Trade frictions laid bare

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Washington’s increasingly hyped-up Inflation Reduction Act (IRA) – a mammoth new green energy subsidy package – has been the subject of growing frustration and fear within European capitals for quite some time. 

Many of America’s time-tested partners view the $430 billion push as an attempt to severely undercut competition among European companies when compared to their U.S. rivals. That view has some grounding: the IRA is a recipe to put European companies at a disadvantage, given that many are now fighting to compete in the global trade ecosystem altogether.

It took urgent U.S.-EU trade talks, significant pressure from France, and blunt criticism from Brussels to compel the U.S. to mend some fences. The goal is to use such pro-EU rhetoric from the White House to convince the world that America and Europe are more united than ever. But dispelling the impression of controversial U.S. climate subsidies won’t be so easy. 

It shows in Washington’s slide towards protectionism against European companies, which stands firmly established by the Act’s own content. Moreover, there are populist overtones in the new federal law on green energy incentives, including the divisive “Buy American” logic. Thus, liberal Europeans are now in a long-term bind as demonstrated by Commission chief Ursula von der Leyen’s assertive stance in a recent speech. 

After all, the implications of the IRA for disadvantaged companies in Europe are drastic. We also see protectionist tendencies gaining strength on both sides, effectively challenging the promise of a so-called “rules-based” liberal free trade order. Time for the self-appointed custodians of that same rules-based order to bite the bullet. 

Make no mistake: the Biden administration has taken the lead in complicating Europe’s industrial challenges. The latter’s frustration is even justified on certain levels. For instance, Europe is right that some $207 billion in specific subsidies are tied to provisions that may qualify as a violation of the World Trade Organization (WTO) rules. Aren’t these the same WTO rules that the U.S. claimed to comply with?

Now as Europe’s deepening energy crisis dampens growth hopes, it is no surprise that top EU capitals are rushing to the task. That includes desperate attempts to bridge trust deficits with their own companies in the green transition space. The reality that the IRA is disadvantaging some of Europe’s industrial core is one that merits pushback from Brussels at all costs. Biden’s rhetoric on Europe-U.S. unity is destined to make matters worse in the process. Consider his admission that the new IRA measures include “tweaks that ... can fundamentally make it easier for European countries to participate and/or be on their own.” This is just reactive politics in the face of European pressure on Washington.

Look no further than French President Emmanuel Macron, who didn’t mince his words in his recent visit to Washington. Macron absolutely exposed the crux of U.S. protectionist measures under IRA, and their adverse impacts as feared by Europe. Thus, Biden is simply reacting to such pressure by trying to exercise damage control and paint the subsidies as a win-win for both sides. That duplicity deserves to be called-out.

At present, close observers of the U.S.-Europe relationship should anticipate more frictions. After all, it is rare for top European officials to express open discontent towards U.S. laws, and follow it up with threats to bolster competition at home. That sense of disenchantment is unlikely to be dispelled by cosmetic U.S. efforts, including public projections of how strong and coordinated the U.S.-EU relationship is. The fact is that the IRA law is billed as some clean energy transition win for the U.S. But it is also designed to plug huge manufacturing gaps on U.S. soil, making it an “America first” endeavor. Europe has sensed those populist overtones early, and has lowkey decided to act in lockstep with its industries to manage adverse exposure in the long-term. Washington is feeling the heat.

There is a strong chance that the U.S. will face even more headwinds trying to manage discontent from its controversial IRA law overseas. Europeans have offered nothing but a reluctant nod of late. But efforts to reconcile contrasting U.S. and EU expectations on industrial subsidies are unlikely to bear fruit for two key reasons. 

First, Washington has shown little appetite to amend its law in the face of European skepticism, and it took the specter of a trade war with Europe to get the U.S. to straighten-up. Second, the margins for concession are also drastically thin for Americans and Europeans alike. The nature of the controversial but important subsidies to the U.S. leave little room to bargain with Europe, and any major concession could be coldly received by overlooked industries in Europe. So to what degree will the mammoth U.S. Act be “tweaked” to benefit European partners in the clean energy space? This is where the Biden administration’s answers are slow to come.

Ultimately, the IRA was driven by the goal of getting U.S. climate commitments in line with domestic expectations, but it ends up revealing the full extent of future frictions with Europe. Biden can claim that he “never intended to exclude folks” who were cooperating with the U.S., and that the law will “create manufacturing jobs in America, but not at the expense of Europe.” 

It doesn’t change the fact that this is all a very poor sell, and that European discontent is here to stay.