Responding to US protectionism has downsides for Europe – Atlantic Sentinel | Popgen Tech

Europe has no good options to respond to US subsidies for green energy and electric cars.

Politicians are right to worry that the tax breaks and buy-American provisions of the Inflation Reduction Act, along with high energy prices as a result of the war in Ukraine, could convince European companies to make the leap across the Atlantic.

But doubling down on US protectionism will make things worse.

What is the Inflation Reduction Act

The Inflation Reduction Act (IRA) is not really about reducing inflation. It’s a $369 billion law that does everything from lowering drug costs for retirees to increasing spending on nuclear power plants.

The IRA includes tax credits for electric cars and offshore wind farms. To qualify, companies must source their materials almost entirely in the United States – “buy American”. The procurement requirements for electric cars are so strict that not a single vehicle currently on the market will meet them.

The hope is that the IRA will reduce US greenhouse gas emissions by 31 to 44 percent in 2030 compared to 2005.

It is partially financed by a minimum tax of 15 percent on the largest corporations.

Why Europe is worried

In proportional terms, the IRA is worth half of the clean energy subsidies that Europe has. The tax concessions and subsidies, spread over ten years, are not Europe’s main concern.

This is the Buy American rule, which can have lasting effects. American manufacturers of electric cars and wind turbines may stop importing European parts. European companies may even move factories to the United States.

What are Europe’s options?

Europe has broadly three options to respond:

1. Create a European “sovereignty fund” to match the IRA, modeled on the EU’s coronavirus recovery fund.
2. Lift or relax restrictions on state aid.
3. Declare a buy-European preference in public procurement.

Germany, the Netherlands and other Atlanticist and free trade countries are wary of all three options. Especially the first two, and especially if EU subsidies are financed by eurobonds: shared European debt. They agreed to joint funding of the COVID-19 recovery fund on the condition that it would be a one-off. Shockingly, high-debt nations in southern Europe see this as a precedent.

All three options have drawbacks

A “sovereignty fund” shall be duplicative of:

• The €750 billion COVID-19 recovery fund, Next Generation EU;
• The €100 billion Horizon Europe program to finance scientific research and technological innovation;
• InvestEU, a €21 billion investment vehicle that also leverages private capital;
• The Just Transition Fund to upgrade and retrain workers for the green economy; and
• EU agricultural subsidies for innovation and rural development.

Allowing governments to support companies or industries would undermine the European single market and violate recently signed trade agreements with Canada and Japan.

Giving preference to European companies and products in public procurement may be the easiest option politically, but it would also be the most blatantly protectionist and could invite retaliation from other trading partners.

There is a better way

The IRA makes allowances for Canada and Mexico, which have a separate trade agreement with the United States (the former NAFTA). Europe must push for the same treatment.

Even better would be a transatlantic “NAFTA” that prohibits discrimination in procurement, frees movement of workers across the Atlantic, harmonizes licensing requirements and product standards, and eliminates most remaining tariffs.

Negotiations for such a trade pact, the Transatlantic Trade and Investment Partnership, were underway before Donald Trump became president in 2017. Joe Biden should give them another shot.