The Inflation Reduction ACT (IRA) has caused a stir in Europe, but it is simply a continuation of American protectionist policies. Europe, whose interests are seriously threatened by this law, must respond. The American disengagement could also impact its strategy towards Beijing.
The IRA: an extension of US protectionist policy
A distortion of competition
The Inflation Reduction Act, an American law aimed at curbing inflation, is presented as a climate law. However, according to Roman Kramarchuk, an analyst at S&P Global Commodity Insight, it is really an industrial policy bill. Furthermore, despite the name of this legislation, a report by Moodsy Analytics shows that it will have only a modest effect on inflation. In the 4th quarter of 2031, the consumer price index would be only 0.33% lower thanks to this legislation.
The first disagreement around the IRA concerns the production of electric vehicles. European leaders accuse the Americans of engaging in protectionism that seriously harms the interests of the old continent. The IRA provides a tax credit of up to $7500 for the purchase of a North American electric vehicle with a battery from the same source. Vehicles produced in Europe would therefore be excluded from the scope of this subsidy. European governments claim that these subsidies are contrary to international trade rules.
On the other hand, the IRA also contains a measurement component on renewable hydrogen that must concern Europe. Indeed, subsidies for the production of green hydrogen could lead to a flight of investment from Europe to the United States in this sector. This is particularly the case for Plug Power, which has paid particular attention to the European market in recent years. The company is now turning away from this to focus on the U.S. market thanks to the IRA’s high hydrogen tax cuts.
The European powers have shown hostility towards this text, which undermines their interests. The European Commissioner in charge of the internal market mentioned in particular an appeal to the WTO to resolve this dispute, which represents the protectionist tone adopted by the Americans.
A continuation of the protectionist policy
Joe Biden remains aligned with Trump’s unilateral approach. It will not resume negotiations on bilateral agreements such as TTIP with the EU. The Biden administration is focusing its efforts on strengthening national production capacity, in particular through significant public investment since taking office. The main difference between the two presidents is that Joe Biden is engaging in what James Bacchus, former chairman of the WTO’s appellate body, calls “polite protectionism.
Since his election, the U.S. president has not pushed Congress to reauthorize the Generalized System of Preferences (GSP), which eliminated tariffs under certain conditions for developing countries. In addition, the CHIPS and Science Act program passed in 2022 also expresses a U.S. national preference. In particular, it heavily subsidizes domestic producers of microprocessors. The IRA is therefore not an isolated protectionist measure.
A different European approach
While the IRA largely excludes European producers from the North American market, EU Trade Commissioner Valdis Dombrovskis recalled that the Tesla Model Y was the best-selling model in Germany in September 2022. This performance was only possible thanks to the European subsidies from which the foreign producers benefit. There is no reciprocity with the IRA. This case is an illustration of the gap between the two entities in the approach to international trade.
In this respect, Christine Lagarde’s speech during the IMF’s annual meetings on October 21, 2021 is enlightening. The ECB President recalls that the share of international trade has grown much more in Europe than in the United States in recent years. Between 1999 and 2019, it rose from 31% to 54% in the Eurozone. At the same time, it has only grown from 23% to 26% in the United States.
Europe’s strong integration makes it vulnerable to protectionist measures taken by China and the United States. Behind certain protectionist measures of these two countries lies a change in industrial policy towards more security at the expense of the efficiency of global supply chains.
Thus, two important projects may not be carried out in the European Union. One is Northvolt’s giant battery plant in Germany. Its president indicated that the group’s priority was now expansion in North America. Tesla has raised similar doubts about a proposed battery factory in Germany.
In addition, the EU and the US have different approaches to climate change. The European Union takes a largely regulatory approach, while the United States relies on incentives. Another difference in approach was felt during COP27. Europe promised financial support to African countries, while the United States seemed reluctant.
An American strategic error?
For the moment, the European response has been timid, refusing to mention protectionist retaliatory measures directly. They will not remain impassive, however. The US and the EU have set up a working group to try to find compromises. However, the IRA went into effect in August 2022, and there does not appear to have been any progress since. Emmanuel Macron’s call for a “European awakening” on November 8 is in line with the European Union’s desire for firmness.
The EU Council reached agreement on the Carbon Border Adjustment Mechanism (CBAM) in March 2022 to meet the “Fit for 55” targets. This border carbon adjustment mechanism wanted by the EU has worried American politicians and businesses. Industry was concerned that the implementation of this mechanism would negatively impact U.S. trade and production. This mechanism can also be seen as a protectionist tool. Other measures could follow if the Americans do not make concessions regarding the IRA.
Protectionism could undermine China strategy
The American disengagement from multilateralism leaves the way clear for China to promote its own vision of economic globalization, without reference to democracy or civil rights. Beijing is already gaining ground with emerging countries. The protectionism of the United States could help to reinforce this dynamic.
To maintain its technological leadership, the United States limits access to its technologies to Chinese companies. However, for this strategy to be effective, its allies must align with this policy. Without the prospect of privileged access to the U.S. market, Europeans have less incentive to follow American policy choices.
The MP group Renew Europe has sent a statement castigating the IRA. The group believes that this law will weaken Europe vis-à-vis China. The adoption of the IRA would therefore be counterproductive in their view, including for the United States.