The threat of a trade war between the EU and the US over the Biden administration’s $370bn climate legislation has stepped up, as France estimated it would lose €8bn as businesses were given incentives to shift to the US.
Brussels is demanding that products made in the EU bloc should have access to the same subsidies as the US is offering to a range of industries to spur green technologies and tackle carbon emissions under its Inflation Reduction Act.
The IRA measures include tax rebates for buyers of US-made electric cars, as well as a series of other significant industry credits for domestic clean energy initiatives, such as solar, wind, nuclear and carbon capture technologies.
Paris has claimed it would lose €8bn in investment as operations are relocated to the US to take advantage of subsidies for local production, diplomats say.
While most EU member states are still calculating the potential damage, the bloc countries agreed on the need for Brussels to push for “tangible and concrete” measures, at a meeting of ambassadors last week, they added.
French president Emmanuel Macron and German chancellor Olaf Scholz at a meeting on Friday reportedly also found agreement about a European response to the US action that encourages its citizens to “Buy American”
The trade tensions have developed despite the Biden administration’s attempts to improve its relationship with Europe after four years of rancour under former president Donald Trump.
France, in particular, has been sounding the alarm in recent weeks that the IRA is unfairly protectionist. French buyers of electric cars are eligible for a subsidy of up to €7,000 regardless of where the car is manufactured. In the US, an income-tested rebate of up to $7,500 will apply to new cars made locally.
Two big European carmakers, Stellantis, which has a sizeable US business selling Chrysler and Fiat models, and the smaller Renault, have invested heavily in electric vehicle manufacture ahead of a 2035 deadline for the EU to phase out cars with traditional fuel engines, with many of their production facilities located in Europe.
Another example of investment that could be affected is in wind energy, GE last year expanded its renewable energy business in Europe with wind turbine blade production at a factory in Cherbourg, France.
France has urged the European Commission to respond to the IRA and was working on options itself, said a finance ministry source.
Potential responses include filing a complaint to the World Trade Organization, retaliatory tariffs, or for an exemption to allow products made in the EU to be part of the US rebate scheme.
An exemption would allow European companies to keep their operations in the bloc, preventing a loss of revenues and green jobs, said a person with direct knowledge of the discussions. “We want Washington to apply the rules in a generous way. This is our best case scenario.”
But US trade experts are divided on what steps the Biden administration can take to address the concerns of Europe, as well as Japan and South Korea, about the impact on their industries, without returning to Congress to alter the text of the legislation.
The US Treasury’s consultation with industry on how to implement the law could provide loopholes for trading partners. For example, the definition of “final assembly” could mean cars could be imported to be completed in the US and thereby qualify for tax breaks.
US Treasury secretary Janet Yellen told the FT earlier this month that her officials were meeting with “different parties” as they worked to draft the regulations that would specify how companies qualified for tax credits.
The US and EU last week agreed to set up a working group on IRA, which the White House said would in part discuss “opportunities and concerns for EU producers”.
Macron argued during a primetime television interview last week that Europe was naive in sticking with its free trade policies.
“We need a ‘Buy European Act’ like the Americans, we need to reserve [state subsidies] for our European manufacturers,” he said. “You have China that is protecting its industry, the US that is protecting its industry, and Europe that is an open house.”
But German finance minister Christian Lindner told the FT that Europe’s response to the IRA should not be to create its own subsidy regime. He called for further talks between the EU and US to discuss its effects, however.
“It’s without question a challenge for us,” he said. “But we need to strengthen our own competitiveness in response. We won’t prevent European companies disinvesting and moving to the US with harsh words, and by entering into a competition for subsidies, but by creating really excellent conditions for investment in Europe.”
Reporting by Javier Espinoza and Andy Bounds in Brussels, Guy Chazan in Berlin, Leila Abboud in Paris and Aime Williams in Washington
Where climate change meets business, markets and politics. Explore the FT’s coverage here.
Are you curious about the FT’s environmental sustainability commitments? Find out more about our science-based targets here