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Perspectives: It’s not worth triggering a big fight over the US’s electric vehicle scheme

Brussels has vociferously criticised provisions in the recently enacted US Inflation Reduction Act that provide a subsidy to consumers buying vehicles assembled in North America. EU leaders should be cautious in how they now proceed and avoid disagreements over climate change measures that descend into endless Airbus-Boeing style trade disputes.

Prior to the summer break, political and trade relations between the European Union and United States were arguably at their highest point since the launch of TTIP talks in June 2013.

With the encouragement of a strongly atlanticist president, the Trade and Technology Council has helped revive ties that had frayed in the aftermath of TTIP’s failure and during four years of the unashamedly US-first Trump presidency.

The positive turn in US-EU relations was all the more impressive given the loss of the traditional bridging power in the relationship, the United Kingdom.

Much to the annoyance of Brexit supporters, Washington appears to have realised it needed stronger relations with Brussels once the UK was no longer present.

Seasoned observers have continued to worry about the future of the relationship, however. The US’ and EU’s fundamentally different approaches to how to use trade measures to help tackle climate change have always been seen as potentially leading to new disputes.

Until now the EU’s carbon border adjustment mechanism seemed the ideal candidate for causing new disputes. This may yet happen, as the US is watching the legislative process closely. But it is instead that US electrical vehicle support move that could be the trigger moment for a new legal dispute. The bill offers subsidies to the purchase of cars only if they are assembled in North America.

Condemnation across the EU has been swift. Both the European Commission and the European Parliament’s international trade committee chair Bernd Lange see this as an obvious new trade barrier. Further afield, South Korea has been among those considering whether to take action at the WTO.

Understanding the politics

Seeing the US measure as in likely breach of WTO rules does not require any great legal knowledge. Yet, at a political level it is reasonable to ask how the issue should be handled and ask if it is worth taking the risk of triggering another long-running US-EU dispute.

Trade policy experts know that many of the economic benefits from our work come from opening up markets to imports. Despite many persuasion and education efforts, this has always been a difficult message to land with the public, whether in Europe or North America.

Domestic production remains highly prized, perhaps even more so now than twenty years ago, given the increased political attention paid to former factory towns and cities. Given the many job losses in manufacturing seen in these places, even if predominantly technology-driven rather than trade-driven, public fears that the transition to a low-carbon economy will lead to less manufacturing are scarcely surprising.

Automotive as a sector is such a major employer in Europe and North America that few politicians want to risk putting it in danger. As such, it is unsurprising that various domestic support is being offered across the Atlantic.

Regardless of arguments about the economic efficiency of the measure, government intervention in car manufacture must be seen as inevitable for the time being.

Not adding to unresolved transatlantic differences

Transatlantic relations have been undermined by fundamental differences in key trade policy areas for at least 25 years.

Though progress was recently made in resolving disagreements around unfair subsidies given to both Boeing and Airbus, the same cannot be said of conflicting approaches towards food regulation. The political unease continues in the entire digital and data area: US unease over various EU regulations such as the Digital Markets Act and the Digital Services Act and EU uneasiness about the lack of effective regulation coming out of Washington.

Adding climate change measures to the list of differences will most immediately raise questions as to whether recently improved relations can endure.

Particularly worth pondering is why the EU and US apparently have so many high-profile differences with each other compared to the number they have with other members of the WTO. Although current trade policy concerns are far greater with respect to China, some toxic combination of friendship and global leadership rivalry keeps US and EU relations fractious.

Policy measures adopted by the US and EU do affect the businesses of the other party, but arguably with a certain balance. EU tariffs on passenger vehicles are higher than those of the US, and both are offering significant subsidies to domestic production, though in different ways.

There has to be a better way than launching disputes.

Agree to disagree

Thinking about trade disputes and the US is of course complicated by Washington’s continued veto on the operation of the WTO appellate body. The presence of a fully functioning dispute settlement system did not lead to more than merely a hesitant truce on the issue of the EU ban on hormone-treated-beef and on the bilateral Airbus / Boeing talks where a bilateral solution needed to be found.

Even a fully functioning WTO system is never going to be able to address the greater politics of trade frictions.

The US and EU need to resolve how they will mutually handle climate change and trade measures, possibly starting with an agreement not to go to formal dispute. Obvious risks abound: that these are two powerful actors trying to define new rules for the global economy, that this is managed trade, that will add pressure to already high-stakes political engagement. These concerns are valid, but none seem greater than the risk of new legal disputes while the world – literally – burns.

Beyond process, the US and EU may just have to accept that there will be some domestic measures that the other adopts that are not what they would want to see but can live with, if there is a willingness to discuss them openly. Since that would be the likely de facto outcome of years of disputes, it would be quicker just to get there by agreement.

Far-sighted US trade commentators have previously suggested that their country’s obsession with changing EU food regulations should be dropped, because it is to attack something fundamental in a way that is never going to happen. Similarly, arguably, there was a certain inevitability to US electric vehicle subsidies only going to North American made vehicles.

On reflection therefore, EU objections to US plans should be discussed mutually, in understanding that this is probably not the battle currently worth fighting. Not least when it has the potential to distract from the immediate energy issues, and the longer term concerns over China.

 

 David Henig runs the column ‘Perspectives’ on the politics of global trade for Borderlex. He is also a UK director at the think tank ECIPE.

 

3 Comments

  1. Pasi Vaaranmaa

    While I understand David´s reasoning – and see considerable merit therein, I have a problem in that we are sort of condoning OUR (or the West´s) subsidies (and protectionism) as a political necessity, while at the same time demanding China to let go of its distortionary practices. Do as I say, don´t do as I do….

    • David Henig

      Agree, the US and EU are doing what we accuse China of doing. My logic is that if this leads only to US-EU disputes, then something is going wrong.

  2. Surprised to find myself in near full agreement with David. The US and EU (and UK) need to emphasize their common interests and not get sucked into high profile disputes that accentuate differences that will be exploited by Beijing. David notes at the outset the hard-to-sell fact that imports are the benefits of trade. Spent over 20 years trying to convince the public and policymakers of that hard truth! That truth will have to serve as a guardrail for policymakers otherwise unrestrained in their zeal to impose barriers and grant subsidies to encourage production at home and to justify most other protection as national security necessities. That all said, politicians are convinced (and I don’t think they’re wrong) that national security, technological primacy, and domestic social cohesion are far more important considerations than trade liberalization at this point. That means we should expect WTO violations in perpetuity — certainly by the US, EU, and China — and we should reconsider devoting ANY resources to reaching agreements at the WTO or reforming the WTO at this point.

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