The world’s largest economic relationship has fallen on hard times.
The European Union and the United States – together responsible for a third of global trade – have clashed in recent weeks over US President Joe Biden’s landmark $370 billion climate plan.
The Inflation Reduction Act (IRA), which was passed by Congress in August, promises generous subsidies and consumer tax breaks that benefit North American automakers. So far, so good. Europe, however, says the law will hurt its companies selling in the US market. Japan and South Korea also raised similar concerns.
Consumers can receive tax relief of up to $7,500 for certain new electric vehicles (EVs) depending on how many of their components were manufactured or assembled in the United States, Canada or Mexico.
Subsidies to automakers that buy US-made parts, including electric vehicle batteries, will make it harder for European companies to compete and could divert investment from the bloc, according to the European Commission. United States The plan also offers tax credits incentivizing domestic production of hydrogen and other renewable fuels.
“The IRA forces European companies to relocate manufacturing to the United States to participate in US-based projects that weaken European industrial capabilities,” said Yvonne Bendinger-Rothschild, executive director of the Euro-Chamber of Commerce. American, to CNN Business.
“While the ‘buy American’ provision may have been what President Biden needed to push the bill through Congress, such a policy is not how you treat your friends,” he said. she adds.
Thierry Breton, the head of the EU’s vast internal market, pulled out of a meeting of an EU-US forum on trade and technology on Monday, saying there were not enough time to discuss block concerns.
In a statement after Monday’s meeting, the EU-US Trade and Technology Council said “preliminary progress” had been made by a separate joint working group.
“We acknowledge the EU’s concerns and underline our commitment to address them constructively,” the TTC said.
The stakes are high for both parties. Transatlantic trade reached a record 1.2 trillion euros ($1.26 trillion) last year, according to the European Commission, which it describes as “a key artery of the global economy”.
While China is Europe’s largest trading partner for goods, when services and investment are included, the US ranks first.
This partnership has become increasingly important in 2022, especially for Europe. Since Russia invaded Ukraine at the end of February, there has been a dramatic increase in shipments of liquefied natural gas (LNG) across the Atlantic as EU countries raced to replace energy imports from Moscow.
But the IRA presents a potentially serious stumbling block. While a trade war is unlikely, the plan tests the transatlantic alliance and pushes Europe to consider mobilizing its own set 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 parties. A “costly trade war” — which usually involves both sides imposing tariffs on imports — was not in the interest of the bloc, she said.
Yet Georg Riekeles, associate director of the European Policy Centre, is pessimistic about the way forward. The IRA is now law, and there is little desire to bring it back to Congress to make substantive changes, he told CNN Business.
“Answers are unlikely to be found now in Washington,” he said.
The IRA is not the first time that Washington and Brussels have clashed.
In 2018, former US President Donald Trump imposed a 25% tax on steel imports from Europe and a 10% tax on its aluminum as part of his “America First” policy which favored the national industry.
The move prompted the bloc to impose its own tariffs on certain US-made products, including jeans, whiskey and Harley-Davidson motorcycles. In October last year, the two sides agreed to temporarily suspend those tariffs while they try to negotiate a deal.
These ongoing disputes only affect around 2% of EU-US trade, but a comprehensive agreement to deepen the vital relationship remains elusive.
For years, both sides have sought but struggled to introduce a duty-free system to boost their respective economies. In 2013, under US President Barack Obama, negotiations for the much-publicized Transatlantic Trade and Investment Partnership began. They ended three years later without a conclusion.
Marianne Petsinger, senior researcher at Chatham House, told CNN Business that Europe and the United States wanted the deal to act as a “counterweight” to China’s growing global economic dominance at the time.
Stalled negotiations over regulations, as well as controversies surrounding the types of products that could appear on European supermarket shelves, she said.
“In a certain way, [the TTIP’s failure] was very around public opposition [in the EU] over chlorinated chicken and hormone-fed beef,” Petsinger added.
Both parties say they want to find a compromise.
French President Emmanuel Macron said last week that he and Biden had “a great discussion on the IRA” at their summit in Washington.
The European Union has several options available to it, analysts told CNN Business.
It could file a complaint with the World Trade Organization or respond with its own set of green technology subsidies, or a combination of the two.
On Monday, Italy’s Economy Minister Giancarlo Giorgetti said the bloc should create its own “European IRA plan”, according to a Reuters report.
So far, however, strict EU ‘state aid’ rules have prevented member states from injecting too much firepower into their national industries for fear of distorting the internal market.
“Their aim is to prevent subsidy races between EU member states, unfair competition and distortions of the EU’s internal market,” said David Kleimann, visiting fellow at Bruegel, a research firm based in Brussels, at CNN Business.
Von der Leyen said on Sunday the bloc was ready to “simplify” its rules to “rebalance” the playing field, which the IRA is tilting in favor of the United States.
Such simplifications are unlikely to “veer into the kind of protectionism” displayed by Washington, Riekeles said.
“Closing borders is a short-sighted response to the economic crisis,” he added.
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