The shift to clean energy shown by installation of numerous windmills and wind farms (Salo Waas, Flickr).
The implementation of the “Inflation Reduction Act,” beginning with the new year of 2023, has already promised to alter economic landscapes internationally and domestically. The bill, aimed at subsidizing U.S. clean energy industries while raising revenue through corporate taxes, has sparked many protests by the European Union and even threats of an international trade war.
Why is the U.S./E.U. Trade Dispute Important?
In 2019, the trade of goods and services between the U.S. and the E.U. totaled $1.1 trillion. Accordingly, any major shift in trading patterns — such as tariffs or even a trade war — with the E.U. is likely to have far-reaching effects on industry and jobs, as the largest areas of U.S. exports to the E.U., American manufacturing, aerospace, and auto industries will likely feel these effects the most. In other words, a decline in trade could lead to more layoffs and higher prices, the latter of which would stimulate already-high levels of inflation in the U.S. As British economist Florian Hense pointed out, “EU-U.S. trade matters most. It is by far the biggest single bilateral trade flow in the world”.
What is the Inflation Reduction Act?
Signed into law in early August of 2022, the Inflation Reduction Act (IRA) invests over $400 billion in areas such as tax incentives for the purchase of electric vehicles, industrial subsidies to producers of clean energy technology (such as solar panels), and tax credits for clean manufacturing. Funded mostly by a minimum 15% corporate tax and increased IRS tax enforcement, the bill is expected to decrease the U.S. deficit and help fight inflation. A key component of the bill is its subsidization of U.S. industries. For instance, under the IRA, consumers receive a $7,500 tax credit for the purchase of an electric vehicle as long as 40% of the raw materials in its batteries are extracted and processed in the U.S. (or countries that have a free-trade agreement with the U.S.).
Why Does the European Union Dispute American Subsidies?
The European Union (E.U.) has declared the aforementioned tax credit for U.S. vehicles, among other sections of the IRA, violations of World Trade Organization (WTO) rules due to their ability to unfairly attract investment to the U.S. These stipulations are regarded by Europe as discriminatory against non-American businesses and have prompted E.U. leaders, such as French President Emmanuel Macron, to call on Washington to change the bill. The European Commission has even filed a direct appeal to the U.S. Treasury Department outlining its concerns and has contemplated filing a complaint with the World Trade Organization.
Should the Commission proceed with its complaint and gain the support of the WTO, the U.S. may be obligated to change its rules or face international trade restrictions. However, the WTO could take years to process a complaint. In the meantime, U.S./E.U tensions can start an economically harmful trade war or subsidy “race-to-the-bottom” (in which both sides provide ever-increasing subsidies) which could stagnate billions of dollars of international trade and hinder economic growth on both sides.
How Might the E.U. React in 2023?
As the U.S./E.U. dispute continues into the new year, and many American officials and economists have been observing the E.U.’s response closely. How key European leaders choose to respond will likely have deep implications for the nature of future international relations and commerce.
Just this February, the European Union appeared to respond to the IRA with the Green Deal Industrial Plan, a $272 billion program that will focus on providing tax cuts and subsidies to businesses investing in clean energy and net-zero technology in Europe. In unveiling this sweeping piece of legislation, the E.U. aims to create a global “level playing field.” Europe’s response to increased tax cuts and subsidies will likely accelerate the production and use of clean energy technology greatly and indicates the stance they will take on trade in the months to follow.
Key Takeaways
The implementation of the 2022 Inflation Reduction Act has had many unintended consequences, chief among them an international trade dispute between the U.S. and its biggest trading partner, the European Union. As the dispute over billions of dollars worth of subsidies for green technology unfolds, the two entities appear poised to double down on their commitment to stimulating the production of this technology and to, as E.U. President Ursula von der Leyen described it, “lead the clean tech revolution.” Although many economists are still wary of a subsidy “race-to-the-bottom,” for now, it appears the Inflation Reduction Act’s goal of increasing clean energy technology and encouraging other countries to do the same is well on its way to realization.