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  • Writer's pictureThomas Smith

The Green Trade War Looming Over US-EU Relations

The emerging threat of a US-EU trade war appears to be intensifying, as EU ministers seek to mitigate the effects of the US Inflation Reduction Act on European industry, particularly regarding the $369bn green subsidy bill. Whilst a joint US-EU task force has been established to negotiate this source of tension, there is little optimism for an agreement at the upcoming Trade and Technology Council meeting in Brussels, on 5th December 2022.

In a speech at a recent meeting of the Trade Foreign Affairs Council, Valdis Dombrovskis, the European Commission Executive Vice-President and Commissioner for Trade, feared that the Inflation Reduction Act would “discriminate against EU automotive, renewables, battery and energy-intensive industries”. Considering the Russian invasion of Ukraine, Dombrovskis called for the maintenance of “transatlantic unity”, rather than division due to the act.

The Inflation Reduction Act represents a landmark piece of US legislation which aims to reduce inflation through a package of subsidies and tax credits, primarily targeted towards sustainable domestic energy production. With $369bn in government spending on green energy, the act represents the largest investment into addressing climate change in US history.

According to Northvolt, the Swedish electric vehicle battery developer and manufacturer, the new legislation would provide a $600m-$800m subsidy for a factory in the US, in comparison to the €155m subsidy available in Germany. This has prompted fears within the EU that green investment may shift away from Europe and towards the US. Furthermore, the subsidies available for North American assembled products risk harming the competitiveness of European companies in the North American market. As well as the attractive subsidies available due to the Inflation Reduction Act, energy prices are currently considerably lower in the US compared to Europe, further increasing the risk of a shift in investment patterns.

In response, the European Commission has questioned the legality of five of the Inflation Reduction Act’s measures, claiming that the tax credits and subsidies display “discriminatory domestic content requirements”, which are in breach of World Trade Organisation rules. The EU is demanding a change to nine of the provisions that restrict subsidies and tax credits to US-assembled products, primarily regarding solar panels, wind turbines and clean hydrogen. Furthermore, the EU insist that the $7,500 consumer subsidy for the purchase of electric vehicles should apply to EU-produced vehicles as well as their North American assembled counterparts.

There is currently great reluctance among many members of the EU to counter the Inflation Reduction Act with a subsidy and tax credit package of its own. These packages are inherently costly and many member states are recovering from extensive government spending during the Covid-19 pandemic. Existing EU measures include the €800bn NextGenerationEU programme, which requires members to commit at least 37% of their national recovery spending towards green investments, and the RepowerEU energy plan, which aims to remove the energy reliance on Russian fossil fuels. However, on 22nd November 2022, French and German Economic Ministers, Robert Habeck and Bruno Le Maire released a joint statement committing to the implementation of a European industrial policy that would respond to these new challenges faced by European industry.

Whilst the Inflation Reduction Act does not take effect until 1st January 2023, and changes can occur to the draft rules until then, there is little optimism for the US-EU task force to reach a compromise over the issue. Nonetheless, all eyes will be on Brussels on Monday 5th December 2022 for the Trade and Technology Council meeting, which will provide the best platform for an agreement to be reached before the act comes into law next year.



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