Explainer: Why the U.S. Inflation Reduction Act has Europe up in arms

PARIS, November 30 (Reuters) – French President Emmanuel Macron will use his visit to Washington this week to raise concerns about the European Union’s large new green energy subsidy package from the United States of America.

While European Union countries welcome the new commitment to the energy transition, they fear that the $430 billion Inflation Relief Act will put their companies at an unfair risk.


European Union countries are concerned that their companies will be hurt by US tax breaks for components used in renewable energy technologies such as electric cars provided they are made in North America.

European Union countries estimate that 200 billion euros ($207 billion) of the total is generated by local content restrictions that potentially violate World Trade Organization (WTO) rules.

French Finance Minister Bruno Le Maire says that while subsidies to boost the energy transition are fair game, they must comply with WTO rules and there must be a level playing field.

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Not only do the tax cuts put European companies at risk from US competitors, but EU state aid rules prevent EU countries from offering as generous tax breaks to companies wanting to set up factories as they can get in the US.

The EU is not the only Washington ally up in arms about the package, with South Korea also concerned that its carmakers will not be eligible for US tax breaks.


With any major revisions by the US Congress out of the picture, European officials say their best hope is to find exemptions along the lines of what Canada and Mexico already have.

While the European Commission and the White House have set up a high-level task force for negotiations, Macron aims to use his political power to push the case for exemptions at the highest level during his state visit.

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EU governments want a quick solution, possibly through a deal agreed at a meeting of the EU-US Trade and Technology Council on December 5.

Although no one wants to revive the trade tensions that damaged transatlantic relations during the Trump administration, European officials say taking the issue to the WTO remains an option if talks go nowhere.

However, a response from Europe is likely to be met with resistance from traditional free trade friendly nations such as the Netherlands and Sweden.


France has responded to calls for Europe to respond with state support for European companies, including “buy European” and large subsidies.

While not vocal about the possibility of a massive aid program, Germany has shown interest in supporting European industry even though its coalition-led government is far from united on how to do so.

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Deputy Prime Minister Robert Habeck, a green politician who met with Macron last week, went so far as to say the EU could set targets for domestically produced products.

Meanwhile, some German officials point out that 200 billion euros are available in EU pandemic recovery funds and could be re-used to support industry.

European governments can also pool resources to support cross-border projects deemed to be in the EU’s wider interest, but approval of these initiatives by the European Commission can often be lengthy and complicated.

With a number of major projects in the pipeline, Le Maire and Habeck called on the Commission last week to streamline and speed up the approval process.

($1 = 0.9649 euro)

Reporting by Leigh Thomas Additional reporting by Andreas Rinke in Berlin and Philip Blenkinsop in Brussels Editing by Mark Potter

Our Standards: The Thomson Reuters Trust Principles.


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