Last week, German Chancellor Olaf Scholz led a blue-ribbon corporate delegation to Beijing. The delegation included, among others, executives from BioNTech, Deutsche Bank, Merck, Siemens, Volkswagen, and BASF SE (whose chief executive has decried “China bashing” and scoffed at calls for decoupling.) As the Economist noted, it still seems that “the interests of German businesses have shaped Germany’s China policy to the exclusion of other concerns.” (Relevant factoids: China is Germany’s number one trade partner, around 40 percent of all Volkswagens sales are in China, and the trip sealed a $17 billion contract for 140 Airbus SE jetliners.)
Still, Scholz’s trip provoked criticism from within his own administration, particularly the Greens, and from other German and European experts. They argued that Scholz’s stance would greatly complicate the process of constructing a common European response to Beijing.
Not to be outdone, the US has also contributed to the confusion and potential disunion on China with steps of its own. A month ago, the Biden administration, with perfunctory alerts to its EU allies in early October, introduced sweeping export controls on China for advanced semiconductor chips and chip-making equipment. The restrictions have an extraterritorial reach, sweeping in companies that utilize US-made equipment or components. Labeled “less a decoupling and more a rupture” by the Financial Times, more than a month later, top Commerce Department officials admit that efforts to coordinate with key allies are still “a work in progress.”
Had it chosen to do so, the US could have mounted a careful security and foreign policy defense of the increased export controls—but not so the discriminatory tax credits for electric vehicles included in the (misnamed) Inflation Reduction Act (IRA). The legislation limits the $7,500 credit to vehicles assembled in North America (after being amended to include Canada and Mexico). While Japan and South Korea have also protested, the EU has taken the lead, starting mildly but, in recent days, advancing stinging rebukes and retaliatory threats. Not unexpectedly, French President Emmanuel Macron is pushing for a Buy European Act, though other top EU officials still hope for some accommodation by the US. In a strong statement to the US last week, the EU warned that the IRA was “clearly discriminatory” and a violation of World Trade Organization rules that could well trigger “a harmful global subsidy race to the bottom on key technologies.”
Both sides have agreed to a task force to attempt to deal with the subsidies issue, but the Biden administration is caught in a difficult, if not impossible, position. The most honest response came from Treasury Secretary Janet Yellen, who has stated bluntly that the administration has little leeway in the legislation, remarking “[it] is what it is.” US Trade Representative Katherine Tai, on the other hand, has laid down a fog of inconclusive rhetoric in meetings with EU officials, stressing—without directly advancing a solution—the need to “focus on . . . shared interests.”
The EU wants a waiver akin to that given to Canada and Mexico, but most think this would entail amending the IRA—a politically difficult, if not impossible, move, especially if there is a new Republican majority in Congress. As an alternative, Tai has obliquely suggested that the EU and other partners should create their own green industrial policy with which the US will cooperate. While the much-touted US-EU Trade and Technology Council is set to meet in early December, the IRA discriminatory provisions are sure to come up, even with the IRA task force in operation. At this point, there is no clear path to a solution, despite all of Tai’s musings about the need for a “real conversation now about where we are and what our goals are.” Alas, so far “conversation” has not led to concrete action.
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