At WEF talks, Europe frets over US plan
Fears that it may cost investment, jobs
A cautious optimism ran among the Europeans gathered high up in the Swiss Alps for the annual meeting of the World Economic Forum last week. There were hopes that the region might cast off the gloomiest economic forecasts and avoid a recession this winter, helped by lower natural gas prices.
But when pondering Europe’s longerterm future, there was plenty of fretting over US President Joe Biden’s Inflation Reduction Act. The concern was voiced loudly in the ski town of Davos, Switzerland, that the law’s provision for $369 billion toward low-emissions energy and green technology would draw vast sums of investment and jobs away from Europe, cementing fears of deindustrialisation on the continent.
Simmering for months, the complaint punctuated speeches and informal discussions from the main conference centre to the back meeting rooms. The Europeans fear that companies will choose to build battery factories and electric vehicle assembly plants and other major projects in the United States to benefit from the tax credits and other incentives in the law that encourage local manufacturing. That could mean that production in Europe would be diverted to the United States, or businesses could simply pick the United States over Europe for future projects.
The new law, for example, provides buyers of electric vehicles a federal tax credit of up $7,500 — but only if those vehicles are made in North America.
“It is no secret that certain elements of the design of the Inflation Reduction Act raised a number of concerns in terms of some of the targeted incentives for companies,” Ursula von der Leyen, president of the European Union, told delegates last Tuesday.
The next day, German Chancellor Olaf Scholz said the local content requirements in the law “must not result in discrimination against European businesses.”
Although he said he welcomed the plans for clean energy investments, he added that “protectionism hinders competition and innovation and is detrimental to climate change mitigation.” EU members “are talking to our American friends about this.”
Outside the conference centre, the tone was less diplomatic: The phrase “trade war” came up more than once.
Solveigh Hieronimus, a senior partner at McKinsey based in Germany, said the law was “protectionist” and “probably more extreme” than the types of trade actions that then-President Donald Trump took against the EU.
The European complaints prompted Biden to promise to make “tweaks” to the law, and last Tuesday, Katherine Tai, the US trade representative, met with Europe’s trade commissioner in Brussels before she headed to Davos.
But many delegates, including Hieronimus, said the focus should be on the European Commission coming up with a united and strong response to the US law to supercharge investments in clean tech and energy, with specific industrial targets. This could include changes to state aid rules and funds to increase grants and loans to emerging technologies, but some warned against more subsidies that could worsen trade tensions.
The EU should use some of the money from a €700 billion ($760 billion) post-pandemic recovery fund to strengthen the region’s competitiveness, Hieronimus said.
It’s “important to double down on a few critical industries,” she said.
Onstage at the forum last Tuesday, von der Leyen announced a plan for a “Net-Zero Industry Act,” which would focus investment on projects to meet clean tech goals by 2030, as well as temporarily changing state aid to “keep European industry attractive.”
The EU was already considering other measures that some have argued will benefit European companies at the expense of those overseas, such as a new carbon tax on imports that may shield EU companies subjected to strict environmental rules from competition with businesses from countries with weaker emissions rules.
British and South Korean officials have also expressed concerns about the US legislation, and on Thursday, British Business Secretary Grant Shapps said on a panel that the Inflation Reduction Act could be “dangerous” because it “could slip into protectionism.”
Although the risk of lost investment in Europe is evident, some delegates said it was more important to praise Washington for its huge investment plans in clean energy and technology, after the nation had been berated in the past for not taking enough action on climate.
“In my view, the Inflation Reduction Act is, by far, the most important climate action after the Paris Agreement 2015,” Fatih Birol, executive director of the International Energy Agency, said in an interview. “I understand that many countries, including the European countries, see that it may create some challenges for them.”
Ann Mettler, vice president for Europe at Breakthrough Energy, an investment fund backed by Bill Gates, and a former director general at the European Commission, praised the Inflation Reduction Act for its simplicity and said it made a lot of sense because the United States needs to “accelerate the energy transition” and shift production of essential clean technologies away from China.
The law should lead to an investment boom in the United States, Mettler predicted, and potentially lead to breakthroughs in emerging technologies such as green hydrogen.
One of the challenges Europe faces is that its own subsidies and programmes for targeted investments are more complicated.
“The lack of competitiveness we now face can’t be blamed on the Americans,” Mettler said.
She added that the Inflation Reduction Act presented an “existential question” for Europe, and the response requires a balance between Europe’s industrial needs and maintaining close ties with its allies, while there is still a war in its region. Getting the response wrong could have “devastating consequences,” she said.