HomeUSU.S. Looks to Allay European Fears of a Subsidy War

U.S. Looks to Allay European Fears of a Subsidy War

The Biden administration is making efforts to address European concerns regarding America’s new climate and tax law, which some allies perceive as a protectionist industrial policy that threatens their economies.

Even after a year since the passage of the Inflation Reduction Act, European officials remain frustrated with the legislation. This legislation included over $300 billion in spending and tax credits aimed at strengthening America’s clean energy industry. U.S. allies have expressed grievances over being put at a disadvantage, as the incentives make their economies less attractive for investment.

Amid escalating conflicts in Ukraine and the Middle East, the Biden administration seeks to alleviate these concerns and assure its closest allies that America does not intend to start a subsidy war.

“A misrepresentation I’ve often heard is that the I.R.A. signals a turn toward American protectionism or the start of a subsidy race to the bottom,” stated Wally Adeyemo, the deputy Treasury secretary, in a speech in Germany on Tuesday. “I want to be clear: It does neither.”

Mr. Adeyemo emphasized that the United States continues to seek ways to enhance coordination with Europe on climate and energy security initiatives. He also argued that the Biden administration desires countries like Germany to maintain a robust industrial base. The United States is implementing a policy called friendshoring, which involves strengthening supply chains with allies while diversifying away from China.

“Even as we spur American production, we recognize the need to build a resilient supply chain that includes our allies,” stated Mr. Adeyemo at the Industry 2023 conference in Berlin.

Europe has faced economic pressure as it reduces reliance on Russian energy and provides extensive support to Ukraine. European officials are particularly worried about new U.S. incentives for the auto industry, fearing that it will divert investments away from their economies. President Biden’s new law includes over $50 billion in tax credits to incentivize the purchase of electric vehicles assembled in North America.

In recent months, the Biden administration has been negotiating agreements with Western allies to allow their critical mineral production to qualify for U.S. tax credits for electric vehicles. Mr. Adeyemo suggested that these agreements would help both the United States and Europe scale up clean energy production over time.

“Through such agreements and partnerships, we will help ensure that both the United States and Europe have access to the critical raw materials that are needed in the production of electric vehicle batteries and to power the renewable energy economy,” he said.

In response to the U.S. incentives, the European Union has been pursuing its own clean energy subsidies.

A European Commission report published last week stated that the impact of the U.S. climate law on the EU economy is not yet clear. The ultimate effect will depend on Europe’s package of clean energy incentives and its efforts to enhance long-term competitiveness and technological advancements.