The world’s biggest economic relationship has hit a rough patch.
The European Union and United States — together responsible for one third of global trade — have been at loggerheads in recent weeks over US President Joe Biden’s landmark $370 billion climate plan.
The Inflation Reduction Act (IRA), which passed Congress in August, promises generous subsidies and consumer tax breaks that benefit North American carmakers. So far, so good. Europe claims, however, that the act will hurt its companies selling into the US market. Japan and South Korea have also raised similar concerns.
Consumers can receive a tax break of up to $7,500 for some new electric vehicles (EVs) depending on how many of its components have been manufactured or assembled in either the United States, Canada or Mexico.
Subsidies for car manufacturers who buy US-made parts, including EV batteries, will make it harder for European firms to compete and could divert investment away from the bloc, according to the European Commission. The US plan also offers tax credits incentivizing domestic production of hydrogen and other renewable fuels.
“The IRA forces European companies to relocate manufacturing into the US to participate in US-based projects that weakens European industrial capacities,” Yvonne Bendinger-Rothschild, executive director of the European American Chamber of Commerce, told CNN Business.
“While especially the ‘buy American’ provision may have been what President Biden needed to get the bill through Congress, such a policy isn’t how you treat friends,” she added.
Thierry Breton, the official responsible for the vast EU internal market, pulled out of a meeting of an EU-US forum on trade and technology on Monday, saying not enough time had been given to discuss the bloc’s concerns.
In a statement following Monday’s meeting, the EU-US Trade and Tech Council said that “preliminary progress” had been made by a separate joint task force.
“We acknowledge the EU’s concerns and underline our commitment to address them constructively,” the TTC said.
The stakes are high for both parties. Transatlantic trade hit a record €1.2 trillion ($1.26 trillion) last year, according to the European Commission, which it describes as “a key artery of the world economy.”
While China is Europe’s biggest trading partner for goods, when services and investment are included, the United States takes the top spot.
That partnership has grown ever more important in 2022, particularly for Europe. Since Russia invaded Ukraine in late February, there has been a dramatic increase in shipments of US liquefied natural gas (LNG) across the Atlantic as EU countries have scrambled to replace Moscow’s energy imports.
But the IRA presents a potentially serious stumbling block. While a trade war is unlikely, the plan is testing the transatlantic alliance and pushing Europe to consider mobilizing its own package of subsidies.
European Commission President Ursula von der Leyen criticized the protectionist “Buy American logic” of the plan on Sunday, saying that it could spark a subsidy race between the two sides. A “costly trade war” — which typically involves both sides imposing tariffs on imports — was not in the bloc’s interest, she said.
Still, Georg Riekeles, associate director of the European Policy Centre, is pessimistic about the path forward. The IRA is now law, and there is little appetite to bring it back to Congress to make substantive changes, he told CNN Business.
“It is doubtful answers will be found now in Washington,” he said.
The IRA is not the first time Washington and Brussels have butted heads.
In 2018, former US President Donald Trump slapped a 25% tax on imports of steel from Europe and a 10% tax on its aluminum as part of his “America First” policy that favored domestic industry.
The move prompted the bloc to impose its own tariffs on some US-made products, including jeans, whiskey and Harley-Davidson motorcycles. In October last year, both sides agreed to temporarily suspend those tariffs while they attempt to negotiate a deal.
Such ongoing disputes affect only about 2% of EU-US trade, but a comprehensive agreement at deepening the vital relationship remains elusive.
For years, the two sides have sought but struggled to introduce a tariff-free system to boost their respective economies. In 2013, under US President Barack Obama, negotiations for the much-hyped Transatlantic Trade and Investment Partnership began. They ended three years later with no conclusion.
Marianne Petsinger, a senior research fellow at Chatham House, told CNN Business that Europe and the United States had wanted the deal to act as a “counterweight” to China’s growing global economic dominance at the time.
Negotiations stalled over regulations, as well as controversies surrounding the types of products that could appear on Europe’s supermarket shelves, she said.
“To some extent, [the TTIP’s failure] was very much around public opposition [in the EU] over chlorinated chicken and hormone-fed beef,” Petsinger added.
Both sides say they want to find compromise.
French President Emmanuel Macron said last week that he and Biden had “an excellent discussion on the IRA” at their summit in Washington.
The European Union has a couple of options at its disposal, analysts told CNN Business.
It could lodge a complaint with the World Trade Organization or respond with its own package of green tech subsidies, or a combination of both.
On Monday, Italian Economy Minister Giancarlo Giorgetti said that the bloc should create its own “European IRA plan,” according to a Reuters report.
Until now, though, strict EU rules on “state aid” have prevented member states from injecting too much firepower into their domestic industries for fear of distorting the internal market.
“It is their purpose to prevent subsidy races among EU member states, unfair competition and distortions of the EU internal market,” David Kleimann, visiting fellow at Bruegel, a Brussels-based research firm, told CNN Business.
Von der Leyen said on Sunday that the bloc was prepared to “simplify” its rules to “rebalance” the playing field, which the IRA tilts in favor of the United States.
Such simplifications are unlikely to “veer into the kind of protectionism” exhibited by Washington, Riekeles said.
“Closing borders is a short-sighted answer to economic crisis,” he added.