US subsidies adding to EU trade strains

Billions thrown at green transition will test trans-Atlantic ties, analysts say

Divergences between the European Union and the United States are expected to deepen as EU countries have criticized the US' Inflation Reduction Act, seeing it as a threat to the EU's economy, analysts said.

The act, which aims to speed up the US transition to a low-carbon economy, contains around $370 billion in subsidies for green energy, as well as tax breaks for US-made electric cars and batteries.

EU member countries have said the act might put European companies, from car manufacturers to green technology enterprises, at a disadvantage.

During a meeting of the US-EU Trade and Technology Council on Monday, officials from both sides met for trade and technology talks but made only "preliminary progress".

Giancarlo Giorgetti, Italy's minister of economy and finance, called on Monday for the EU to take a common approach to support competitiveness and protect strategic production, in order to counter the subsidies in the Inflation Reduction Act.

EU Internal Market Commissioner Thierry Breton earlier threatened to appeal to the World Trade Organization and consider retaliatory measures if the US did not reverse the subsidies.

The Inflation Reduction Act was also discussed by French President Emmanuel Macron and US President Joe Biden during Macron's visit to the US early this month.

Chen Fengying, a senior researcher on the global economy at the China Institutes of Contemporary International Relations, said that since the outbreak of the Russia-Ukraine conflict in February, EU countries have followed in the footsteps of the US in imposing sanctions on Russia, although these moves have also harmed their own economies by causing soaring energy prices and higher costs of living.

Despite this, the US "makes a profit from selling energy and has introduced the (Inflation Reduction Act), which will hurt the European economy. No wonder the EU countries have expressed strong dissatisfaction," she said.

In a recent interview with the Italian newspaper Corriere Della Sera, European Council President Charles Michel said that the impact of the Russia-Ukraine conflict in the US is not the same as for the EU. While the US, as an exporter of energy resources, can benefit from soaring oil and gas prices, the EU pays a heavy price. The bloc is now at risk of a recession and faces competition from US industries, he said.

Chen said that the enactment of the Inflation Reduction Act shows that the US is determined to bring manufacturing companies back to the country.

"Industrial subsidies are of vital interest to both the US and Europe, and while the US does not want to damage its relationship with Europe over this issue, it is unlikely to make any substantive concessions. As a result, trans-Atlantic relations are likely to remain strained over the issue for some time to come," Chen said.

'Massive adverse impact'

He Yun, an associate professor at Hunan University's School of Public Administration, said that the Inflation Reduction Act aims to subsidize green technologies made in the US, but not those that are imported. This will give domestic producers an advantage, which "will have a massive adverse impact on the European economy", she added.

On the one hand, the US is the largest destination for EU exports, so subsidies will make European exports of such things as electric cars and batteries less competitive compared with those that are produced in the US, she said. On the other hand, because of high energy prices, many European companies are already moving their production to the US, and the Inflation Reduction Act will accelerate the exodus and leave European manufacturing in an ever weaker position.

"As a result, the bill is perceived in Europe as discriminating and breaking WTO trade rules," she said, adding that whatever happens, the bill will bring more trade friction between the US and Europe and deepen bilateral mistrust.

Agencies contributed to this story.