The United States is becoming increasingly economically isolated, at the expense of partners such as the European Union and Japan. They should immediately file a complaint with the WTO.
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| US Marine Corps War Memorial, Washington DC, USA |
When President Biden assumed office, the atmosphere in trade ties between the EU and the United States initially improved. In the battles over aviation sector subsidies (Airbus/Boeing) and unlawful US tariffs on EU steel imports, interim remedies were first agreed upon, only to be defused by longer-term accords. Furthermore, the Trade and Technology Council (TTC), which has now convened three times at the cabinet level, has established a body for low-threshold trade. However, these overwhelmingly beneficial advances in commercial ties between the EU and the US have shattered in recent weeks and months.
The biggest impediment is the US Inflation Reduction Act (IRA). It was signed by President Biden on August 16, 2022, and will now go into effect at the start of the new year. It is based on the Build Back Better Act talks. US President Joe Biden presented a $1.7 trillion investment package that would include significant increases in America's social safety net as well as climate protection. Among other things, the IRA includes a $369 billion investment package for climate protection - the greatest climate investment in US history. The Inflation Reduction Act intends to cut emissions in the United States by roughly 40% by 2030 compared to 2005 levels.
These "Made in the USA" standards pervade the whole program. Nine financing streams totaling at least $231 billion USD may be noted here, ranging from electric automobiles to steel for wind turbines, batteries, solar systems, CO2 capture technologies, and the green hydrogen manufacturing chain. Bonus credits are provided to US enterprises who adhere to appropriate salaries and apprenticeships in order to boost well-paying, high-quality US jobs. The IRA shows serious industrial and geopolitical ambitions, in addition to the welcome, ambitious decarbonization agenda. On the one hand, the shift to a CO2-neutral economy creates jobs in the United States. On the other side, reliance on China should be lessened, and rivalry with Beijing should be increased.
And the competitive climate will undergo major change. For example, fully utilizing the IRA tax credits may significantly lower the cost of renewable energy (between 43 and 63 percent), resulting in major development in the United States. Despite the name, the Anti-Inflation Act is unlikely to have a significant influence on inflation. Prices are unlikely to fall. Rather, it is an industrial policy tool that both supports and accelerates the change.
However, as a direct result of this policy, European items are barred from entering the US market. Worse, this transfers investment away from the EU and toward the US. These trends may already be seen in the automobile sector, as well as in the field of renewable energy. Furthermore, certain states, such as Texas, are not ashamed to openly promote with subsidies and now 10 times cheaper energy prices compared to the EU, as well as less stringent labor relations rules.
As a result, the EU's negative repercussions are evident. This is not how you should handle allies, especially in today's world. The new US legislation is also incompatible with World Trade Organization norms (WTO). The IRA openly discriminates against European firms. The statute is in violation of the GATT, the ASCM agreement on subsidies, and the TRIMs agreement on trade-related investments. The fundamental reason for this is because the United States exclusively binds its subsidies or tax breaks to the production of raw materials, intermediate products, and finished goods in the United States. Furthermore, the concept of equal treatment of the most favored nation clause (MFN) is ignored when products from Canada and Mexico are given preferential treatment.
What can Europe do to avoid falling behind the United States while also preventing the trade war with the Americans from escalating? We should first try to solve the problem inside the newly formed IRA task team. Options for eliminating prejudice in legislative implementation are being considered here between the US and the EU. The legislation can be worded differently. However, the only possible solution appears to be to eliminate the need for local production content from the statute itself. The EU should not seek an exception similar to that provided for in the IRA for Mexico and Canada, as this would violate WTO regulations. If this isn't doable,
Going to the World Trade Organization is not an act of escalation. The WTO is the cornerstone of the trade system for the EU, therefore registering a complaint is not an act of hostility, but rather an essential step in receiving confirmation that this law is not WTO-compliant. If we do not initiate WTO proceedings if a solution is not reached, it would be harmful to the heart of EU trade policy and the credibility of the multilateral trading system.
In addition to filing a WTO lawsuit, we must consider and implement additional steps. The EU should collaborate with allies and nations impacted by the IRA, including South Korea and Japan. The US market for EU products must stay open. The EU must also respond to the IRA through industrial policy. A shift in industrial value generation, particularly in transformational domains, is unacceptably disruptive. We must adjust and update the structure of state aid, but in a targeted manner. In this framework, we can provide more subsidies, but only in a very focused and sustainable manner. We must, in particular, expedite the creation of green hydrogen.
On the other side, what we should certainly not do is write a "Buy European Act". This would be contrary to WTO principles and would be damaging to long-term economic success. Under the current conditions, establishing a new EU Sovereignty Fund to encourage investments in green technologies is unfeasible. Rather, we should look at what we can presently achieve within the constraints of our current financial resources. In short, we should not adopt policies identical to those of the United States, nor should we engage in a subsidy race, but rather preserve and shape the rules-based multilateral trade system.
Another problem impacting on transatlantic relations is unlawful steel import barriers. In this regard, the EU and the US agreed on a standstill settlement in October 2021, and the EU suspended the pending procedures against the US. Other concerned countries, on the other hand, have petitioned the WTO to prosecute US conduct. The responsible dispute settlement panel determined in early December that the United States' 25 percent tariffs on steel imports imposed in 2018 breached international trade norms. The tribunal rejected the United States' sweeping rationale that the imports posed a threat to national security. It must always be determined objectively whether a government's arguments for applying national security measures are covered by WTO standards.
The United States' attitude is now unfathomable, as the Biden administration just rejected the ruling severely. The US has no intention of complying with the demands of the panel. Instead, they believe that national security safeguards can never be validated. It does not auger well for conflict resolution when one side makes a claim and the opposing side claims that they do not need to present proof or arguments since the system must accept their claim. As a result, the United States is urging other countries to follow suit in the future.
However, the issue of WTO compatibility does not appear to play a role in the US's most recent proposal to resolve the steel tariff dispute with the EU, namely the development of a Global Sustainable Steel Arrangement (GSA) in mid-December. However, there is no longer any link to national security. It's intriguing that the United States wants to include compliance with globally recognized labor rights as a GSA requirement. The GSA serves as a foundation for bilateral discussions, as well as dealing with the WTO. There is little doubt that additional commitment from the US is required to stabilize multilateral trade law.
It is obvious that, in the current global context, the EU and the US are economically and technologically dependent on one another. It is consequently critical to address trade irritants and use the Trade and Technology Council for its intended purpose, namely to forge new ground and avoid or settle trade conflicts. The next Trade and Technology Council conference will be held in Sweden in summer 2023. The time between now and then should be used to find a solution that is agreeable to all parties.
The author Bernd Lange has been an German SPD MEP since 2009, he has been Chairman of the Trade Committee and deputy member of the Committee on Industry, Research and Energy since 2014.