Biden’s climate plan strains trade ties with Europe | Popgen Tech

London
CNN Business
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The world’s largest economic relationship has hit a rough patch.

The European Union and the United States – together responsible for a third of world trade – have clashed in recent weeks over US President Joe Biden’s landmark $370 billion climate plan.

The Inflation Reduction Act (IRA), which passed Congress in August, promises generous subsidies and consumer tax breaks that benefit North American automakers. So far so good. However, Europe claims that the law will harm its companies that sell in the US market. Japan and South Korea have also raised similar concerns.

Consumers can receive a tax credit of up to $7,500 for some new electric vehicles (EVs), depending on how many of their components were manufactured or assembled in either the United States, Canada or Mexico.

Subsidies for carmakers that buy US-made parts, including EV batteries, would make it harder for European companies to compete and could divert investment away from the bloc, according to the European Commission. The USA plan also offers tax credits that encourage domestic production of hydrogen and other renewable fuels.

“The IRA forces European companies to move manufacturing to the US to participate in US-based projects that weaken European industrial capabilities,” Yvonne Bendinger-Rothschild, executive director of the European American Chamber of Commerce, told CNN Business.

“While the ‘buy American’ provision in particular was possible that President Biden needed to get the bill through Congress, such a policy is not how you treat friends,” she added.

Thierry Breton, the official responsible for the EU’s vast internal market, pulled out of a meeting of an EU-US forum on trade and technology on Monday, saying not enough time had been given to discuss the bloc’s concerns .

In a statement after Monday’s meeting, the EU-US Trade and Technology Council said that “preliminary progress” had been made by a separate joint task force.

“We acknowledge the EU’s concerns and underline our commitment to constructively address them,” the TTC said.

The stakes are high for both parties. Transatlantic trade reached a record €1.2 trillion ($1.26 trillion) last year, according to the European Commission, which describes it as “a key artery of the world economy.”

While China is Europe’s largest trading partner for goods, the United States takes first place when services and investment are included.

That partnership has become increasingly important in 2022, especially for Europe. Since Russia invaded Ukraine at the end of February, there was a dramatic increase in shipments from USA liquefied natural gas (LNG) across the Atlantic as EU countries scrambled to replace Moscow’s energy imports.

But the IRA presents a potentially serious obstacle. While a trade war is unlikely, the plan tests the transatlantic alliance and pressures Europe to consider mobilizing its own package of subsidies.

European Commission President Ursula von der Leyen on Sunday criticized the protectionist “Buy American logic” of the plan, saying that this could trigger a subsidy race between the two sides. An “expensive trade war” — which typically involves both sides imposing tariffs on imports – was not in the bloc’s interest, she said.

Still, Georg Riekeles, co-director of the European Policy Centre, is pessimistic about the way forward. The IRA is now law, and there is little appetite to bring it back to Congress to make substantive changes, he told CNN Business.

“It is doubtful that answers will be found in Washington now,” he said.

The IRA is not the first time that Washington and Brussels have butted heads.

In 2018, former US President Donald Trump slapped a 25% tax on steel imports from Europe and a 10% tax on its aluminum as part of his “America First” policy favoring domestic industry.

The move led the bloc to impose its own tariffs on some US-made products, including jeans, whiskey and Harley-Davidson motorcycles. In October last year, both sides agreed to temporarily suspend those tariffs while they try to negotiate a deal.

Such ongoing disputes affect only around 2% of EU-US trade, but a comprehensive agreement to deepen the vital relationship remains elusive.

The two parties have tried but struggled for years to introduce a tariff-free system to boost their respective economies. In 2013, under US President Barack Obama, negotiations for the much-discussed Transatlantic Trade and Investment Partnership began. They ended three years later with no conclusion.

Marianne Petsinger, a senior research fellow at Chatham House, told CNN Business that Europe and the United States wanted the agreement to act as a “counterweight” to China’s growing global economic dominance.

Negotiations have stalled over regulations, as well as controversies surrounding the types of products that can appear on Europe’s supermarket shelves, she said.

“To some extent, [the TTIP’s failure] was very much around public opposition [in the EU] about chlorinated chicken and hormone-fed beef,” Petsinger added.

Both sides say they want to find a compromise.

French President Emmanuel Macron said last week that he and Biden had “an excellent discussion about the IRA” at their summit in Washington.

The European Union has a few options at its disposal, analysts told CNN Business.

It could file a complaint with the World Trade Organization or respond with its own package of green technology subsidies, or a combination of both.

On Monday, Italian Economy Minister Giancarlo Giorgetti said the bloc should create its own “European IRA plan,” according to a Reuters report.

But until now, strict EU rules on “state aid” have prevented member states from injecting too much firepower into their domestic industries for fear of distorting the single market.

“It is their aim to prevent subsidy races between EU member states, unfair competition and distortions of the EU internal market,” David Kleimann, visiting fellow at Bruegel, a Brussels-based research firm, told CNN Business.

Von der Leyen said on Sunday that the bloc was prepared to “simplify” its rules to “rebalance” the playing field, which tilts the IRA in favor of the United States.

Such simplifications are unlikely to “devolve into the kind of protectionism” that Washington has exhibited, Riekeles said.

“Closing borders is a short-sighted answer to economic crisis,” he added.