President Joe Biden and other U.S. officials think they have a winning climate message to share with the world—passage of the Inflation Reduction Act, which provides investments and tax credits to help transform the U.S. economy to net zero and help meet its 2030 climate pledges. U.S. climate envoy John Kerry sees it as a way to spur other countries to comply with their own pledges.
However, the Inflation Reduction Act (IRA) has attracted widespread criticism from U.S. trading partners, mainly because it contains provisions that encourage U.S. production of electric vehicles and renewable energy that have opened the door to trade disputes. U.S. allies, such as the European Union, Japan and South Korea say the Inflation Reduction Act is a way for the United States to subsidize its manufacturing base, potentially harming the manufacturing base of its allies. E.U. Trade Commissioner Valdis Dombrovskis threatened a World Trade Organization complaint if those provisions are not amended. The Biden administration and European Commission established a task force late last month to “address specific concerns raised by the EU related to the IRA.” More recently, E.U. officials filed comments with the Treasury Department alleging that five of the law’s tax credits “contain provisions with clearly discriminatory domestic content requirements, in breach of WTO rules.”
The provisions include tax credits for electricity from certain renewable resources; for sustainable aviation; for production of hydrogen; for clean vehicles; for advanced manufacturing production; and for clean fuel production. For example, the electric vehicle tax credit of $7,500 has several restrictions. To qualify for $3,750 of the credit, an increasing share of a vehicle’s battery minerals such as lithium and nickel must be extracted or processed in the United States or in a country with which the United States has a free-trade agreement, starting at 40 percent in 2023 and increasing to 80 percent in 2027. The other half of the credit will only be available for vehicles in which a majority of its battery components are made in North America, starting at 50 percent in 2023 and growing to 100 percent by 2029. In contrast, France offers a roughly equivalent subsidy for electric vehicles regardless of where they are manufactured.
Autos Drive America, which represents foreign car manufacturers, indicates that the Inflation Reduction Act provisions could encourage other countries to retaliate with policies that penalize U.S. exports. There are projections of mass importations of electric vehicles from China into Europe. By 2025, up to 800,000 Chinese-built cars could be sold in Europe, most of them full-electric vehicles. While Chinese manufacturers are selling more and more electric vehicles in Europe, both European and American manufacturers are increasingly shifting their electric vehicle production to China.
There is also research to suggest that the law’s “buy American” provisions could undermine its environmental objectives by making solar power more expensive. A study published in Nature found that if the United States gives up using Chinese-made solar components in favor of U.S. products, solar energy costs would increase, making it unlikely that the United States could meet Biden’s 2030 Paris commitment. The adoption of similarly “nationalistic” policies by China and Germany could cause solar panel costs to increase 25 percent by 2030.
Treyer of the Institute for Sustainable Development and International Relations said climate-friendly domestic investments by the United States and Europe could frustrate less wealthy nations and their hopes of ascending the ladder of economic development. Countries in Africa may find themselves consigned to extracting and exporting raw materials for Northern markets instead of growing their own manufacturing bases with skilled labor.
The view of the Inflation Reduction Act from the South is that the United States is insisting on building the power, the capacity and the industrial jobs within the United States leaving nothing for the developing countries. All the added value will be captured by the already developed countries, leaving nothing for the lesser developed nations. To deal with this, developed countries might need to introduce policies to encourage companies to create jobs in nations they rely upon for raw materials. The idea is going to be ensuring that the economic players of Europe or the United States, when they invest in African countries to obtain resources or extract minerals, guarantee that some of the jobs remain in those countries. The United States is expected to announce new innovation hubs to be sited in Africa during the COP 27 climate talks.
Conclusion
The European Union and other U.S. allies want Washington to remove discriminatory content and production requirements in the Inflation Reduction Act, calling for more transparency in the tax credits granted by the law, and ensuring that the subsidies do not create adverse effects. The Biden administration is caught between its desire to promise to reduce carbon dioxide emissions and its promise to spur domestic job creation in green technologies, which are undeniably dominated by China. Both the European Union and the United States want to resolve the dispute before the Trade and Technology Council in early December, where the transatlantic partners want to agree on a series of actions to strengthen their bilateral cooperation.
