Steel and Batteries: It Is Increasingly Noticeable How the EU and the US Cannot Agree

The Hungarian media consumer would hardly know from the brief news about it a week ago that the world’s No. 1 and No. 3 economic powers, or as Viktor Orban put it, his two main political adversaries, the United States and the European Union, held a summit.

This is not surprising, given that the visit to Washington by Ursula von der Leyen, president of the European Commission, Charles Michel, president of the European Council, and Josep Borrell, high representative of the European Union for Foreign Affairs, did not produce any substantial results.

This might be expected since the added value of state visits is typically low in light of the daily coordination that takes place between the different levels of EU and U.S. governments regarding questions of defense, economics and politics.

However, that coordination is becoming increasingly difficult on a number of important issues, and the lack of results is becoming more noticeable.

While there is a great deal of agreement on how to tackle foreign policy crises in Europe and its nearby regions, the EU is still unable to reach results with its most important market and trading partner concerning disputes over the trade of electric cars and steel, the carbon tariff and the economic strategy toward China a year after the U.S. announced its industrial policy.

Industrial Policy

The knottiest problem is protectionism in the U.S. automobile industry, which has been a source of ongoing friction between the U.S. and the EU for the last year. The American program at the heart of discussions is known as the Inflation Reduction Act, which was actually adopted last August to encourage the spread of green energy production and electric mobility.

The IRA provides a maximum of $7,500 (about 2.7 million forints) in government subsidies for the purchase of new electric cars by the public. As a rule, however, the money is only available if the car is assembled in North America and the battery or the majority of raw materials used in the battery are not from a “problematic country,” i.e, China (as well as less significant countries in battery production like Russia, Iran or North Korea), but from the U.S. or “free trade partner countries.”

Although the latter exemption was included in the law in the interests of the South Korean, Japanese and European automobile industries, the problem is that the EU is not a free trade partner of the United States. Former President Donald Trump rejected the last economic agreement initiative between the two sides in early 2017 after a long period of negotiations. It is worth mentioning that the chances to ratify it were not high anyway due to European agricultural protectionism and the opposition of American multinational companies to Europe’s asserting its interests.

Europe noted the risk that Volkswagen, BMW, or Mercedes would be forced to move their production to the U.S. and eliminate European workplaces.

In response to the EU’s complaints, the U.S. government sneaked a loophole into the law by relaxing the criteria for partners that receive special consideration and exempting leased vehicles (as interpreted by the tax authorities) from the domestic production requirement. This is because the subsidies cover the cars and batteries produced abroad for business uses. In this case, lease purchases are considered business uses by the importers where they can pass on the price advantage to the local lessee.

Thanks to this, EU car exports to the U.S. are soaring, while the great automobile trade surplus with China has practically vanished.

At the same time, a free trade partnership would be necessary for the batteries and electric cars produced in the EU to receive IRA subsidies in the long run. With no political capital on either side for a comprehensive agreement, the parties envisaged a mineral trade agreement on the procurement and processing of raw materials important for battery production, such as lithium, cobalt, manganese, nickel and graphite, to resolve this.

The plan was to sign this agreement during the summit last week, but it eventually came to nothing since the EU found the labor, environmental and supervisory rules demanded by the U.S. government unacceptable.

The main point of contention is that the U.S. authorities want to control third-country mines and raw material processing plants that supply EU manufacturers. The car manufacturers in the EU oppose this, and the EU claims that it expects strict enough rules already from the domestic automobile industry.

Still, an agreement would be timely if only because Chinese retaliation against the U.S. and European electric car industry has also begun. Beijing has recently started restricting exports of several raw materials that are essential for battery production and where most of the global supply is under Chinese control.

The Country of Iron and Steel

The other knotty question involves the steel and aluminum sector where the EU responded with sanctions of its own to U.S. tariffs on products of EU origin during the Trump administration. While the protective tariffs were significantly eased after Joe Biden was elected, the debate remains unsettled.

The Biden administration is now trying to get the EU to join the movement against the Chinese steel industry and, as the Americans put it, create a “Green Steel Club” in exchange for completely lifting the sanctions. This would mean that members of the “club” could jointly punish those countries whose steel production leads to high levels of greenhouse gas emissions.

On the other hand, the EU claims that it already has a mechanism for dealing with greenhouse gas emissions in the form of the EU carbon tax, or as Brussels calls it, the Carbon Border Adjustment Mechanism, which aims to penalize products from more highly polluting countries and which was enacted after years of protracted legal and political processes. The United States’ ambitions are not well understood in the capitals of the EU because China supplies only 7% of U.S. and EU steel imports, and a series of EU protective tariffs have already been imposed on Chinese steel in recent years, citing the strong state aid the sector receives. Besides that, Washington’s recommendation would certainly break the World Trade Organization’s system of rules.

However, a carbon tax does not work for the Biden administration since American producers naturally oppose the taxation of their emissions and because the American president’s sphere of influence is limited in this area. Considering the current composition of Congress, there is no chance for the adoption of EU rules either. Biden is holding his ground because the sector is located in those swing states for the most part where a victory would play a key role during the 2024 presidential election.

Since the suspension of the previous import tariffs will expire on Oct. 31, the disagreement must be resolved either by extending the suspension or by an agreement that involves compromise from both sides. Otherwise, the trade war, as during the Trump administration, might resume.

This question should have been resolved during von der Leyen’s and Michel’s trip to Washington, but that didn’t happen. At the moment, they will extend the suspension date of the protective tariffs, and the negotiations will continue.

An additional problem is that the IRA is far from being just about the automobile industry, as it also allocates comparably significant sums for greening U.S. energy production and other manufacturing sectors. The Europeans fear that the industry might move from Europe to the U.S. because of low American energy prices. Even more, Hungarian government propaganda claims that the IRA could result in the “collapse of world trade,” that “the U.S. is a murderer of the European industry,” and that “America tramples Europe underfoot.”

There are not many signs that this is happening since as the development of the automotive trade balance indicates, there is no major European industry that has experienced the American drain, and the macroeconomic effects of the IRA on Europe will be minimal according to the analysis of the German and French economy advisory boards. One explanation for this is that the sectors targeted by the IRA also receive special consideration and significant state aid from the EU and its member states, while the other explanation is that industrial competitiveness in 2023 concerns more than just energy prices. Because of the higher levels of self-sufficiency, a more unified market, and lower taxes, energy prices have been lower in the United States than in the EU for decades.

That said, it may cause long-lasting disagreement that the EU and the U.S. have very different institutional structures and therefore very different means of tackling climate change according to former EU Trade Commissioner Cecilia Malmström and other political scientists. Although there is no political appetite in Washington for penalizing pollution, the support of green energy is politically more feasible. However, the European Union prefers taxes because of internal market rules that restrict state aid, the lack of a strong central fiscal capacity, and the German and northern European aversion to spending EU money. This, in turn, makes it difficult to reconcile the interests and political options of the two parties.

Their Foreign Policy

Besides the steel, priority differences also remained on the two sides of the Atlantic regarding China. Increasingly more people in Europe consider China a rival and fewer consider it a partner, while Commission President von der Leyen is trying to push the EU’s economic and diplomatic relations with Beijing in a more rigid direction.

At the same time, French, German and other leaders of the member states are frowning on this type of activism. On the one hand, according to member states, von der Leyen tends to overstep her authority and tries to represent the EU on issues where she has no power to do so, be it economic issues or even support for Israel.

On the other hand, there is also occasional criticism from member states that are less committed to the United States or that place a higher value on their business affairs with China, and here we should not think primarily of Hungary, which is hysterical about everything, but also of France, for example, which has real influence over the issue. At times, there was criticism about how the standpoint of the president of the European Commission is conspicuously aligned with that of Washington on many important issues.

There is no resounding success either with respect to the fact that Washington occasionally uses bilateral pressure to get its way, for example when it recently swayed the Dutch government to restrict Chinese exports of ASML, the world’s most important manufacturer of chip-making tools. Serious condemnation by Europe followed, since members of the EU naturally prefer to decide for themselves how to regulate trade with China.

Of course, the European political situation contributes to the disruptions as well. The rivalry arising from the individual ambitions of EU leaders was also noticeable at the EU-U.S. summit. Rumors from Brussels have it that der Leyen and Michel hate each other, and they are making increasingly less effort to hide their animosity in diplomatic events. The two arrived separately at the White House and had separate bilateral meetings with Biden.

In light of this, those assembled in Washington tried to focus on common ground. There was great unity in supporting Ukraine, condemning Hamas, and preventing an escalation of the Israeli-Palestinian conflict, although the U.N. General Assembly vote calling for a humanitarian cease-fire shows that even the EU member states are not aligned in their views on the situation in the Middle East.

Noah Barkin, a researcher at the German Marshall Fund and a long-time chronicler of trans-Atlantic politics, also pointed out that since Biden took office in 2021, Washington and Brussels have made great strides on a number of important economic and political issues. Resolving economic differences, however, requires more political will than that.