Wed, 01 Feb 2023

President Emmanuel Macron begins his three-day state visit to the US on Wednesday bolstered by shared bilateral visions on Russia's invasion of Ukraine and China's assertiveness in the Indo-Pacific. But President Joe Biden's latest Inflation Reduction Act has alarmed the EU, and the French leader will have to stake a firm position on US subsidies and protectionism.

The official billing ahead of the first state visit of Joe Biden's presidency was all roses, with the White House describing the guest, French President Emmanuel Macron, as the "dynamic leader" of America's oldest ally.

Nearly two years after Biden took office, the diplomatic pageantry of a state visit - which was put on hold due to the Covid-19 pandemic - is finally back. The war in Ukraine has brought the two countries, with their shared revolutionary histories as well as a fair share of prickly diplomatic patches, closer.

But there's a thorn in the Old Continent's side as Macron begins his three-day visit to the US on Tuesday. Tensions have been simmering between Europe and the USA over the Inflation Reduction Act (IRA), which Biden signed into law on August 16, 2022. The law authorises a $370 billion package of green subsidies, which will be allocated to the construction of wind turbines, solar panels, microprocessors and electric vehicles.

The most emblematic measure of Biden's colossal plan, but also the most controversial, is a generous tax credit of up to $7,500 reserved for buyers of an electric vehicle manufactured in a US factory and equipped with a locally manufactured battery. This would give a boost to the establishment of sustainable industries on US soil and effectively compete with China, which is at the forefront in this field.

But these massive subsidies will also have the adverse consequence of excluding European companies from the US market by favoring Elon Musk's Tesla over German BMWs or French Renaults.

"I think that this is not in line with the rules of the World Trade Organization and that it is not in line with friendship," said Macron after a meeting with representatives of 50 French industrial sites in early November.

Trade war would be 'lose-lose' for EU

Threatened by a recession, the EU is increasingly concerned about the issue. Businesses in the Old Continent are already suffering a massive competitive shock compared to their allies on the other side of the Atlantic, who are much less exposed to skyrocketing energy bills due to the Ukraine conflict.

The US, which is energy independent thanks to the development of shale gas and oil, benefits from lower and more stable prices. It's a situation that could lead to a new era of deindustrialisation in Europe, to the benefit of the US, according to some economists.

"This is a major concern that we will raise at the European level," said French Prime Minister Elisabeth Borne in an interview with the daily, Les Echos. The US investment plan, which could create a significant distortion of competition, could cause France to lose "10 billion euros in investment" and "10,000 potential jobs", according to Borne.

Faced with US protectionism, the EU is considering countermeasures such as the creation of a "Buy European" act - designed as a direct response to Biden's "Buy American" plan - to protect Europe's green industries.

At this stage, however, the option of a subsidy race is being ruled out. "We have to be very careful about subsidies in order to avoid a trade war," said Jozef Sikela, minister of industry and trade of the Czech Republic, which holds the rotating EU presidency.

"The question is whether Europe really has room to maneuver to counteract these provisions. We could put in place the same protections at the European level, but we know that in this game, it is a lose-lose situation," explained Stephanie Villers, an economist at Price Waterhouse Coopers, France.

America looks out for American interests

To avoid a new trade war between Europe and the US, such as the one waged by former US president Donald Trump on aluminum, Macron will try to convince Biden that it's in his interest not to weaken the Old Continent.

"The pitch will be to say: there's obviously a Chinese challenge. We are ready, in the EU, to end our naivety towards Beijing. But you can't ask us to help you with China and then have the IRA," a French diplomat who requested anonymity told Reuters.

Aware that Biden will never go back on this plan, which is a crucial policy plank, the French president will try to push his American counterpart to agree to some adjustments. The goal is to negotiate exemptions for European companies, particularly for electric vehicle manufacturers, along the lines of those already obtained by Mexico and Canada.

But according to Villers, it is unlikely that the Biden administration will concede to the requests of "its oldest ally". "It's important to understand that this is not in the spirit of the United States, which has always favoured its trade and economy to the detriment of other powers," she explained.

To ease tensions, Europe and the US set up a "task force" last month, which is scheduled to meet on December 5. If the talks fail, the Inflation Reduction Act could become a serious stumbling block between Brussels and Washington DC.

The European Commission could even go so far as to refer the matter to the World Trade Organization. But this process would take at least a year, noted the Financial Times. What's more, the 27-member EU has its own internal divisions and interests when it comes to maintaining a Western united front against Moscow and the consequences of the Russian invasion of Ukraine.

This article has been translated from the original in French.

Originally published on France24

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