French President Emmanuel Macron has warned that the U.S. risked "fragmenting the West." The IRA and the federal Creating Helpful Incentives to Produce Semiconductors and Science (CHIPS) Act were not properly coordinated with Europe and created "the absence of a level playing field."

by Vanessa Lett

BERLIN, Jan. 21 (Xinhua) -- Since the U.S. passed its 2022 Inflation Reduction Act (IRA) in August last year, Germany and other European Union (EU) countries have criticized the bill as thinly veiled protectionism.

"The U.S. is our partner with shared values, but this is an enormously protectionist economic policy," German Minister of Finance Christian Lindner has said.

The 369 billion U.S. dollar package is the single largest investment in green initiatives in the country's history. Its official aim is a 40 percent reduction in U.S. greenhouse gas emissions by 2030 compared with 2005 levels.

However, critics argue that the IRA also contravenes free trade principles on international markets under the banner of climate protection and anti-inflation measures.

"FRAGMENTING THE WEST"

Although supporting the IRA's climate goals, many business leaders and politicians in Europe believe the "Buy American" provisions attached to the U.S. subsidies violate World Trade Organization (WTO) rules. There is also fear of deindustrialization and damage to EU economies by luring manufacturers away from Europe.

During his visit to Washington in December last year, French President Emmanuel Macron warned that the U.S. risked "fragmenting the West." The IRA and the federal Creating Helpful Incentives to Produce Semiconductors and Science (CHIPS) Act were not properly coordinated with Europe and created "the absence of a level playing field."

Subsidies and tax credits of more than 200 billion U.S. dollars are tied to domestic manufacturing in the United States. For car manufacturers to qualify, batteries and most other electric car components must be locally produced.

It is no surprise that Germany is concerned about these conditions. The country's automobile industry will be unable to compete with these terms as EU regulations prevent member states from offering similarly generous tax breaks to companies looking to set up factories.

"The effects on the German automotive industry are very negative," car expert Ferdinand Dudenhoeffer told Xinhua on Tuesday. Battery cell factories that were currently set up in Germany by large Chinese battery manufacturers such as CATL would "partly be deprived of their competitive edge."

This not only puts Chinese companies, which are making large investments in the country, at a disadvantage, but is also "detrimental to Germany as an industrial location," Dudenhoeffer said. "Technological development and the establishment of the battery industry in Germany are clearly being damaged," he added.

ROBUST EUROPEAN RESPONSE

There is resentment in Europe, particularly in France and Germany, that the IRA was not discussed at the U.S.-EU Trade Technology Council last year. Robert Habeck, German minister for economic affairs and climate action, called for "our own robust European response" to the U.S. subsidies.

Alongside diplomatic efforts, European Commission President Ursula von der Leyen is considering a structural change in the EU, including the development of a Sovereignty Fund for an industry "Made in Europe." Or, as French Minister for Finance Bruno Le Maire put it, "we need a European IRA."

However, there are concerns within the EU that the relaxation of state aid rules will skew the market towards richer member countries, such as Germany. Amid surging prices due to the energy crisis, many countries in the bloc already envy the ability of Europe's economic powerhouse to spend billions on anti-inflation measures.

Another possible response is for the EU to file an official complaint under the WTO's dispute settlement mechanism. Although a ruling would not be binding, it would provide clarity and add weight to the European argument against the IRA.

Bernd Lange, chair of the European Parliament's Committee on International Trade, told German media Funke Mediengruppe in early December that it was "necessary for the EU to lodge a complaint with the WTO. By doing so, we will clarify that the actions of the U.S. are obviously not in line with WTO regulations."

LOOMING TRADE WAR

There is still hope in Brussels and across Europe that a trade war can be averted. While seeking a strong response, German politicians are leading the calls for economic diplomacy over retaliation.

At the same time, German Minister Habeck and his French counterpart, Bruno Le Maire, propose to ensure that European products are "eligible for tax credits in the same way as U.S. products." They believe this is the only way to bring about an "era of green manufacturing on both sides of the Atlantic."

Regardless of Europe's response to the IRA, economists are confident about the bloc's future. "The fear that companies will now migrate from Europe to the U.S. in flock is exaggerated," Holger Goerg, president of the Kiel Institute for the World Economy (IfW Kiel), told Xinhua on Wednesday. "Europeans should keep a cool head now."

The EU's COVID-19 recovery plan was "significantly larger in terms of annual economic output," he recalled. The Next Generation EU (NGEU) recovery instrument was endowed with 750 billion euros (813 billion U.S. dollars), split roughly equally into loans and non-refundable funds.

In addition, "the U.S. lost much of its attractiveness for foreign investment in recent years," Goerg said. So-called greenfield investments, a form of foreign direct investment (FDI), fell from around 18 billion U.S. dollars in 2014 to less than 4 billion U.S. dollars in 2021.

"This points to deeper problems that cannot even be solved by tax or other financial incentives, such as those provided by the IRA," he said.