Transatlantic ties are in for a chill
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We think US-EU trade relations could see a further deterioration after the adoption of the US Inflation Reduction Act. Gaining a leading position in the green transition race remains key for escaping the current ‘stagflationary’ dynamics that have captured Europe. Hence, the stakes for the EU to assert its position are higher than in previous transatlantic trade spats.
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The midterms have also raised questions about continued US support for Ukraine. A sudden withdrawal of US support (though unlikely) would be a game changer for the war effort. Amid growing internal divisions, we think it unlikely that the EU would make up for any shortfalls in US support and see the proposed EUR 18bn EU loan scheme for 2023 as a maximum.
Winning the green transition race
US-EU relations have been on the mend since the Biden administration took office, with some decades-long trade disputes such as the Airbus-Boeing subsidy stand-off, finally resolved. However, new areas of contention have opened-up of late.
While EU leaders have been focussed on fire-fighting a worsening energy crisis, the US Congress has quietly passed the Inflation Reduction Act (IRA). As part of the USD 369bn of energy and climate related investments spending, the act includes tax credits for electric vehicles made in North America as well as provisions seeking to boost the US battery supply chain and its renewable power sector. This has raised ire in Brussels amid fears that it will contribute to the loss of competitiveness of European industry. The US is the second largest export destination for European car manufacturers, accounting for 17% of exports in 2021, so the stakes are high.
A dedicated ‘task force’ has been established with the hopes of winning some IRA exemptions for EU companies, similar to the ones granted for Canada and Mexico. However, amid increasing frustration of the US’ protectionist moves, the EU has not ruled out legal action at the WTO if the talks do not yield any results. A joint meeting of the Trade and Technology Council, a transatlantic forum set up to align regulations, on 5 December is seen as a deadline for progress. Comments from US trade representative Katherine Tai have made it clear that there is little appetite on the US side to ask Congress to revise legislation that only narrowly passed it.
With the dispute at the core of the global green transition race and European industry’s competitiveness, we see a risk of further escalation as neither side wants to back down. In contrast to Mexico and Canada, which are crucial for North American energy security, a Republican-led House will have few incentives to grant a net energy importer like Europe preferential treatment. Furthermore, the continued cosying up to China of some European countries like Germany is increasingly raising eyebrows in Washington. Brussels has also refrained from joining the wide-ranging US tech restrictions on China and the EU’s carbon border adjustment mechanism remains an item of consternation in Washington. The US has countered criticism of the IRA by calling on the EU to step up its own green industrial policy and reduce reliance on China for strategically important products in the process.
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