production of electric vehicles, renewable electricity, sustainable jet fuel and hydrogen. Solar energy and other green industries are creating thousands of US jobs as the economy recovers from the pandemic, and a solid economy would help Biden as he seeks reelection in 2024. Policymakers in Europe, Japan and South Korea are concerned that the law could divert investment to the US that might otherwise flow to their regions.

Japan said the measures are “discriminatory” and could make its giant automakers hesitant to invest in America’s shift to electric cars. The South Korean Hyundai Motor Co. and its subsidiary Kia Corp. said the law puts them at a disadvantage because they don’t have EV plants in the US yet, but will soon). The loudest complaints come from Europe. Industrial subsidies have been at the heart of some of the thorniest disagreements between the US and the EU, including a decades-long dispute over aid to aircraft manufacturers Boeing Co. and Airbus SE, which led to trade tariffs worth tens of billions of dollars in 2019. These deadlocks can lead to additional costs for businesses, leading to higher prices and weaker growth. That’s the last thing either side needs right now, as governments are eager to boost industries that can help them meet binding climate commitments.

3. What are the EU’s main concerns?

The European Commission, which handles international trade matters on behalf of the 27 member states of the EU, says the US measures include local content, production and editing 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 the raw materials in their batteries are sourced and processed in the US or in countries that have a free trade agreement with the US. That means U.S. partners — such as Canada and Mexico — are exempt from the legal restrictions on content, while other foreign automakers are not.

4. Has the US allayed the concerns?

Biden makes no apologies for the law, saying it will benefit American workers and help fight climate change. Nevertheless, he acknowledged that the law contains some “glitches” and told reporters in late 2022 that there is room for adjustments to “make it easier for European countries to participate.” Separately, the U.S. Treasury Department has indicated that some imported cars are eligible for electric vehicle tax credits, which allayed some concerns.

5. How has the EU responded?

The member states have yet to agree on a common position on US law. The commission and EU leaders such as France’s Emmanuel Macron have called on Washington to change the rules. The committee has appealed directly to the U.S. Treasury Department with its concerns. The head of the European Parliament’s trade committee, Bernd Lange, called on the committee to file a complaint with the World Trade Organization. If the EU takes a dispute to the world trade body and wins, the US may have to change its rules or face trade retaliation, but that would take several years.

6. How is this struggle related to China?

The dispute threatens to undermine Biden’s efforts to build a coalition of Western allies to confront alleged trade abuses by China. Their willingness to provide financial support to their local industries makes it harder for them to complain about China handing out its own subsidies on a range of critical goods. Last year, Washington and Brussels negotiated a deal to establish new international rules to curb trade-distorting Chinese subsidies. The new US law represents a change of tactic – aiming to move global supply chains for clean energy products away from China so that Beijing cannot abuse its dominant position in some key commodities. Any resulting supply chain disruption could disproportionately affect the EU as it is 98% dependent on China for its rare earths and magnets, which are used in car batteries, solar panels, power generators and hydrogen storage equipment.

7. What does the WTO say?

Nothing formal, as the EU has not filed a dispute. But WTO director-general Ngozi Okonjo-Iweala urged the US and EU to try to settle the disagreement amicably in order to start a “race to the bottom” on subsidies. appearance.

8. Can the EU match Biden’s green subsidies?

Yes. The Biden administration has encouraged the EU to offer green subsidies itself. 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 bill. In fact, if the US and the EU succeed in aligning their green subsidy plans, it could accelerate global efforts to decarbonise the economy and become a model for other countries to emulate.

9. Could there be another transatlantic trade war?

It’s too early to say. Biden says he is committed to addressing EU concerns and that Treasury Department implementation work is underway. German Chancellor Olaf Scholz says he is confident there will be no trade war and expects the US and EU to reach an agreement to allay Europe’s concerns.

More stories like this are available at bloomberg.com