Why the US Inflation Reduction Act has Europe up in arms

Why is Europe angry?

The 27 EU countries are worried their companies will be cut off from U.S. tax credits for components used in renewable energy technologies like electric cars, offered under the new law on condition they are made in North America.

EU countries consider that some 200 billion euros ($207 billion) of the U.S. subsidies are tied to locally produced content provisions that potentially violate World Trade Organization (WTO) rules. European Commission President Ursula von der Leyen said on Sunday that while competition was a good thing, there should be a level playing field.

Not only do the tax breaks put European companies at a disadvantage to U.S. rivals, but EU state aid rules in their current form prevent member countries from offering similarly generous tax breaks to companies looking to set up factories.

The EU is not Washington’s only ally up in arms about the package, with South Korea also concerned its carmakers will not be eligible for the U.S. tax breaks.

What does Europe want?

Since any major revision by the U.S. Congress is out of the picture, European officials say their best hope is to secure exemptions along the same lines as those already granted to Canada and Mexico. After French President Emmanuel Macron raised concerns last week during a state visit to Washington, U.S. President Joe Biden opened the door to making “tweaks” to the package.

EU governments want a solution quickly, possibly with an arrangement agreed at an EU-U.S. Trade and Technology Council meeting on Dec. 5. A draft joint statement said ahead of the talks the package was on the agenda. Although neither side wants to rekindle trade tensions that damaged transatlantic relations during the Trump administration, the head of the European Parliament’s trade committee Bernd Lange said a negotiated settlement would only yield small changes, and that Europe should file a complaint at the WTO.

But such a riposte from Europe would be likely to face resistance from traditionally free-trade-friendly nations such as the Netherlands and Sweden.

Can Europe also support its companies?

France has led calls for Europe to respond with state support of its own for European companies, including through a “‘Buy European’ act” and large-scale subsidies. While not as vocal about the possibility for a massive subsidy programme, Germany has shown interest in supporting European industry, although its coalition-led government is far from united about how to do so.

Meanwhile, some German officials point out that 200 billion euros in EU pandemic recovery funds remain available and could be repurposed to support industry.

European governments can also pool resources to subsidise cross-border projects deemed to be in the broader EU interest, but getting such initiatives approved by the European Commission can often prove long and complicated.

With a number of big projects in the pipeline, French Economy Minister Bruno Le Maire and his German counterpart Robert Habeck last month called on the Commission to streamline and speed up the approval process. Von der Leyen said that the EU’s state aid rules should be adapted in response to the U.S. green subsidy push.