U.S. President Joe Biden signed the Inflation Reduction Act in August, and it will take effect in January. It has sparked strong discontent in Europe and poses a serious challenge to the U.S.-EU alliance.
While the IRA aims to tame inflation, in practice it leads to trade protectionism and will do little to alleviate the elevated inflation and economic hardships within the United States.
The act provides high subsidies for production and investment in electric vehicles, key minerals, clean energy and power generation on the condition that commodities are produced and sold in the U.S. or North America. This not only tilts the playing field against Europe but also breaches WTO rules.
The bill will greatly reduce the competitiveness of the EU’s exports to the U.S. and set up barriers for European high-tech products destined for the U.S. market. The interests of European companies are thus imperiled. In addition, the compound effect of subsidies and lower energy costs have prompted more European companies to move to the United States, and a consequent risk of “de-industrialization” looms over Europe. The IRA will undermine the European economy at the core — so much so that French President Emmanuel Macron warned that it could “divide the Western world.”
The U.S. has repeatedly proclaimed that the “alliance system” is the most important pillar of its global hegemony, in line with its self-appointed status as “world leader,” while its “commitment” to its allies is mostly talking the talk without walking the walk, to pull the wool over allies’ eyes. Under the U.S. logic, it could trample the interests of allies to safeguard its own national interests. The so-called alliance system is just a tool to serve U.S. interests, which can be bent or abandoned arbitrarily. The list of examples goes on and on.
After taking office, the Biden administration invested heavily in repairing the transatlantic alliance, which had been severely fractured on Donald Trump’s watch. However, when the interests of the U.S. are at stake, it will “take action when it is necessary” without regard to the interests of its allies. For instance, the U.S. left out its allies when it withdrew troops from Afghanistan. It stole a large order from France to build a conventional submarine for Australia, and Australia instead worked with the U.S. and Britain to build a nuclear-powered vessel. It made a fortune from the war in Ukraine, while the Europeans paid almost “three to four times the price” to buy natural gas. All these indicate that in the American lexicon, friends are subordinate to self-interest.
These examples of “America first” only concern individual countries or specific areas, but the IRA is an upgraded version of “America first,” and the harm it brings to Europe is global and universal. This is why European officials at all levels have severely criticized and questioned the act. The leaders of the EU, France and Germany have expressed their intention to take retaliatory steps. The EU trade ministers appealed to the Biden administration to acknowledge their serious concerns about subsidies and refrain from discriminating against European companies. Macron met with a number of European business executives over dinner and pleaded with them to keep operations in Europe, among other things.
While the EU has responded strongly to the IRA, the policy options available are very limited. The EU has asked the U.S. to amend the act to significantly reduce subsidies, but the boat has sailed and it’s unlikely that the U.S. would amend domestic legislation over external pressure. As for recourse to WTO arbitration, the WTO Appellate Tribunal has been suspended for years due to U.S. obstructionism, and even if Europe submits a petition, it will be subject to stonewalling.
On the issue of access to the U.S. market for electric cars and renewable energy products, the EU is asking for the same treatment as Canada and Mexico, but if the requests are granted, they may well apply to other U.S. allies, such as the Republic of Korea and Japan. The only remaining options are to adopt the Buy Europe Act and respond to U.S. subsidies with European subsidies, which would trigger a subsidy race between the two sides.
There are different views within the EU on these two proposals. In short, the EU has been very loud about the IRA, but its responses remain far from clear. Nevertheless, the clock is ticking for Europe. A joint U.S.-EU working group was set up in November to address the issue. It has convened several times, but no progress has been made. Macron visited the U.S. to engage with President Biden on the matter, and Biden said the U.S. would make some adjustments to the IRA. But later a White House spokesman walked this back and confirmed that there were no plans to push Congress to amend the IRA. It is clear that the U.S. will not back down and will uphold its own interests. After this, Europe should wake up to this simple and plain reality.
The back and forth between the U.S. and Europe over the IRA reflects a new dynamic in the transatlantic alliance.
First, the world today is undergoing profound long-term changes. The two sides are allies, but U.S. interests are always paramount. Competing interests may become an important factor in defining the course of the alliance. The only way for European allies to ensure geopolitical independence and freedom of action is to maintain an independent foreign policy, not take sides or subordinate themselves to any major power.
Second, since the outbreak of the Russia-Ukraine conflict, European allies are trying to wean themselves from energy dependence on Russia and shift to American natural gas, or LNG. U.S. sanctions induced diminished EU dependence on Russian energy but in a way that is stifling Europe. The U.S. is pursuing its strategy to weaken Russia at the expense of Europe, which has become the biggest collateral damage of the conflict.
Third, the so-called transatlantic alliance solidarity is misguided. For a long time, the European allies have blindly followed the U.S. in the absence of an independent foreign policy, which is an important contributor to the current predicament. If Europe does not make changes, a long-term recession and “de-industrialization” will be the shape of things to come.
Fourth, it is by no means easy for the U.S. to impose its will on its European allies. The Netherlands, for one, opposes the U.S. approach and has refused to toe the line of U.S.-set export controls. The U.S. makes a point of suppressing the Chinese chip industry, while the Netherlands wants to retain its position in the Chinese market, including the autonomy to export high caliber chip manufacturing machinery to China. It has made clear that it will not follow in America’s footsteps with regard to imposing export restrictions on China.
Finally, the U.S. and Europe are divided over the threats they face. The U.S. sees China as its primary strategic competitor, with Russia coming up next. Europe sees Russia as an existential threat in terms of energy supplies and security. This is the broad strategic context of U.S.-European interaction. America’s beggar-thy-neighbor approach — especially in passing the IRA — has seriously undermined the interests of its European allies, prompting them to recalibrate their policies toward China. Instead of following the U.S. policy and going tough on China, the Europeans are working to strengthen their engagement and communication with China and rebalance their relations.
Although some European countries and politicians advocate decoupling from China, or at least reducing their dependence, the strong economic symbiosis between China and Europe cannot be severed arbitrarily or through obstruction. On the other hand, there are significant differences between China and Europe in terms of ideology and values, and both sides should maintain a constructive approach to communication and consultation in order to properly manage their differences.