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The subsidy war unleashed by the US puts Europe on the ropes


Washington, with the excuse of accelerating the energy transition, has launched a package of million-dollar subsidies that poses a threat to the European industry

Last January, a large delegation of US congressmen, led by Democratic Senator Joe Manchin, arrived at the Swiss station in Davos willing to take advantage of the World Economic Forum to explain to the European allies the good intentions of the Law of Reduction of Inflation (IRA, for its acronym in English) that has caused so many blisters in the transatlantic relationship.

It didn't take them long to verify, through the words of the German Chancellor, Olaf Scholz, and the Luxembourg Prime Minister, Xavier Bettel, among others, that the mission was not going to be easy.

The United States has jumped on the new protectionist wave that adds pressure to global trade, still mired in the effects of the pandemic, the impact of the war in Ukraine, the rise in inflation, and energy and food supply problems.

Since the end of Barack Obama's term and even more so with Donald Trump as president, the United States has waged a war against China for global technological dominance that has resulted in a blockade of technology transfer and the subsidy of national production.

The arrival of Joe Biden to the presidency of the country has only exacerbated this trend that deepens the fragmentation of the global economy.

The new industrial policy that the United States is designing through the Inflation Reduction Act and the Chips and Science Act (both from August 2022) and the Infrastructure Investment and Jobs Act (from November 2021) has a notable bias protectionist.

The rules contain important provisions to limit tax and financial incentives to US companies only.

A decision that many experts and of course the European authorities consider causes market distortions and violates international trade rules.

“The arrival of Joe Biden to the presidency of the United States has had very positive effects in the global arena, such as the return of the first world power to the Paris Agreement or the support it is providing to Ukraine in the face of Russia's invasion.

But when it comes to trade, the Biden Administration is the same as [Donald] Trump's or even worse”, underlines Cecilia Mälmstrom, former European Trade Commissioner and now, among other positions, non-resident senior researcher at the Peterson Institute for International Economics, based in Washington.

Tesla factory assembly line in Texas.


The last straw has been the Inflation Reduction Act.

The same night on August 16, when Biden signed the law, the president of the European Commission, Ursula von der Leyen, published a tweet in which she congratulated herself on the firm commitment of the United States in favor of clean energy, a more sustainable growth model and the fight against climate change.

But it was enough that they began to transcend the details of the law for the alarms to go off between her advisers and the college of commissioners.

“The dynamics of the law are very worrying.

It is also a bipartisan position, which guarantees its permanence over time even if there is a change in the Administration.

The worst thing, moreover, is that the EU has been caught completely by surprise.

In September 2021, the European Union-United States Council on Trade and Technology was created to address precisely these issues and the provisions of the standard were never addressed in those meetings," says Niclas Poitiers, a researcher at the European think tank



More information

Germany and France call for a "strong response" to Biden's anti-inflation law in Europe: "We cannot get into a trade war"

a profound change

Experts consider that the IRA is the most important climate law ever approved in the history of the United States and assure that it represents a profound change in the role of the State to promote and protect companies and sectors considered strategic for the first world economy.

Technological changes derived from the need to face climate challenges and energy independence are one of the priority objectives.

Today, more than 25% of electric vehicles are produced in Europe, and barely 10% in the United States.

To change this reality, the new US legislation provides aid for consumers of 7,500 dollars per vehicle provided that at least 40% of the raw materials used for the car battery are extracted in the United States or in a country with which it has signed a Free trade agreement.

That percentage will be 80% by 2026. Likewise, 50% of the components of electric batteries must be manufactured or assembled in the United States, Canada or Mexico, the three countries that make up a free trade zone.

By 2029, the requirement rises to 100% of the components.

The European Union has also approved large subsidies to accelerate the decarbonisation of the economy, stimulate the development of clean technologies and support the transition of the industry, but without discriminating by nationality of the manufacturer or origin of the materials used in manufacturing.

Likewise, next autumn a tax on imports of the most carbon dioxide (CO₂)-intensive products will enter into force, the first climate tariff in the world, which, as explained in various meetings by the Commissioner for Trade, Valdis Dombrovskis, has been designed under the premise of respect for the rules of the World Trade Organization (WTO) and without any discrimination based on origin.

Dombrovskis defends "a transatlantic alliance for a greener economy and the creation of transatlantic value chains to face this challenge", without ruling out that the EU could end up denouncing some of these measures before the WTO.

The disbursement made by the European Union, in any case, is not even remotely comparable to the volumes of aid handled by the United States.

The Congressional Budget Office (CBO, for its acronym in English) has estimated that the IRA will cost public coffers some 369,000 million dollars (about 350,000 million euros).

However, Credit Suisse analysts estimate that this investment can be multiplied by almost four, given that the programs are not limited in volume or amount and their final scope will depend on consumer and business demand for the plans.

“By our calculations, federal climate spending may reach $800 billion, twice the estimate.

This, combined with the multiplier effect on private investments and green financing programs, can boost the total cost of the law to around 1.7 trillion dollars in 10 years," the entity's experts underlined in a recent report. .

To these important amounts must be added the 280,000 million dollars from the Chips and Science Law destined to subsidize the production of semiconductors in the United States and the 1.2 trillion (almost the equivalent of the entire Spanish economy) from the Infrastructure Law , which also contains provisions for the use of raw materials and American-made products in the construction of airports, highways, bridges, train lines provided for in the law.

A true revolution.

Last December, French President Emmanuel Macron traveled to Washington to convey to the authorities his concern about the legislative changes.

"You are damaging my country," he snapped at Senator Manchin, a key player in approving the IRA, during a meeting with congressmen.

The president later met with Biden at the White House, where “we had a very good, frank and fruitful discussion (…).

What we decided with President Biden is precisely to solve this problem," Macron said in an interview on CBS.

do and then ask

This is what Jeremy Shapiro, director of research at the European Council on Foreign Relations (ECFR) and a former senior US State Department official, has called “ex post coordination”: the US makes a decision without consulting its European allies, there is a furious response on the other side of the Atlantic, Washington expresses its surprise and sends several high-ranking officials to the continent —this is where the congressmen's trip to Davos can be framed— to try to calm the spirits of its partners, the president admits his limited capacity to introduce changes and offers to make some definite concession.

The Europeans then declare themselves satisfied with the effort of the United States to meet their demands.

It is the applied dynamics, for example,

in the withdrawal of troops from Afghanistan or in the Aukus agreement on nuclear submarines.

Given the tight balance of forces on Capitol Hill, it is unthinkable that Biden would accept amendments to the latest industrial laws to ingratiate himself with his European partners.

If anything, according to Poitiers, some progress in aid for electric cars and raw materials.

In his latest State of the Union address, Biden left no room for doubt: “I know I'm going to be criticized for this, but I'm not going to apologize for it: when we do these projects, we're going to buy American products.

It is fully consistent with international trade rules.

Since 1933

Buy American

It has been the rule in force in public contracts, but for too long, administrations—Democrats and Republicans—have given up applying it.

That's over,” he announced to senators and congressmen.

“Tonight I also announce new contract requirements that will establish that all materials used in the construction of infrastructure projects must be made in the United States, from wood to glass, plaster to fiber optic cable.

Everything will be American!” he declared to the unanimous applause of the House.

Norbert Rücker, an analyst at Swiss bank Julius Baer, ​​believes that "the fear and concern that these laws have aroused seem disproportionate and out of line with economic reality."

But some business decisions call this view into question.

The German car group Volkswagen, Europe's largest vehicle manufacturer, has halted plans to build a battery plant in eastern Europe and move it to the United States, where it estimates it could receive some $10 billion in loans and aid collected in the wrath.

Volkswagen is waiting to see what the European reaction is before making a final decision, but the rethinking of the production strategy gives an idea of ​​the global impact of the US legislation.

The companies value, in addition to the generous subsidies, the agility in the processing of the aid and the management at the different levels of the Administration in the United States, which contrasts with the heavy European bureaucracy.

The Tesla case

The president of the consultancy Eurasia Group, Ian Bremmer, recounted in one of his weekly notes a conversation between Chancellor Scholz and the founder of Tesla, Elon Musk, in which the German president asked him why the car company had given up a grant valued at 1,000 million euros to increase the production of battery modules in its gigafactory in Brandenburg (Germany).

Musk, one of the world's richest men, responded that the amount of time and effort he required of his managers to comply with all European regulations compared to the United States was simply "prohibitive."

Tesla has transferred that production to the New Mexico plant, which thanks to the free trade agreement with the United States will be able to benefit from the aid approved by the IRA.

In this debate there is no position of specific companies.

The European industry has insisted that the problem is not so much the volume of aid contemplated by the legislation as the regulatory uncertainty and has asked the authorities to expedite the deadlines and the guarantees on the final result of the administrative processes in the awarding of business projects and community funds.

Faced with the prospect of a notable flight of investment, and after many months of announcements with little content, Brussels has accepted that "in exceptional cases" Member States can equalize aid to companies to avoid their relocation, while facilitating the procedures and will expand the cases in which State aid is allowed.

It is about expanding the extraordinary regulation that was adopted in response to the Russian invasion of Ukraine, only now it can be done in areas that were already considered as a destination for aid or projects located in at least three Member States.

The main problem of the EU is that not all member countries have the same fiscal capacity to subsidize production and that a race for public aid within the EU can cause enormous distortion of the single market that can fatally injure the own European project.

In fact, Germany and France account for 77% of the aid granted to European companies by their respective countries as a result of the war in Ukraine.

“A shift in European industrial policies is inevitable and indeed necessary, but it is critical that it is done at the European level and not as the sum of national decisions.

It is the only way to preserve the single market, the main element of European integration due to its positive effects on growth and the standard of living.

If it is going to become a question of the fiscal space that each country has at each moment, the single market ceases to exist de facto”, says Erik Nielsen, economic adviser to the Unicredit Group.

"It's certainly the biggest threat," agrees Niclas Poitiers of Bruegel.

"If you are not in the area of ​​influence of one of the large economies, especially Germany, it will be difficult for you to benefit from this exceptional state aid."

The race undertaken by the two global powers has consequences beyond their borders.

At the end of February, the managing director of the International Monetary Fund, Kristalina Georgieva, warned the G-20 finance ministers meeting in the Indian city of Bengaluru that the competition waged by rich countries to attract the production of electric vehicles threatens with leaving out the emerging economies, with a very limited capacity to respond to this aid.

“Tax policies should focus on accelerating the transition to a green economy rather than gaining competitive advantages for their companies,” Georgieva pointed out.

A position similar to that expressed by the director general of the WTO, Ngozi Okonjo-Iweala, who warned against policies that end up having negative indirect effects on third parties or that leave countries behind without the resources to compete in a race for subsidies.

It did so within the framework of the Davos Forum, where the trade ministers of 27 countries, including of course the European Union and the United States, launched the Trade Coalition on Climate, with the aim of fostering cooperation and avoiding trade frictions in measures taken by different countries to deal with climate change.

As much as in view of the facts it is hard to believe.

More fuel on the inflation fire

The succession of


that the global economy has suffered in recent years (from the pandemic to the Russian invasion of Ukraine and the confrontation with China) have reduced integration and caused greater fragmentation of the global economy.

“Deglobalization is accelerating through a combination of old-fashioned protectionism, a new trade relocation to countries with shared values, and geostrategic sanctions and bans,” said Raghuram Rajan, former governor of the Bank of India, in a recent article. Reserve Bank of India and former IMF Chief Economist.

National security has now become a priority objective of economic and trade policies, with the consequent relocation of supply sources.

This reduction in the value and logistics chains to avoid production breaks in the future will have consequences on prices in the medium and long term, since it implies higher costs than in their current locations. 

In this environment, Larry Fink, founder and president of BlackRock, the largest fund manager in the world, admitted in his annual letter to the firm's investors that the companies' production decisions will be more guided by this new need to reduce their exposure to geopolitical tensions than by maximizing profit in the form of lower costs.

“That is why I believe that inflation is going to be persistent and that it will make it difficult for central banks to reduce it in the long term.

Hence my forecast that inflation will be around 3.5% and 4% over the next few years,” Fink pointed out this week. 

Capital Economics analysts believe that if trade tensions are limited to what has been seen so far, economies and financial markets will gradually adapt to the new environment.

But if the fracture deepens, "it can cause supply shortages, repeated inflationary spikes, interest rate rises and a dramatic tightening of financial conditions around the world," they stress.

The coin is still in the air. 

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Source: elparis

All business articles on 2023-03-20

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