Tensions Over Trade in the Transatlantic Alliance

US & EU

By Emil Bjerg, journalist and editor

The relationship between two global giants, the EU and the US, was expected to get a healthy reset after the election of Joe Biden. Instead, things have gotten tense after the adoption of the US Inflation Reduction Act. This article explores the depth of the conflict and looks at scenarios for the Transatlantic Alliance in 2023. 

Throughout the past six months, tensions have been rising between the European Union and the United States. The reason behind that is the American US Inflation Reduction Act.

The act, a $369 billion plan that provides subsidies for American climate products and technologies, has been met with criticism, especially from Europe where several leaders see it as protectionist.

Despite its name, the Inflation Reduction Act is actually engineered more toward handling the climate crisis than inflation. Experts call it the most significant climate action legislation in US history and it’s predicted that it could cut national greenhouse gas emissions down by a whopping 37 – 41 percent in 2030 compared to 2003 levels, bringing the US closer to meeting its commitment to the Paris Agreement.

The act establishes rigorous guidelines for the carbon footprint of imported commodities and provides subsidies for American climate innovations and companies. That makes European officials worried that American businesses will get an unfair edge on the global market, not having to adhere to the same norms as their rivals from Europe.

Another worry is that the legislation would trigger a “green trade war” between the US and the EU as the latter might retaliate by imposing its own regulations as well as giving subsidies to businesses operating in Europe. This might have a detrimental impact on the two global giants’ relationship as a whole and may hurt the world economy.

The act has already led to tensions over subsidies and protectionism in trans-Atlantic relations, with the EU having considered complaints to the World Trade Organization or trade sanctions as potential responses. “There’s potential for this to escalate into a larger conflict,” Niclas Poitiers, a research fellow at the think tank Bruegel, recently said.

Reactions from European leaders

French president Emanuel Macron has been one of the vocal critics of the U.S. Inflation Reduction Act, a law he says risks “fragmenting the west”. Further, in a less diplomatic tone, Macron added that the act is “super aggressive” against European companies.

Macron has been arguing for a ‘Buy European Act’, one that mimics the Inflation Reduction Act with subsidies to local manufacturers: “We need a Buy European Act like the Americans, we need to reserve [our subsidies] for our European manufacturers. You have China that is protecting its industry, the U.S. that is protecting its industry, and Europe that is an open house”, Macron said.

Like Macron, the President of the European Commission, Ursula von der Leyen, follows Macron as she said the EU might make a European act with subsidies to avoid losing manufacturing to the US. This could be in line with the general wish to pursue a bigger ‘strategic autonomy’, that the EU has been pursuing with increasing motivation over the past 10 years.

However, according to senior analysts from the European Council on Foreign Relations, the threat of counter-subsidies “lacks credibility”. According to them, that would risk pushing “both sides into a race to the bottom as companies could threaten to move overseas unless they receive ever higher subsidies”.

The German chancellor, Olaf Scholtz, conciliatory approach seems to reflect that risk: “I am confident that this will involve a lot of work, a lot of effort, and certainly a lot of decisive discussions, but that in the end, we will find a solution that we can all live with – the USA, the European Union, and its member states”, he stated.

Among other top politicians who have raised serious concerns about the inflation reduction act are French and German ministers of finance, Bruno Le Maire and Christian Lindner.

Margrethe Vestager, European Commission Vice President called for a calm approach to the tension: “We already have war in Europe. The last thing we need is a trade war”.

A critical alliance in geopolitics

From a European perspective, tensions in the Transatlantic Alliance come at a critical point in time. Especially because there is war on the continent – a war that the Ukrainians will have a hard time fighting without the unified support of the Transatlantic Alliance.

But the tensions between the EU and the US also come at a time when the US – and to an increasing degree – EU is facing challenges with China. Here, the Transatlantic Alliance and its stability is seen as important in trying to restore what’s left of the rules-based world order, an order that is dwindling by the day due to the continuous challenges from China and Russia.

From globalism to protectionism

The trade relations between the EU and the US have recently had their ups and downs – and the general trend over the past 15 years has shifted from a globalist free-trade approach to a protectionist one.

During Obama’s administration, efforts were made to strengthen economic ties between the United States and Europe through initiatives such as the Trans-Atlantic Trade and Investment Partnership (TTIP). While the TTIP negotiations faced significant challenges and were ultimately unsuccessful, they reflected the Obama administration’s commitment to free trade and the administration’s wish to deepen economic ties with Europe.

Quite the contrary, during his time in office, former President Donald Trump implemented several protectionist policies toward Europe, including imposing tariffs on various European products. These tariffs were justified by the Trump administration on the grounds of national security, but they were met with strong opposition from European leaders and resulted in the EU imposing retaliatory tariffs on a range of American products.

The transatlantic trade was expected to return to a status quo between the two long-term allies, the EU and the US, with the election of Joe Biden, but the recent developments have put this expectation in jeopardy. One could argue that Biden’s economic policies bear a bigger resemblance to those of Trump than to Obama’s – for whom Biden was a vice president. The French newspaper Le Monde has even stated that “for the EU economy, Biden has proved worse than Trump”.

A challenging situation for the US

However, a trade war between the two global powers would also pose a significant challenge for the U.S.. Professor of international political economy, Eric Jones, says: “A trade war between the U.S. and Europe would be more challenging than a trade war between the U.S. and China because it would weaken U.S. multinationals, reduce the size of the markets U.S. firms can access, and create incentives for U.S. firms to divest from their foreign assets and so unleash further foreign competition”.

With both the US and EU having strong incentives to avoid a trade war, let’s have a look at where the conflict seems to be heading in 2023.

Scenarios for 2023

When it comes to Transatlantic trade, 2022 was a much more rocky year than anyone could have expected. 2023 that could stir even more chaos between the two allies as consumer demand is predicted to falter as we’re awaiting whether a recession will hit or not.

While a recession might deepen the trend of protectionism, geopolitics might be what brings the two global powers closer. The war in Ukraine and challenges from Xi Jinping make good bilateral relations attractive, seen from both sides of the Atlantic.

However, after the US Reduction Inflation Act, EU leaders might see themselves forced to retaliate somehow, either by continuing the threat of regional subsidies on green tech or by imposing tariffs. According to Niclas Poitiers from the think tank Bruegel, a throwback to the strained trade relations during the Trump era – including new threats of tariffs imposed on goods from across the Atlantic – is a likely scenario for 2023.

As of the time of writing, the European Commission industry chief Thierry Breton is actively seeking support in the European Parliament for a ‘Clean Tech Act’ to support European production and technology. The funds from the 750 billion-Euro post-corona recovery plan

are not entirely spent, and could potentially be directed to support the green industries in Europe.

Subsidies as well as tariffs imposed by the EU could be the beginning of a slippery slope leading to escalations from both sides. But it might also be what powerful European leaders deem necessary to get even.

The geopolitical situation, good diplomatic relations and the common belief in the rule-based world order will come in handy if the situation escalates.

With the war in Ukraine, tensions between the US and China, global warming, inflation, and a luring recession, fingers crossed, the leaders in the Transatlantic Alliance manage to steer clear of a trade war in 2023.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.