No One Needs War on US Subsidies

Although Europe styles itself as the leader in the field of climate change and has a real track record of reducing greenhouse emissions, it has problems with its related industrial policy, writes the director of the Polish Economic Institute.

Europe’s problems with American subsidies are now one of the more widely discussed economic topics in Brussels, Berlin and Paris. The Inflation Reduction Act provides for the spending of $370 billion, which the U.S. will use to increase green economy production capacity in its territory. For many, an economic war that will bring down European industry has just begun.

The 2022 act includes, among other things, tax credits for the installation of solar panels and other renewable energy sources, which are intended to significantly reduce the price of “green” energy. It also provides tax breaks for electric car buyers in the amount of $7,500 worth of subsidies for investments in energy efficiency and reduction of methane emissions by the energy industry. The first investments using tax credits and subsidies have already started in some states, including LG’s decision to build a battery factor for electric cars in the U.S.

This is the only climate act passed by Congress since, for example, Barack Obama’s initiatives implemented at the presidential level were partially blocked by the courts and reversed by the next Republican president. Therefore, this is a different philosophy than that of the EU — less prescriptive and prohibitive, which enforces emission reductions by putting in place standards, but rather one that initiates change through economic incentives.

So far, the U.S. has seen more than 40 new projects in the eight months since the implementation of the new regulations. They are expected to be worth $44 billion and create 32,000 new jobs. It is not known how many of them would have been implemented without the IRA, but public assistance certainly accelerated some board decisions.

Europe Is Greener Than the US

The U.S. has a geopolitical administration, and we in Europe do not have a geopolitical European Commission. Ursula von der Leyen has announced that her term will be marked by a much greater commitment to global affairs and conflict resolution. Trade securitization in the U.S. has become a fact of life; in Europe, we still haven’t fully adopted the new rules of geostrategic action. Trade is not part of our security policy.

For more than a decade, the U.S. has sought to limit the threats posed by the rise of an undemocratic China. Since 2018 it has been in an open trade dispute, and the approach to China is one of the few issues that unites Republicans and Democrats. After the pandemic and the Russian invasion of Ukraine, the U.S. is preparing for the worst — a situation in which supply chains in key areas for America’s security will be disrupted. The U.S. takes the risk of China invading Taiwan seriously — unlike Europe, as evidenced by Emmanuel Macron’s visit to Beijing. Europeans have more trust that this scenario will not materialize; therefore, they prefer to continue exporting cars or luxury goods to the Chinese market.

Complaining about the IRA and expecting French, German or Italian businesses to receive even more subsidies — and even more concessions — shows how much European businesses are used to rent-seeking. Over the years, corporations have become accustomed to public assistance in various situations (looking at the scale of illegal but also legal aid for research and development). For the first time in a long time, the Americans have begun pursuing an industrial policy similar to that of Europe, and we should not be surprised that, given the scale of its economy, it will have a global impact.

Europe is used to being a climate change leader. Donald Trump’s presidency was convenient for many governments because it helped them hide their own failures and point to the world’s largest economy as that which undermined the sense of any green initiatives. Although Europe is posing as a leader in climate change and indeed has a real track record of reducing greenhouse gas emissions, it has a problem with the industrial policy associated with it. The EU creates fewer green patents per 1 million inhabitants than the U.S. or Japan (Denmark is the leader). The IRA is threatening European plans to put the economy on a green footing, though, in fact, the U.S. was ahead of us in this respect before.

Consequences of American Subsidies

The IRA may result in two or, at most, three scenarios for European industrial production.

Scenario 1: Competition. The Americans will take away part of our industrial base. Companies will be tempted by subsidies in the U.S. and will close their factories in Europe. New projects will also go to the U.S. Europe will lose some of its competitiveness, and the production of all green economy products will be profitable only in America. The EU has its subsidies and corporations, and, to some extent, China benefits from them. We may see increased protectionism.

Scenario 2: Cooperation. The IRA has a limited influence on production transfer to the U.S. Some investments that have been planned for the American market are already realized there. BMW and Volkswagen cars produced in these markets today are turning into hydrogen and electric cars. There is no damage to production in Europe. We are creating a cluster of green investment incentives in Europe and the U.S. We are reindustrializing ourselves to become more secure. It will be profitable for European businesses to force the signing of a free trade agreement with the U.S. so that there is a level playing field between the two geopolitical partners. Free trade can reduce the problems with subsidies and at the same time help to counter China. The negotiations that von der Leyen started with the U.S. government are a signal that Europe regards the U.S. as a more important partner than China.

3. The intermediate scenario, in which the EU introduces even more aid mechanisms and applies looser public aid rules in line with the current proposals but does not, for example, opt for more common debt or for aid that is virtually universal. These will rather be sectoral policies with limited impact. It’s more complicated than what America can offer, where the federal government can create its own tax framework. The simplicity of solutions for companies that the U.S. offers will be far more appealing. The impact of the IRA on companies in Europe may be quite illusory and remain a nod to EU regulators, but it is hard to imagine that production for the European market will be moved to America.

The U.S. will be greener, and it’s good if we take the climate change crisis seriously. For now, Europe has been active in industrial policy and must continue to do so. Partners and friends need more, and not less, trade exchange. The war over subsidies is not necessary, and it doesn’t have to materialize. It is worth understanding why the U.S. wants to produce some of its key products closer to its market — because it is afraid of a trade war with China — and so should we. The IRA is not targeting Europe, but China.

Instead of focusing on the potential negative effects of the IRA, the EU needs to protect its supply chains from the threats posed by China’s potential authoritarian decisions. Americans made the first leap in the field of low-carbon technologies in the 1970s in response to the oil crisis. Europe — in spite of Poland’s warnings — missed the opportunity to prepare for the current energy crisis. Americans know that raw materials or semiconductors have become the new oil, and they do not want to be surprised by the crisis in this area. It is worth joining forces with the U.S. and together prepare for a potential semiconductor crisis.

Dr. Piotr Arak is the director of the Polish Economic Institute.