Is Global Trade War Coming?

France and Germany want to use the threat of American protectionism to subsidize their companies.

The U.S. Inflation Reduction Act, which was introduced at the beginning of this year, may lead to a global trade war. It’s a huge package of support for the economy, especially in the areas of clean technologies, as well as tax breaks and subsidies worth a total of $367 billion. At the same time, the law on semiconductors comes into force, which also provides for subsidies for this industry. All these benefits are limited to “made in the U.S.” products. That’s is a blatant violation of international trade rules, which should be guaranteed by the World Trade Organization. The boycott of the organization was initiated by detested-in-Brussels Donald Trump, who blocked the operations of the arbitration panel.

Without functioning arbitration, there is no way to resolve commercial disputes lawfully, so retaliation becomes the only effective weapon. Another might be persuasion, which produces results essentially among allies. Joe Biden seemed to be this kind of a proven friend of Europe. However, not only did he not effectively reactivate the WTO, as many had hoped, but under his administration, the most protectionist law in the post-war period came into force.

Disappointed

“Buy American” is a concept known since the end of World War II, and it has been used at different times and with different intensity. “It should come as no surprise that it appears during Biden’s time; after all, Democrats are known for their protectionist tendencies,” a senior European Commission official said. However, this does not change the fact that Europe is disappointed. Full of good intentions, it wanted to settle old disputes, as evidenced by the establishment of the Transatlantic Trade and Technology Council, which regularly meets at the level of U.S. ministers and EU commissioners and is supposed to act as an early warning system; where there is a risk of rupture, there is a need to talk.

But what can be done when the entire legislative act is aimed at everything that is not American? And that, with the devastating war in Ukraine and skyrocketing energy prices? “The last thing we need is an additional source of economic harm. But that’s what we may get in the form of another destructive trade war,” wrote Anne Kruger, the former economist of the World Bank and the deputy head of the International Monetary Fund, in the article published in “Project Syndicate.”

Berlin admits it: The dependence on Russian energy carriers, which partly financed Putin’s invasion of Ukraine, was the biggest mistake of German diplomacy since 1945. Will the West learn a lesson from this and free itself from dependence on other dictatorships, starting with China?

Brussels proposes to persuade Washington to make some modifications to the IRA, such as allowing European-made electric cars to be subsidized. In its current form, the IRA provides for a surcharge of $7.50 for each such vehicle on the condition that it was made in the U.S. and with mostly American components. By way of exception, in the last days of 2022, the U.S. agreed to allow commercial vehicles into this scheme, but it seems that this is the maximum of concessions.

A trade war is therefore a threat, but according to experts, more of a theoretical one. Because the U.S. is too powerful, and Europe — especially at the moment — is too dependent on it. “Who is the main security guarantor for Europe by supplying the key equipment for Ukraine in the war with Russia? Who is helping Europe with LNG supplies when gas imports from Russia have collapsed?” asks Jacob Funk Kirkegaard, a resident senior fellow with the German Marshal Fund. According to him, Washington could respond to a decision to restrict imports of U.S. products by imposing, for example, 15% export duties on gas. Europe knows this very well; therefore, the threat of a trade war is only rhetorical. Instead, the idea of replicating American solutions is being presented as an increasingly serious option.

That is, if the U.S., and at the same time China, is investing billions of euros in its economy, Europe should also defend the competitiveness of its industry by doing the same. In particular, France and Germany are proposing to tear down the foundations on which the common market was built — namely, to ban public aid. If this were allowed, then the strongest countries in the EU would be consistently winning — the two countries with the largest budgets, with unlimited possibilities to subsidize their companies. But Paris and Berlin argue that the situation is unique: If we do not want the industry to leave Europe, we must give it financial incentives to remain.

Old Demands

“France and Germany are using the American threat to implement their long-held demands. This is a political strategy to convince those traditionally opposed to state aid and subsidies, i.e., open, smaller or poorer economies — the Netherlands, Scandinavians, Eastern Europe,” Kirkegaard believes. The European Commission is aware that this is a deadly strategy for equal opportunities in the single market, which is why Ursula von der Leyen proposes loosening the rules only for a part of the economy and creating an EU fund for all. But Germany doesn’t want to agree to it. At a special EU summit in February, the leaders of the 27 countries will discuss the topic.

However, experts suggest that it’s worth calming emotions a bit. Because the American plan is not that bad for Europe, and it doesn’t require a significant response. “The EU should not be dragged into an escalating race for subsidies — especially with a country with such deep pockets and a global reserve currency. There is also the risk of directing subsidies to sectors that may inevitably move their production abroad,” says Milan Elkerbout from the CEPS think tank. And he adds that Europe, though it uses different tools, has for decades also been supporting the transition from coal. Kirkegaard adds that for years we’ve been urging the U.S. to invest in a green economy and fight climate change. When they finally get serious about it and want to invest close to $6.9 billion,* we sound the alarm instead of rejoicing.

*Editor’s Note: This is the figure (in dollars) that the author cites. However, the Joint Committee on Taxation and Congressional Budget Office estimate $369 billion invested in energy security and climate change over the next ten years.