(Bloomberg) -- Time is running out for the European Union to resolve a dispute with the US over its massive subsidy program set to come into force in January, as the bloc weighs a series of measures to ensure European companies remain competitive.

The European Commission is trying to find a way to make sure EU firms aren’t at a disadvantage from subsidies that US President Joe Biden’s Inflation Reduction Act will hand out to American firms, according to people familiar with the issue. 

Some of the options available for EU officials include anti-dumping measures and a new instrument to remedy distortions created by subsidies granted by non-EU countries to businesses operating in the single market. 

The bloc’s executive arm would assess how to cut red tape for firms benefiting from existing EU incentives, said the people who asked not to be named on a confidential issue.

German Chancellor Olaf Scholz, speaking about the US law, told reporters in Berlin on Friday that “we must ensure fairness in the relationship between Europe and the US.” He said this “is why France and Germany, the French President and I, campaigned very early on for the EU to approach the US government directly and start negotiations on this issue.”

The EU is so far reluctant to take major steps including creating its own subsidy program as it worries about negative spillover worldwide. Member states are also against triggering a trade war with their transatlantic ally despite seeing the package as in breach of World Trade Organization rules.

Avoid Trade War

“I want to avoid a trade war by any means,” Dutch Foreign Trade Minister Liesje Schreinemacher said earlier Friday on her way into a meeting with her EU colleagues in Brussels. “No one benefits from any trade war.”

EU policy makers say the US law violates WTO subsidy and non-discrimination rules. The bloc argues that the legislation’s tax credits penalize European automakers because it forces them to source raw materials for electric batteries from countries that have a free-trade agreement with the US.

A spokesperson for the commission said the US law shows how important it is that the EU and Washington work together to coordinate approaches to key global technology, economic and trade issues. Work is advancing steadily and will continue, the spokesperson said.

High-Level Talks

EU trade ministers discussed the US plan Friday ahead of the high-level talks due in Washington next month between the commission and the Biden administration. But progress made in the Trade and Technology Council has been overshadowed by meager results from talks to address European concerns about the US law.

The commission does not expect the US to amend the law’s main points as it is a core part of Biden’s agenda, the people said. Instead, the task force triggered by European concerns is looking at targeted solutions to some specific demands of the bloc. 

Officials hope to achieve some concrete results by the time the TTC convenes on Dec. 5. But the EU side is increasingly pessimistic as there is no perceived sense of urgency from the US after three meetings, and instead Washington is stressing opportunities for European companies offered by the green package, the people said.

‘Take Stock’

Valdis Dombrovskis, the commission’s vice-president for trade, said that the December meeting will be “a good time to take stock” and then decide on the next steps.

The commission already told member states that the task force will continue its work beyond the December gathering, until the EU side gets clarity on how the US intends to implement the subsidies from Jan. 1, when the law comes into force, the people said.

The commission wants to keep all possible options available, including bringing a case to the WTO, although the bloc has insisted over the past days that dialog is the best way to find a solution. A case would take several years to work its way through the trade body’s hobbled dispute-settlement system. Even if the EU wins the costly and time consuming dispute, the US could essentially veto the outcome by appealing the decision to the WTO’s paralyzed appellate body.

A failure to resolve the issue may persuade European nations to match America’s massive domestic subsides, which could quickly sink into a transatlantic trade war akin to the multi-decade Airbus-Boeing subsidy fight. 

Member states have been demanding the same treatment that Canada and Mexico obtain under the US law. If that is not the case, “we will obviously have to think of other measures which could be either coercive ones, or obviously support ones for our own companies here on European soil,” warned Olivier Becht, French minister delegate for foreign trade.


--With assistance from Bryce Baschuk and Kamil Kowalcze.

(Updates with Scholz comment in fifth paragraph)

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