Trade tensions between the United States and the European Union over the Inflation Reduction Act and the billions it provides to subsidize electric vehicles and other clean energy efforts will overshadow the state dinner President Joe Biden is hosting for French President Emmanuel Macron Thursday night.
Here are some of the biggest issues that have pitted the U.S. and France against each other in a brewing trans-Atlantic trade war — and options the EU is considering to respond.
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Why the European Union is angry
At issue are the Inflation Reduction Act’s provisions on EV subsidies and other clean energy investments. The bill requires electric vehicles to be assembled in North America to qualify for the tax credits of up to $7,500 per vehicle and implements strict sourcing requirements for battery components beginning in 2024. Other parts of the law seek to incentivize investments in U.S. solar and wind projects.
Those provisions are meant to boost domestic manufacturing and help establish the U.S. as a leader in the clean energy space.
But they’ve also put the U.S. at odds with European allies, which argue the subsidies violate international trade laws and would damage their own industries. (Other key allies, including Japan and South Korea, have also publicly voiced displeasure.)
“We are not allies on the same page,” a Macron adviser told the French outlet AFP ahead of Macron’s trip, adding that he expects the talks with Biden to be “challenging.”
Now, with Washington showing no signs of backing down, and Macron leading the charge on pressuring the U.S. to do so, the gap between the two longtime allies has grown wider.
Here are some options the EU is considering to respond.
File a complaint with the World Trade Organization
The first and perhaps most obvious choice for the EU is to file a complaint with the World Trade Organization.
In comments filed to the U.S. Treasury Department earlier this month, the European Commission said five Inflation Reduction Act measures that offer tax credits and subsidies “contain provisions with clearly discriminatory domestic content requirements” in breach of WTO rules and risk a global “race to the bottom” on clean energy incentives.
Of the $369 billion included in the Inflation Reduction Act for energy security and climate change funding, EU countries argue, $207 billion is tied to locally produced content provisions that discriminate against other countries and potentially violate the WTO rules.
French Finance Minister Bruno Le Maire said in a recent interview that while he believes such subsidies are “fair game” for countries to pass, they should comply with WTO rules and foster a “level playing field.”
In fact, many trade experts concede that the EU would likely prevail in any WTO dispute against the U.S. But even if it does, its chance of finding an actual remedy there is slim. That’s because it can take years for a case to make its way through the WTO.
And even after it does, the organization has no appellate body in place currently that would allow it to hear appeals or serve as a final court of jurisdiction to mediate international trade fights — grinding the dispute settlement process to a halt and rendering the body largely toothless.
Pass a ‘Buy European’ subsidy program
In response to the Inflation Reduction Act, Macron has urged the EU to adopt a “Buy European” program, which would prioritize the use of European-made components in key industries. In the days leading up to his White House visit, Macron met with dozens of business executives in Paris to push the effort and to encourage them to keep investing in France.
The idea of such a program has quickly gained traction within the bloc since Macron announced it earlier this fall and has even won cautious support from longtime holdouts, such as Germany.
Now, EU leaders are openly discussing the idea of funneling billions in state subsidies to encourage investment in their own clean technology projects — including battery production, wind power, and hydrogen.
But whether they’re willing to fund such a program remains to be seen.
And in Washington, the threat of a retaliatory Buy European program has not gone over the way some in Europe may have hoped.
“The administration’s response to the Europeans has been … ‘If you’re upset about these subsidies, why don’t you guys go do the same thing?’” William Reinsch, a trade expert at the Center for Strategic and International Studies, said in an interview.
If Europeans do the same thing, it “will accelerate the conversion to EVs. It will accelerate battery production, and it will accelerate the development of the kind of industrial base in Europe that leaders say they want. So, win, win, win,” Reinsch added. “[But] I think the Europeans are responding to that by saying, you know, our pockets aren’t deep enough for that.”
It’s also likely to antagonize global trading partners, on which the EU depends much more heavily than the U.S.
Push for trade exemptions
European officials have refined not only their arguments against the U.S. in recent weeks but also their asks — which are, essentially, for them to be treated as if they have a free trade agreement with the U.S.
During his talks with Biden, Macron will try to negotiate exemptions for European companies on the model of what Mexico and Canada have in place, a French presidential adviser told Reuters.
He will also attempt to convince the U.S. it is not in its best interest to weaken EU companies at a time when both the EU and U.S. are facing competition from China, this person said.
But securing a trade agreement is a lengthy and extensive process.
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And without that, the U.S. only has two near-term solutions, Reinsch said. The first for the U.S. would be for the Treasury Department to pass a waiver for the EU, an unlikely effort and one that would almost certainly be overturned in court, or for Congress to go back and amend the sourcing requirements.
“But [the] only action that Congress seems to be even remotely contemplating is not changing any of the rules [or the countries included] but providing more time [for companies] to comply,” he said.
