21 November 2022 17: 30

A trade war could break out between the US and Europe over new US law

There is growing momentum in Berlin for a radical Plan B.

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A trade war could break out between the US and Europe over new US law

With only six weeks left before talks on green industries, the Germans are frustrated that Washington is not offering a peace deal and are increasingly thinking about countermeasures that violate established prohibitions: European subsidies. Europe unhappy an American inflation reduction law that could lead to a trade war. This is stated in the article Politico.

Recall We previously reported that the new US law violates international trade rules and discriminates against European manufacturers.

The opinion of the author may not coincide with the opinion of the editors.

Europe's fears are related to the US $369 billion package of subsidies and tax breaks to support US green businesses, which comes into effect on January 1. Europeans fear that Washington's scheme will encourage companies to transfer investments from Europe and stimulate buyers "buy americanwhen it comes to buying an electric car, which angers major EU automakers such as France and Germany.

The timing for this industrial measure could hardly be more unfortunate.as Germany is in open panic as some of its leading companies - spurred in part by rising energy prices after Russia's invasion of Ukraine - are shutting down domestic businesses to invest in other countries. The last thing Berlin needs is more business encouragement to leave Europe., and the EU wants the US to strike a deal where its companies can enjoy US benefits.

However, the conclusion of an agreement seems unlikely. If this confrontation gets out of hand, it will lead to trade war, what scares the exhausted Europeans. While the first step will be mostly token protest at the World Trade Organization (WTO), the clash could easily escalate into former U.S.-era tariff battles. Donald Trump

This means that there is growing momentum in Berlin to adopt a radical Plan B. Instead of an open tariff war with America, the increasingly discussed option is to break the classic rules of free trade and play Washington's own gameby funneling public funds into European industry to support domestic green champions in sectors such as solar, batteries and hydrogen.

France has long been a leading proponent of strengthening European industry with public funds, but is still more economically liberal Germans didn't want to start a subsidy race against America. However, now the situation is changing. Senior officials in Berlin say they are increasingly leaning towards the French opinion unless talks with the US lead to a surprise last-minute solution.

Berlin is the economic center of the bloc of 27 countries, so it will be a turning point if Berlin eventually decides to throw its forces into government subsidies in an industrial race with the US.

Time is running out

The clock is ticking for a truce with Bidenwhich looks increasingly unlikely. Recent Attempts by the EU-US Ad Hoc Task Force to Address EU Problems did not arouse much enthusiasm on the part of the American side regarding amendments to the controversial legislation, the European Commission informed the EU countries this week.

"Just a few weeks left" - warned Bernd Lange, Chairman of the Trade Committee of the European Parliament, adding that "once the law is in place, it will be too late for us to push for any changes.”

Lange said a failure to reach an agreement would likely spark a WTO lawsuit from the EU against the US, and Brussels could also hit back at what he sees as discriminatory US subsidies. imposing punitive tariffs. Trade war warnings are already clouding the lead-up to a high-level EU-US meeting in Washington on December 5th.

This is precisely the kind of spat the German government wants to avoid, as the Chancellor Olaf Scholz hopes to achieve unity among like-minded democracies against the backdrop of a Russian war and growing challenges from China. Earlier this month, the Scholz government attempted to reach out to Washington by proposing a new trade deal between the EU and the US to resolve differences, but this the offer was quickly rejected.

There are supporters of the subsidies approach in Brussels, with EU executive officials saying one of the main proponents is the powerful internal market commissioner Thierry Breton. Breton is already advocating the creation of a "European Solidarity Fund" that will help "mobilize the necessary funding" to strengthen European autonomy in key sectors such as batteries, semiconductors or hydrogen. German support could help Breton win internal EU strategy discussions over more conservative trade commissioner Valdis Dombrovskis.

Breton will travel to Berlin on November 29 to discuss with the Scholz government the consequences of the inflation reduction law, as well as industrial policy and energy measures. Germany's considerations even echo calls from top Biden administration officials, including the US Trade Representative Katherine Tai, who call on the EU not to get involved in the transatlantic trade dispute and instead roll out its own industrial subsidies; this strategy, which Washington also sees as way to reduce dependence on China.

Plan B

Scholz first pointed out late last month that EU may have to respond to US law own tax cuts and government support if talks with Washington fail to reach a solution, supporting similar plans formulated by the President of France Emmanuel Macron, who will meet with Biden on December 1 in Washington.

Although Scholz does not approve of Macron's initiative, formulated as the "Buy European Act" (which sounds too protectionist for the Germans), the chancellor agrees that The EU cannot be idleif faced with unfair competition or loss of investment, people with knowledge of his thoughts reported late last month.

Negative economic news such as that automaker Tesla has shelved plans to build a new battery plant in Germany and is instead investing in the US. or steelmaker ArcelorMittal partly shutting down production in Germany, calls in Berlin have intensified to consider increasing government support to counter the downside caused by both the US scheme and high energy prices.

While the government's official line remains that Berlin does not lose hope for a solution reached through negotiations with Washington, Officials in Berlin say incentives could be increased for industry to locate green technology production in Europe.

A spokesman for the German Ministry of Economy stated that, faced with problems stemming from the Inflation Reduction Act, “we will have to develop our own European response that puts our strengths first… The aim is to competitively shift the creation of green value to Europe and strengthen our own production capacities.”

The spokesman warned that the US and EU “must be careful that there is no subsidy race that prevents the best ideas from dominating the market”and added: “Green technologies, in particular, thrive best in an environment of fair competition; Protectionism kills innovation.”

One important condition that could help Germany and the EU protect said fair competition and avoid the global free trade system sliding into protectionist trends is to ensure that any EU government subsidies remain in line with WTO rules. This means, contrary to US law, that these subsidies will not discriminate against local and foreign producers.

It is very important that support also comes from German industry. “In the area of ​​industrial policy and subsidies, we could consider measures compatible with WTO rules – as the EU is already doing in the microchip sector,” - I said, Volker Treyer, head of the foreign trade department of the German Chamber of Commerce.

Treyer also emphasized that "there should be no discrimination" against foreign investors, but added: “This certainly does not rule out the possibility of settlement bonuses, which in turn should be available to investors from all countries who would be interested in such investment commitments in Europe.”

In Brussels, the Commission's competition department also signaled that it was considering forthcoming proposals with an open mind. "There are no tools excluded a priori", when it comes to EU response to US subsidiesBen Smulders, Deputy Director General of the Department of Public Assistance, said on Thursday.

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