How US Green Deal Has Opened Floodgates for Subsidies

President Joe Biden’s $370 billion plan to support businesses leading the transition to a low-carbon economy has riled some of America’s largest trading partners, who say the measures unfairly benefit US companies and harm free trade. Now the European Union is striking back with state support for industries that could generate as much as $1 trillion in green investments by 2030. Asian allies are following suit. It’s starting to look like the kind of global subsidy war that tends to benefit wealthy nations at everyone else’s expense. 

1. What’s triggered the subsidy race?

The US Inflation Reduction Act offers tax credits and other incentives for the production of electric vehicles, renewable energy, sustainable aviation fuel and hydrogen. Solar and other green industries are creating thousands of US jobs as the economy recovers from the pandemic, and a solid economy would help Biden if he seeks reelection in 2024. Policymakers in Europe, Japan and South Korea worry that the law could lure investment to the US that might otherwise flow to their regions. German carmaker Volkswagen AG, for example, opted in March to build a $2 billion factory for its new electric Scout brand in South Carolina and picked a site in Canada for its first battery plant outside of Europe, describing the incentives on offer as akin to “a gold rush.”

2. What happens in a subsidy war?

When deep-pocketed governments attempt to outspend each other to produce national champions, companies in small and developing economies are usually impacted the most because their governments can’t muster the same scale of funding. The race to prop up industries can also lead to political dysfunction and tit-for-tat trade measures that raise costs for companies and consumers. One of the best examples of a subsidy war is the multi-decade US-EU dispute over support for aircraft makers Boeing Co. and Airbus SE that led to tariffs on tens of billions of dollars worth of trade in 2019. 

3. How did US allies react to Biden’s plan? 

Japan’s government initially complained that the US measures were “discriminatory” but Washington and Tokyo ultimately struck a deal to allow critical minerals sourced in Japan to qualify for the US subsidies. South Korea’s Hyundai Motor Co. and its affiliate Kia Corp. said the law puts them at a disadvantage because they don’t have any EV plants in the US yet, though they soon will. South Korea has announced its intention to jump into the fray with a 550 trillion won ($413 billion) investment plan focused on public-­private partnerships in chips, batteries, robots, EVs, displays, biotechnology and other areas. The loudest complaints came from Europe, however. 

4. What were the EU’s main objections? 

The European Commission, which handles international trade matters on behalf of the EU’s 27 member states, said the US measures include local content, production and assembly requirements that discriminate against non-US companies. Specifically, the law offers consumers a $7,500 tax credit for electric vehicles as long as 40% of raw materials in their batteries are extracted and processed in the US or in countries that have a free-trade agreement with the US. That means US partners such as Canada and Mexico are exempt from the law’s content restrictions, while other foreign car producers are not.

5. How did the EU respond?

Europe is advancing its own subsidies and tax breaks. The proposed Net Zero Industry Act aims to spur the investments required to meet at least 40% of the EU’s “clean technology” needs from within the bloc’s own borders by the end of the decade. The hope is that companies will prioritize manufacturing in Europe and resist the lure of Biden’s tax breaks. The EU also passed a €43 billion ($47.5 billion) subsidy program in April called the Chips Act to support advanced semiconductor manufacturing in the bloc. The idea is to remain competitive with the benefits offered by the 2022 US CHIPS and Science Act. 

6. Could this evolve into a trade war?

That looks unlikely. A trade war would go beyond subsidies to impose barriers on imports of goods from competing nations. Biden has sought to dial down the tension, acknowledging the US law has some “glitches” and that there’s room for tweaks to make it easier for European countries to participate. There were signs the two sides were trying to find some common ground. The EU is in talks with the US for a similar arrangement to the US-Japan deal on critical minerals. Discussions around joint procurement of metals used in EVs may allow European companies to benefit from some of the US measures. And a loophole has been created that allows Hyundai to access full US subsidies for rental and leased EVs, a market that makes up more than 25% of its US sales. 

7. How is this fight related to China?

China has displaced Europe, Japan and the US as the top manufacturer of key climate change technologies and inputs like solar panels and rare earth minerals and magnets, which are used in car batteries, power generators and hydrogen storage equipment. Much of that progress is thanks to generous state support for Chinese industry. Biden’s law and the EU’s initiatives are partially a response to that government largess. Their aim is to redirect global supply chains for clean-energy products away from China so that Beijing can’t abuse its dominant position in some key raw materials. This would be a radical shift for the EU especially, as it relies on China for 98% of its rare-earth minerals and magnets. 

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