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Thursday, March 23, 2023

World trade: Biden and von der Leyen discuss subsidy dispute

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The Europeans seemed caught off guard when US President Biden signed a law with the motto “Made in America”. How far does Washington meet Brussels now?

A US law that provides for billions in investments in climate protection and subsidies for US industry has triggered great concerns in Germany and the EU about competitive disadvantages. US President Joe Biden and EU Commission President Ursula von der Leyen want to discuss defusing the trade conflict at a meeting in the White House (8 p.m. CET). The problem from a German and European perspective with the so-called Inflation Reduction Act (IRA) of the USA: Many subsidies and tax credits are linked to the fact that profiting companies use US products or produce them themselves in the USA.

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A senior White House official stressed ahead of the meeting that the IRA is essentially pursuing a set of goals that the US shares with the European Union. So there is agreement that “historic investments” are necessary to achieve the climate goals. They want to invest in the expansion of clean energy and related jobs and ensure stable supply chains. Appropriate measures are taken “alongside allies and partners”. The aim is for both sides to communicate their approaches to the other and not get into a competition.

In the case of Biden, that recently sounded less forgiving. He had repeatedly made it clear that he wanted to focus more on preferential treatment for domestic industry. As recently as Thursday, during a speech in the US metropolis of Philadelphia, he said: “I spoke to our European friends (…) to make it clear to them: We’re not trying to deny them anything.” But the USA is at the beginning of the supply chain – and not at the end.

Milestone in US climate policy

The IRA is a major domestic political success for the US President. Even if not all of the 80-year-old’s climate projects made it into the package, the law is a milestone in US climate policy. He doesn’t want to untie the package again. This means that the talks between the US and the EU are now mainly about room for interpretation and questions of application. Nothing will change in the basic direction of the law.

A stumbling block for Europeans is now tax breaks for electric vehicles. The US Treasury Department still has some leeway here when it comes to which vehicles are eligible. That could help the Europeans. A sticking point, however, is the requirement that a certain percentage—and increasing in the coming years—of critical car battery minerals must come from the United States or be recycled in North America in order to qualify for a portion of the tax break. It is also possible that the battery minerals come from a country with which the USA has a free trade agreement.

The United States has various free trade agreements – for example with Canada or Mexico. However, there is no such agreement with the European Union. One possibility is now to conclude one with Brussels for the area of ​​critical minerals. Because the term free trade agreement is not defined in the US climate law. Then European-made electric vehicles could be eligible for tax credits. Legally, however, it should not be that easy. Because there are also doubts as to whether such mini agreements on individual sectors actually pass as classic free trade agreements.

Trade war should be avoided

“We hope that following the meeting we will be able to start negotiations on an agreement on critical minerals and a dialogue on transparency of subsidies,” the White House said.

A real trade war is not in the interest of either Brussels or Washington. This is especially true at a time when the West wants to stand together in the face of Russia’s war of aggression in Ukraine. Both sides are likely to want to avoid a situation such as the years-long dispute over state aid for the US aircraft manufacturer Boeing and its European rival Airbus. The USA and the EU had subsidized their own aircraft manufacturers for many years and then sued each other before the World Trade Organization (WTO) for distorting competition. WTO arbitral tribunals had declared the subsidies illegal and allowed punitive tariffs worth billions.

Nevertheless, Germany, France and other EU states have repeatedly made it clear that there must be a European answer to the US law. Finally, EU Commission President von der Leyen presented a new green industrial program that is intended as a reaction to the US and Chinese subsidy policy. It reported an investment requirement of hundreds of billions of euros in climate-friendly technologies. To this end, Brussels wants to expand and accelerate access to subsidies and give the EU states more freedom for targeted subsidies.

Will there be concrete solutions?

It remains unclear whether Biden and vor der Leyen will present concrete solutions or more general declarations of intent. EU and US representatives have been working in the background for months to defuse the conflict.

According to the US government, the joint meeting will also focus on support for Ukraine, which has been attacked by Russia, and the “challenges” posed by China. The US administration official said he expects the EU and US could take additional steps to increase pressure on Russia – including by “targeting third-country actors around the world who support Russia’s war.” .

Source: Stern

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