How Biden Administration’s Economic Policy Affects U.S.-Europe Relations

Zhao Huaipu

Since taking office， the Biden administration has introduced policies to expand domestic spending and spur economic growth in the face of deep domestic division and increasingly intense international political and economic competition. It has revived state interventionism in an attempt to gain competitiveness through new industrial policies and to foster a new international economic governance and control system. The ultimate goal is to consolidate the basis for long-term growth and competitive advantages. Bidens nationalist and expansionary economic policy which serves the U.S. strategy of great power competition has added to the uncertainty in international relations. Its Inflation Reduction Act has been questioned and opposed by many for its discriminatory and protectionist overtones， bringing adverse impact to U.S.-Europe relations in particular.

Bidens Economic Policy with Overtones of “America First”

The U.S. has seen its economic advantages waning and global standing plummeting in the wake of the 2008 financial crisis. In response to the evolving international environment， it has adjusted its international strategy and economic policy. Trumps “America First” protectionist policy marks a turning point of U.S. economic policy against the backdrop of globalization backlash. With its radical economic policy， the Trump administration attempted to reshape the global industrial chain， create employment by bringing the manufacturing sector back home， protect the interests of American workers and businesses and buoy the American economy. Its strategy of trade protectionism and economic nationalism targeted not only China but also any other country or group that might compete with the U.S.， the EU included.

Since Joe Biden took office， it seems that the protectionist rhetoric has been largely replaced by emphasis on WTO rules and WTO role. To ease economic and trade relations with the EU， some compromise was made and agreement on steel and aluminum was reached between the two sides through consultations and negotiations. Despite these positive changes， the Biden administration can hardly alter the logic of “America First” and has limited room for policy adjustment. The WTO Appellate Body to which new appointments had been blocked by the U.S. under Trump remains paralyzed with Joe Biden in office. The current administration even tries to infiltrate WTO negotiations with the Democratic Party platform such as addressing forced labor on fishing vessels in fisheries subsidies negotiations. At the same time， it continues Trump administrations proposal of adding environmental factors into the consideration of anti-subsidy investigation. All these have only made negotiations more complex and difficult. As a matter of fact， goodwill to the WTO and easing of trade relations with the EU is practically a means for the Biden administration to reshape Americas image as champion for the multilateral trading system and to strive for more cooperation with others -- Europe in particular.

Under the shadow of Trumpism， the current Administrations economic policy is inevitably constrained by domestic factors. The proclaimed return to multilateralism and international cooperation is nothing more than a means to the end of maintaining American leadership and hegemony. Despite differences in specific policy measures， the underlying logic to seek “America First” does not and will not change. A living example is the Inflation Reduction Act.

Inflation Reduction Act and European Response

In August 2022， a Federal Act covering taxation， health and climate change was passed by the U.S. Congress， which will direct $ 430 billion over the coming 10 years toward addressing climate change， developing clean energy and shoring up health care， including a record $369 billion funding for climate and energy expenditure. The package， known as the Inflation Reduction Act （IRA or the Act）， aims to curb inflation by reducing the deficit， making Medicare more affordable and investing in sustainable energy， and is considered the largest climate bill in history. It is estimated that by 2030， the Act will cut greenhouse gas emissions by about 40% below 2005 levels. The IRA at first blush looks like a much-needed， positive legislation for America and the world， but a closer look reveals that it may cause more problems than it solves. Under the Act， the U.S. government will provide huge subsidies for green businesses whose production is mainly done in the country， with a focus on the homegrown electric vehicle industry. A $7，500 subsidy （tax credit） is offered to consumers purchasing electric vehicles （EVs） whose critical components such as batteries are produced and assembled within the U.S.， excluding EVs made in other countries， in a bid to promote domestic EV production and application of green technologies and boost the economy by gaining a competitive advantage over other countries. The Biden administration also aims for global leadership， hoping that the Act can make America “again” a leader in global climate policy.

Nonetheless， the Act has sparked considerable controversy across the world， as it intends to foster an environment favorable only to the U.S. through protectionist measures and to alleviate its economic woes such as high inflation. Americas allies in Europe and Asia （Japan and South Korea） have criticized it as a violation of WTO rules and manifestation of trade protectionism. European Commission President Ursula von der Leyen said that the Inflation Reduction Act has received so much additional scrutiny in Europe and the rest of the world because it can lead to unfair competition， close markets and fragment global supply chains.

There are three main reasons behind the EUs strong doubts and pushback. For starters， it is believed that the Act supports Americas clean energy industry through subsidy and encourages discriminatory and unfair competition at the cost of European businesses. According to the domestic （local） content requirements， only EVs assembled and clean energy technologies procured in North America （i.e. the U.S.， Canada and Mexico） can receive the subsidy. The EU views this as discrimination against foreign manufacturers and imported products， which puts Europe at a disadvantage in the EV market and may see EV manufacturers including car battery markers relocating to the U.S. Apart from that， the bloc believes that， without a cap on subsidy spending or production， investment may be diverted from Europe to America. Valdis Dombrovskis， Commissioner for Trade and Executive Vice President of the European Commission， said the IRA contains many elements that discriminate against European exporters to the U.S and makes fair competition with American products in third countries hardly possible.

Second， the Act increases the risk of European deindustrialization and hampers its green transition and strategic autonomy. Even before the Act was passed， the EU had been plunged into crises by the escalation of the Ukraine crisis including soaring energy prices and inflation， bringing grave challenges to local manufacturers. Many businesses in the EU have been thinking about investing in the U.S. due to the gloomy prospects of European industry. The Acts preferential treatment for green businesses will surely generate a siphon effect. The bloc warns that the IRA may result in “a significant diversion of future investment and production， threatening jobs and economic growth in Europe and elsewhere”. More consequentially， these measures aiming at spurring the manufacturing and green energy sectors are tilting the playing field to the advantage of the U.S. In short， the IRA brings adverse effects to EUs green transition and industrial development and creates challenges for European strategic and economic autonomy.

Third， the U.S. exploits crises in disregard of concerns of its allies. According to an article on the website of the French weekly Le Point， the U.S.， which enjoys energy autonomy and technological and armament dominance， stands to benefit from the escalation of the Ukraine crisis， while Europe， which sides with the U.S. in imposing sanctions against Russia， suffers a lot from the energy crisis and faces a real threat of industry， job and capital outflow to America. Amidst all this， the U.S. woos European businesses with low energy cost and government subsidies and sell its pricy liquefied natural gas （LNG） to Europe. EU officials say that LNG imports from the U.S. are four times as expensive as LNG inside the country. No wonder Charles Michel， President of the European Council， complains that the European industry faces soaring energy prices and U.S. competition.

IRAs Impact on U.S.-Europe Relations

The biggest challenge for the U.S. and EU over the IRA is to address the EUs concerns while upholding the law. It is commonly believed that there are several possible scenarios. The first option is for the U.S. to amend the Act by making EU producers eligible for subsidies and support. But it is going to cause bitter controversy. Democrats in Congress have already made it clear any amendment is not possible， and the White House has expressed no interest in changing the legislation as well. Second， the EU may ask the U.S. for exemption. But granting the bloc a waiver would be politically difficult because of the explicit domestic content requirements. If the waiver is indeed granted， the EU may need to change its Carbon Border Adjustment Mechanism （CBAM） and exempt American companies from paying a border carbon tax in return. That said， such a compromise will create many new problems and prove to be unfeasible. Third， the two sides can assess IRAs impact on EU manufacturing sector and work out a solution through negotiations. Biden has indicated willingness to make changes in the law to accommodate European interests. However， it remains to be seen how the specific rules concerning domestic content requirements will be set and whether the implementation can be flexible （so as to include European producers）. Fourth， the EU may raise green subsidies to support its industry. Nonetheless， this may bring some new problems， such as a heavier burden on taxpayers and negative impact on relations with third countries. The last and also the most costly scenario is that in absence of a negotiated solution， the EU may impose retaliatory tariffs against the U.S.， which will heighten tensions and even trigger a trade war between the two sides. Or the EU may bring the dispute to the WTO， which will also hurt its relations with the U.S. The continued blocking of appointment of new judges to the Appellate Body of WTO may turn the dispute into a protracted one.

Finding a solution through negotiations seems to make sense for both sides. EUs will for that is even stronger. Its immediate priority is to prevent its industry， plagued by the energy crisis， inflation and recession， from suffering yet another blow of IRA-induced investment outflow. In addition， under security pressure brought by the Ukraine crisis， the EU wishes to address dispute with the U.S. in a low-risk manner. The two sides established in October 2022 a dedicated Task Force on the Inflation Reduction Act within the U.S.-EU Trade and Technology Council （TTC） mechanism. The joint statement of the third TTC meeting in early December that year noted that “preliminary progress” of the Task Force was made. To ease the EUs strong discontent and to appease its ally， it is possible for the U.S. to take some remedial measures to grant European companies some form of waiver or subsidy， but there remains much uncertainty.

Before a solution is worked out， the Act will add further strain to U.S.-Europe trade relations. If the two sides fail to reach one， the EU， out of its own interests and reputation， may bring the dispute to the WTO or resort to retaliatory tariffs. While maintaining negotiations with the U.S.， the bloc recently issued a written statements， warning that the Act distorts the level playing field and the bloc will consider taking retaliatory action including offering similar subsidy incentives to European companies.

Regardless of a solution or not， the damage is already done. Under the Ukraine crisis， Americas recent stimulus measures including the IRA are like adding fuel to the fire， making Europes industrial and manufacturing crisis even worse. The exploitation of allies has taken Europe aback and laid bare Americas selfishness in disregard of morality and rules. Although the EU says it does not want conflict with the U.S.， the Act has already caused rift to their relations. Still worse， it may deepen Europes distrust of America. The key finding of a pan-European poll conducted by the European Council on Foreign Relations in November and December 2021 is that Americans have a new president but not a new country. This shows Europeans distrust of the U.S. and their doubt about Bidens promise that “America is back”. In their view， the IRA has confirmed their doubt.

Conclusion

As global green transition gathers momentum， especially as countries compete for the lions share in the clean energy market， trade conflicts over subsidy will inevitably arise. The climate-related trade dispute between the U.S. and Europe is exacerbated by the introduction of the Inflation Reduction Act， which ties local content requirements to clean energy subsidies. If the two sides fail to settle their dispute over the Act， both may increase green subsidies， thus excluding others from the fast-growing clean technology market and undermining cooperation with emerging markets and developing countries as well as global green development. Looking ahead， trade conflicts over green subsidies may be common in a world of growing climate asymmetries. The recent trade tensions between the U.S. and Europe over the IRA highlight the need for a green reform to the international trading system. In this process， it is necessary to oppose climate hegemony， reject economic and trade protectionism and ensure that developing countries benefit from a green trade regime.

Zhao Huaipu is Professor of Institute of International Relations China Foreign Affairs University