Why Europe Is Fuming Over America’s Green Subsidies

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President Joe Biden is offering about $370 billion in subsidies and tax breaks to boost green industries and reduce America’s greenhouse gas emissions. But some of America’s biggest trading partners — most importantly the European Union — say the measures would unfairly benefit American companies and run afoul of World Trade Organization rules. Washington and Brussels have often sparred over state support for industries including aircraft manufacturing, banana and beef production and biotechnology. If this latest flashpoint turns into a transatlantic trade war, it could hinder the development of technologies needed to transition to a low-carbon economy.

1. What is the content of the dispute?

The Inflation Reduction Act of 2022 provides subsidies and tax credits for the production of electric vehicles, renewable electricity, sustainable aviation fuel, and hydrogen. As the economy recovers from the pandemic, solar energy and other green industries are creating thousands of American jobs, and if Biden seeks re-election in 2024, he needs a solid economy. EU policymakers fear the law could attract investment to the U.S. that would otherwise go to Europe if there was a more level playing field.

Industrial subsidies have been at the heart of some of the thorniest disagreements between the U.S. and EU, including support for planemakers Boeing and Airbus. A decades-long dispute led to tariffs on tens of billions of dollars worth of trade in 2019. . These stalemates could last for years and lead to punitive costs for businesses, leading to higher prices and slower growth. That’s the last thing either party needs right now, as governments are keen to foster industries that can help them meet binding climate commitments.

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3. Why does the EU oppose US subsidies?

The European Commission, which handles international trade matters on behalf of the 27 EU member states, said the U.S. measures included discrimination against non-U.S. companies on local content, production and assembly requirements. Specifically, the law provides consumers with a $7,500 electric vehicle tax credit as long as 40% of the raw materials in their batteries are extracted and processed in the United States or a country with which the United States has a free trade agreement. That means U.S. partners — such as Canada and Mexico — are exempt from the law, while other foreign automakers are not.

4. Has the US addressed the EU’s concerns?

Biden was unapologetic about the law, saying it benefits American workers and helps fight climate change. Still, he acknowledged some “little problems” with the law, telling reporters in late 2022 that there was room for adjustment “to make it easier for European countries to participate”. Separately, the U.S. Treasury Department said some imported cars would be eligible for EV tax credits, easing some, but not all, of the EU’s concerns.

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5. How is the EU responding?

Its member states have yet to agree on a position on the U.S. green subsidy law. EU leaders including the European Commission and French leader Emmanuel Macron have repeatedly called on Washington to change the rules. The committee appealed directly to the U.S. Treasury Department, expressing its concerns. Bernd Lange, chairman of the European Parliament’s trade committee, called on the committee to lodge a complaint with the WTO. If the EU takes the dispute to the global trade body and wins, it could persuade the U.S. to change its rules or face trade retaliation, but that will take years to play out.

6. What does this struggle have to do with China?

The dispute threatens to derail Biden’s efforts to revive transatlantic trade and build a coalition of Western allies to counter China’s trade abuses. Both the U.S. and the EU are willing to provide financial support to local industry, making it harder for them to complain about Chinese subsidies on a range of key goods. As recently as 2022, Washington and Brussels are negotiating a deal to set new international rules aimed at curbing trade-distorting Chinese subsidies. The new U.S. climate bill represents a change of tack — aimed at shifting global supply chains for clean energy products away from China so Beijing cannot abuse its dominance in some key raw materials. Any resulting disruption to supply chains could disproportionately affect the EU, which relies on China for 98 percent of its rare earth minerals and magnets, which are used in car batteries, solar panels, generators and hydrogen storage .

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7. What does the WTO say?

Nothing official, as the EU did not raise the dispute. But WTO Director-General Ngozi Okonjo-Iweala urged the US and EU to try to resolve their differences amicably to prevent a “race to the bottom” on subsidies.

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

Yes. The Biden administration is encouraging the EU to provide its own green subsidies. 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 upcoming US climate laws. If the United States and the European Union can successfully adjust their green subsidy programs, they could even accelerate the global decarbonization process and serve as a model for other countries to follow.

9. Will this spark another transatlantic trade war?

It’s too early to tell. Biden said he was committed to addressing the EU’s concerns and that Treasury’s implementation was underway. German Chancellor Olaf Schulz said he was confident there would be no trade war and hoped the U.S. and EU would reach a deal to address European concerns.

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