Tensions between Europe and the U.S. were on display at the 5 December meeting of the transatlantic Trade and Technology Council.

European manufacturers are being lured away to the U.S. by financial incentives included in the Inflation Reduction Act to manufacture renewable energy components and build green power projects in America, as we reported in “U.S. Goes From Capitalism to Corporatism” (29 Nov 2022).

Europe’s governments have voiced particular concerns over tax credits for electric vehicles assembled in the U.S. with U.S.-made components.

The incentives were designed to power up the U.S. electric vehicle industry in response to China’s looming dominance of tomorrow’s auto industry. However, those incentives may well violate the rules of the World Trade Organization, European governments and industries said.

Governments in Japan, South Korea, and the U.K. also have complained about attaching “made local” provisions to the incentives. South Korean officials have called for the U.S. to delay the incentives for three years pending negotiations so foreign manufacturers have time to adjust to the new playing field.

Those incentives have sparked a special resentment and a measure of desperation among European governments, which are striving to boost renewable energy on the continent to replace Russian imports of oil and natural gas.

Russia has cut off virtually all natural gas exports to Europe and the European Union has banned imports of Russian oil, both a result of Russia’s Ukraine war and Western sanctions.

As a result, European economies are being lashed by record-high energy prices.

Expansion of the U.S. renewable energy market “must not come at the expense of European interests,” lobby group BusinessEurope said in a 2 December public statement calling for negotiations between the two parties.

Thierry Breton, the European Union’s (EU’s) internal markets commissioner, canceled his plan to attend the council’s meeting because the agenda “no longer gives sufficient space to issues of concern to many European industries and ministers,” his office said in a public statement. 

Instead, he will meet in Washington with his U.S. counterparts early next year to press for changes in the incentives.

President Joe Biden has said he is open to altering the incentives but did not specify which provisions he would or would not be willing to change.

To counter the U.S. lures to their industries, officials in France, Germany, Ireland, and other countries have called for the EU to establish its own suite of incentives and subsidies to keep manufacturers at home.

However, competing packages of subsidies create “a dangerous game” and “a race to the bottom,” Jozef Sikela, Czech minister of industry and trade said in a public statement.

“No one wants to get into a tit-for-tat but what the U.S. has done isn’t consistent with the principles of free trade and fair competition,” Leo Varadkar, Ireland’s trade minister, said in comments quoted by The Wall Street Journal.

The U.S. and EU have established a joint task force to propose compromises that both sides would find acceptable.

TREND FORECAST: The U.S. is likely to make some space in its incentives for foreign manufacturers to share the U.S. government’s generosity, but so much is at stake that the space is unlikely to be very roomy.

As a result, the European Union or individual nations will offer their own bribes to companies to stay put. Some of these same countries already have shown a willingness to subsidize home heating bills; protecting the future of key industries is likely to be even more important to them.

However, offering subsidies will channel more cash into their economies, working against central banks’ efforts to reduce inflation.