Dec 5, 2022

US, EU to Address Differences on EV Subsidies That Could Threaten a Trade War

Jillian Deutsch and Eric Martin, Bloomberg News

A Hyundai Motor Co. Ioniq 5 electric vehicle charges outside the Air-One vertiport, developed by Urban-Air Port, for the vertical take-off and landing of flying taxis and autonomous delivery drones, in Coventry, U.K., on Monday, April 25, 2022. While dozens of fledgling aerospace enterprises are racing to bring flying taxis to market, attracting billions in investment, spending on so-called vertiports has lagged behind, raising concerns that the first eVTOLs could find their operations limited. , Bloomberg

(Bloomberg) -- European Union and US officials committed in principle to resolving a dispute over electric-vehicle incentives that threatens to spark a trade war, without Washington making specific concessions and time running short.

The Inflation Reduction Act, which the EU says provides unfair subsidies to US manufacturers and threatens to undermine the transatlantic relationship, has caused alarm in European capitals that only eased during French President Emmanuel Macron’s visit with US President Joe Biden last week.

US officials continued the charm offensive with representatives from the European Commission on Monday at the third Trade and Technology Council meeting in College Park, Maryland, north of Washington.

Secretary of State Antony Blinken said the US heard the concerns of its “European friends about certain specific aspects of the legislation,” and set up a taskforce with the EU. “We are continuing to give momentum to that conversation and to working through the differences, as President Biden said we would do.”

Executive Vice President Valdis Dombrovskis said that he was leaving the meeting “more optimistic than when we arrived” but stressed urgency.

“We don’t have long -- the IRA is due to be implemented next January,” he said. “We need to see results still this year.”

US Concessions

It could be difficult for the US to find a way of placating Europe, as the IRA has already passed. EU officials are pushing for the US to provide exceptions to European countries similar to what Canada and Mexico have.

The most likely route to try to accommodate EU concerns would be for the US Treasury Department to issue a waiver allowing European vehicles to qualify, said William Reinsch, who served as undersecretary of commerce for export administration in the Clinton administration.

While such an interpretation of the law would be unlikely to hold up in court in the face of lawsuits from groups that favor a stricter interpretation, that process could take years to play out, providing an interim solution, said Reinsch, now a senior adviser at the Center for Strategic and International Studies in Washington.

“I don’t think they have as much flexibility as the president implied” to satisfy European demands, Reinsch said.

Subsidy Spats

In Europe, more politicians are calling for a regional response that would rival the IRA -- a move that risks shifting the fight over industrial subsidies from the US to within the bloc. In a speech over the weekend, commission President Ursula von der Leyen pushed to re-examine state-aid rules and create a European fund to invest in clean tech.

While backed by key countries like France, these ideas are controversial for fiscally conservative EU countries and even within the commission. German Finance Minister Christian Lindner said the EU must be more agile, and there is “room for improvement” on state aid, but called for more debate on other aspects of von der Leyen’s proposal, especially the creation of a European sovereignty fund.

“If that means a kind of rebranding of existing tools, I’m open to discussion,” Lindner said. But if it means issuing new common European debt, “then I think this would not be an improvement of our competitiveness or stability -- it would be a threat.”

Executive Vice President Margrethe Vestager also stressed that the EU will not change state aid rules in the EU treaties. She pointed to the EU’s Chips Act that allowed governments to subsidize the production of semiconductors; however, this was highly controversial among members of the commission.

Future Work

Blinken added that there will be further work between the EU and US on telecom infrastructure, while another EU official at the TTC meeting said there would be more talks about 5G and 6G research.

But there are also other disagreements between the two. US officials mentioned the need for European countries to align on semiconductor export controls at the TTC, according to a commission official.

The Biden administration implemented sweeping controls in October meant to cut off China’s access to advanced semiconductors, and has been pressuring the Netherlands to follow suit by cutting off more sales from Dutch chip-equipment maker ASML Holding NV to China. Officials again raised the issue of chip exports at Monday’s meeting.

ASML already does not sell its most advanced EUV equipment to China after pressure from the Trump administration. The Dutch government has been vocalizing resistance to US pressure.

Commerce Secretary Gina Raimondo said the EU and US didn’t talk about ASML explicitly at the TTC but discussed export controls and have aligned sharing information on semiconductor shortages and subsidies.

In passing, US officials also mentioned upcoming changes to the EU’s cloud cybersecurity certification, which could make it harder for US tech giants like Amazon.com Inc. and Microsoft Corp. to win government cloud contracts.