Takeaways from the Davos World Economic Forum (WEF): the US: conciliatory but unbending; the EU: anger turns to resignation—and division.

The Inflation Reduction Act (IRA) continues to roil US-EU relations, as evidenced from the WEF dustups and subsequent inconclusive consultations. As noted previously, the $369 billion IRA will allot huge subsidies only for electric vehicles (EVs) assembled in North America, and similar restrictions apply to subsidies for the production of rare minerals needed for EV batteries. It also exempted nations that had a trade agreement with the US.

Responding to vehement European protests, President Joe Biden in December promised to “work out some of the differences.” Now, two months later, major “differences” remain unresolved. This forms the background of the WEF Kabuki dance. Two headlines from Davos limn the serious and the comic: “US Lawmakers in Davos Tell Europeans: America’s Not Protectionist” and “The Unintentional Hilarity of Transatlantic Discourse.” The latter headline came from Tufts University’s Daniel W. Drezner on his blog. All this stemmed from the fact that the US congressmen at the WEF did not fiercely defend the Buy America details of the IRA, but rather claimed that the defensible IRA goal is to strengthen America, which in turn will strengthen Europe. As Sen. Joe Manchin (D-WV), a chief architect of the IRA, told French President Emmanuel Macron: “That bill was designed to basically strengthen the United States so that we can help our allies . . . and if anybody needs it, the EU needs it.” 

In turn, European officials warned that Europe would be forced to match the US subsidy and protection policies if some accommodation could not be reached. (US Trade Representative Katherine Tai actually has urged Europe to match these new industrial policies.)

The Post-WEF State of Play. US Treasury Secretary Janet Yellen, who is responsible for the IRA’s EV battery incentive sections, has postponed final rules until March. Meanwhile, confusion reigns on both sides of the Atlantic. Early on, Yellen indicated some flexibility on defining “trade agreement,” but recently has stated that the EU and Japan (and other nations without formal free trade agreements with the US) would have to negotiate possible mini-deals covering battery minerals or other EV components. Meanwhile, Sen. Manchin has adamantly opposed expanding eligibility for the subsidies. In addition, labor, environmental, and consumer groups have urged the administration not to expand eligibility for the benefits.

The EU’s Response. Europe is deeply divided on a response to the IRA. Last week, after weeks of hand-wringing and debate, the European Commission presented a plan to match the IRA, entitled “A Green Deal Industrial Plan.” As critics immediately noted, it largely consisted of repackaged prevision funds (left over from the $800 billion COVID-19 recovery program and the $220 billion alternative energy loan program, plus an additional $20 billion in new grants). The proposal also aims to loosen EU rules regarding state aid. Critics immediately labeled the proposed initiative as “old wine in new bottles.”

Major Issues. European leaders are well aware of the investment pull of US direct subsidies and tax credits for green technology. (Delegations from US states are already dangling substantial investment enticements.) 

EU leaders are meeting this week to debate the European Commission’s new green initiative. Briefly, here are the divisions and competing national visions. France is pushing for a more interventionist state in technology development and trade protection. (“France is basically in favor of spending in all directions.”) Germany, while open to pouring more national resources into clean energy programs, is opposed to more large-scale Europe-wide programs (along with other fiscally conservative northern countries). On the question of further loosening EU rules in national state aid, even larger divisions loom. Economically liberal states, such as Sweden and the Netherlands, fear a permanent turn to state interventionism and, ultimately, protectionism. Along with other small states, they also fear that large countries, such as Germany and France, will reap most of the gains through their ability to spend lavish cash on their companies.

These national divergences are mirrored in the European Commission itself, with France’s Thierry Breton, the European commissioner for the internal market, pitted against European Commissioner for Competition Margrethe Vestager.

This week, economic ministers from Germany and France came to the US for meetings with top US officials, receiving cordial but inconclusive responses. (They were reduced to pleading only for “transparency.”) 

All this adds up to a lively debate as European leaders meet in Brussels now, and they can’t really expect any major accommodation from this side of the Atlantic.

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