US protectionism poses 'existential challenge' to Europe, say EU leaders

US protectionism poses 'existential challenge' to Europe, say EU leaders
Audi Brussels plant, in Vorst-Forest, Brussels. Credit: Eric Lalmand / Belga

European leaders are becoming increasingly alarmed by the harmful impact of recent "protectionist" US legislation on European industry, with the EU Commissioner for the Internal Market Thierry Breton even calling it an "existential challenge" to Europe that could potentially lead to the continent's "deindustrialisation".

The Inflation Reduction Act (IRA) was signed into US law in mid-August this year and is arguably President Joe Biden's flagship legislative achievement. It provides up to $369 billion in government subsidies to stimulate green investment and consumption. The vast majority of these subsidies, however, are only available for products manufactured in the US. This has already encouraged a number of European companies to relocate their manufacturing plants from Europe to America.

"I think it's time for us Europeans to tell our American friends that we are very concerned about the Inflation Reduction Act, and that it could cause the deindustrialisation of Europe," French Economy Minister Bruno Le Maire recently said. His words were echoed by Breton, who claimed that immediate action must be taken in order to "revert the deindustrialisation process taking place".

'A stab in the back'

The IRA compounds the structural disadvantage faced by European manufacturers relative to American ones, with gas prices in Europe currently ten times higher than they are in the US. Moreover, it comes at a time when both American and European leaders have repeatedly emphasised the importance of transatlantic solidarity to confront the high energy prices and general inflation triggered by Russia's full-scale invasion of Ukraine in February.

In an EU-US Joint Statement issued in May, the transatlantic partnership was hailed as "a cornerstone of our shared strength, prosperity, and commitment to freedom, democracy, and respect for human rights". It emphasised the growing need for "strong transatlantic bonds and cooperation on issues related to trade, technology, and security."

"We are extremely worried and shocked, we consider these subsidies a protectionist stab in the back on the part of the Americans," the Executive Manager of EU Affairs at the Federation of Belgian Companies ('Fédération des entreprises de Belgique'), Olivier Joris, told l'Echo. "Our fear is that investments will be directed more towards the United States than towards Europe."

In recent weeks, Northvolt (a Swedish battery startup), Iberdrola (a Spanish energy firm), and BASF (a major German chemicals company), have all claimed that they will relocate a substantial portion of their investment or production to the US in order to take advantage of US subsidies.

No good options

In response to the challenges posed by the IRA, energy analysts see three courses of action that the EU can take. Unfortunately, none of these is likely to alleviate the problems caused by the US' aggressively protectionist policy.

One option is for the EU to mirror US policy by introducing green subsidies of its own. Although apparently supported by French President Emmanuel Macron, this would risk violating World Trade Organisation (WTO) rules – notwithstanding the fact that the IRA itself breaches these same rules.

Yet EU measures in response could also pave the way to an economic "race to the bottom" as countries and blocs compete to provide the most favourable conditions for manufacturers.

Indeed, as Czech Trade Minister Josef Sikela cautions, a "subsidy race" is unlikely to have the resolution that either side hopes for and goes against the idea of building constructive trading relationships that satisfy both parties.

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A second option has been posited by French Minister for Trade Olivier Becht, who states that of the $369 billion in US subsidies, "$200 billion are not WTO-compliant". Becht argues that this is grounds for the EU to file a formal complaint to the WTO. Yet this would deeply harm EU-US ties at a time of profound global crisis and shared transatlantic challenges, including (but not limited to) Russia.

The third, and probably best, option would be to negotiate a deal with the US, and in particular, to formally alter the US inflation act so that EU-made products are eligible for the same subsidies as US-made ones.

Yet this might well prove politically impossible given that Biden's Democratic Party lost control of the House of Representatives to the Republicans in the recent mid-term elections.

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