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How to head off a new transatlantic trade war

If you’re wistful for the glory days of the Airbus-Boeing bust-up — with the transatlantic aircraft subsidies tussle suspended after 17 years of World Trade Organization litigation — then a dispute over green tech has ambitions to fill the gap.

Joe Biden’s Inflation Reduction Act (IRA), which emerged out of the congressional mire to become law in August, has worried the EU. It contains blatantly discriminatory measures, offering US consumers tax credits to buy electric vehicles only if they’re assembled in North America. It also requires critical minerals and batteries increasingly to be bought from North America or a country with which the US has a preferential trade agreement, and deters sourcing from high-risk countries such as China.

As subsidy races go, this could be politically nastier than Airbus-Boeing, which was essentially about competition between aircraft produced in their companies’ home countries in a mature industry. The electric vehicle credits might directly shift jobs by encouraging European and Asian car companies to set up in the US in a fast-developing sector with early mover advantage.

That would come at a very bad time for Europe, already threatened with rapid deindustrialisation by its particularly severe version of the Ukraine energy price shock. Nor is it a one-off: EU officials note there are other programmes of concern in the IRA, such as government support for green hydrogen, not to mention the potential transatlantic subsidy race in semiconductor production.

Brussels has been complaining about the credits since an earlier iteration was discussed last year, with South Korea also voluble. But Margrethe Vestager, the EU’s competition enforcer, told the Financial Times in an interview last week that Brussels doesn’t immediately contemplate bringing a WTO case.

Although it’s possibly unwise for Vestager to diminish the value of a bargaining chip so explicitly, it does seem sensible to leave the slow and clumsy tool of WTO dispute settlement on the shelf for now. The EU strategy for the moment is to try to influence the drafting of regulations that will implement the IRA. The exact details of qualifications, waivers and so on sometimes soften the protectionist bite of US trade legislation considerably relative to its rhetorical bark. Valdis Dombrovskis, the EU’s trade commissioner and a details man if ever there was one, is in Washington this week making his views known.

Yet, even if it’s weakened in practice, the underlying direction of US industrial policy remains concerning. EU officials are pleased Washington is taking climate change seriously, but they don’t see much sign of the Biden administration’s stated desire to work with allies to build green and resilient supply networks.

Unlike aircraft subsidies, the context for the US’s electric vehicles tax credit is reducing dependence on China. Given Beijing’s predilection for manipulating the supply of raw materials where it dominates global production, such as rare earth minerals, it’s a perfectly reasonable goal. But Washington’s discriminatory methods suggest that domestic lobbying is playing an outsize role.

Moving production by Korean and European carmakers to the US isn’t about “ally-shoring”, which aligns supply networks with strategic allegiances: it’s simple protectionism. Some nifty lobbying by Canada meant Canadian and Mexican-built cars also became eligible for preferential tax treatment, but that makes it a regional agreement, not a strategic one.

Even without a formal transatlantic trade agreement in place there are mechanisms supposed to deal with irritants such as these. The Trade and Technology Council, a co-operation forum Brussels and Washington set up last year, isn’t technically supposed to deal with the electric vehicle tax issue but it will no doubt be discussed there.

There ought to be some potential for a bargain over climate and industrial policy, including the EU and US looking a little more kindly at each other’s potentially trade-distorting interventions. The EU has its own ambitions in industrial policy: the Battery Alliance, a public-private partnership created by the European Commission in 2017, is one of the more successful attempts at encouraging a new-generation sector in Europe.

Brussels would also like the US to accept its attempt to equalise the cost of carbon emissions between domestically produced goods and imports with its carbon border adjustment mechanism. For its part the US, which is imposing a broad new set of export controls on chip technology to China, would like European governments to treat Beijing, in the EU’s own formulation, more as a rival and competitor than as a partner.

Any transatlantic bargain is going to require a more constructive attitude, particularly from the US. With regard to trade and building a resilient supply ecosystem, the Biden administration has talked strategic co-operation but frequently acted unilaterally. The last thing a transatlantic partnership needs while struggling to create binding co-operation is another protracted subsidy dispute to distract and divide it.

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