Thursday, March 30, 2023

Subsidies: between Washington and Brussels, a policy of small steps

The conversation gradually changed in tone. Following a meeting at the White House with Joe Biden, mainly intended to iron out differences around the Inflation Reduction Act (IRA) and its massive subsidies, the President of the European Commission welcomed a “very good, very constructive” meeting.

Joe Biden and his administration repeating that they are “not going to apologize” for initiating the energy transition in a country fed on fossil fuels, the head of the European executive hailed the IRA “because it is of a massive investment in the green transition”, even ensuring that it is duplicated in Europe by the Plan for an industrial green agreement.

To avoid a “zero-sum” game, however, the White House and the European Union have announced that they “intend to immediately begin negotiations for a targeted agreement on critical minerals”. The idea is that the “critical” raw materials extracted or transformed within the European Union can be assimilated to the geographical criteria allowing to benefit from the subsidies of the IRA for the purchase of an electric vehicle.

To benefit from a tax credit of 3,750 dollars on the purchase of a battery-powered vehicle in the United States, it is thus necessary that at least 40% of the value in critical metals (then up to 80% after 2026 ) either sourced or processed in the United States “or in a country involved in a free trade agreement”, according to the law passed last year. The United States wanting to quickly reduce its dependence on China and being far from being self-sufficient, they actually need suppliers to cover their needs.

The Europeans, for their part, have not specified what additional outlets such an agreement could open up to them. At the end of December, the Treasury Department had also indicated that vehicles intended for long-term rental (leasing) could be eligible for American tax credits. And Janet Yellen’s services must still clarify their interpretation of the law on these last points by the end of March.

However, the scope of progress remains limited. Because the IRA also provides massive direct aid for investing in the United States: tax credits for investment and production in solar, wind or carbon sequestration, in particular. And this is what seemed to worry European leaders the most in recent weeks, given the announcements of plans to set up factories in the United States.

“Dialogue” or “transparency”?

On this issue, the United States and the European Union announced on Friday the launch of a Dialogue on incentives for the development of clean energies. “Both parties will take steps to avoid any disruption to transatlantic trade and investment flows that may result from their respective incentive measures,” the joint statement said.

For Ursula von der Leyen, it is a question of “transparency” on American aid, as Bruno Le Maire and his German counterpart Robert Habeck also came to plead in February. A word that the press release does not take up, however, considering on the other hand that the new body “will also facilitate the exchange of information on the non-commercial policies and practices of third parties – such as those employed by the People’s Republic of China”.

To strengthen “economic security” and “national security”, Brussels and Washington note, moreover, that they must “improve” their tools for controlling exports and “incoming” investments. A subject pushed by the White House, which tightens the noose on China and pushes its partners to do the same, as recently with Japan and the Netherlands in semiconductors.

The joint press release finally ensures that we remain “committed” to reaching an agreement on transatlantic steel and aluminum exchanges. Sixteen months after announcing a “truce” in the conflict, the objective is now to conclude by next October.


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