Zach Meyers is a senior research fellow at the Center for European Reform,
Following Russia’s invasion of Ukraine, relations between the United States and the European Union looked stronger than ever. Still, mistrust is building up.
European leaders are now fixated on America anti-inflation law (IRA), which promises huge subsidies for US-made electric vehicles (EVs) Huh. Brussels, meanwhile, sees a protectionist industrial policy that will drain EV investment from Europe, jeopardizing the future of the bloc’s car sector.
But there is a tinge of unreality and hypocrisy about the European complaints about the IRA – a matter of doing what I say rather than what I do. And there are many reasons for this fear to be misplaced.
European dreams of exporting massive amounts of EVs to the US – or at least attracting a disproportionate share of global EV investment – are a mirage. The EU accounts for only a tiny fraction of US car imports today, and that was never likely to change much with the EV revolution
Additionally, the EU itself takes a protectionist approach to EVs, imposing a default 10 percent import dutyis more than equivalent US tariff, and the bloc’s recent free trade agreements provide impetus to on-shore EV supply chains. This type of protectionism, along with the high cost of shipping EVs across borders, means that about 80 percent Worldwide EV sales are dominated by locally produced vehicles. So, it’s not a zero-sum game – more production in the US doesn’t mean less production in Europe.
As the EU argues, IRA is also unlikely to disrupt EV supply chains.
If EV makers want to qualify for the IRA tax credit, they must rework their battery supply chains to remove Chinese involvement before the credit expires in eight years’ time – a tall order indeed. The existing supply chain is already struggling to keep up with the growing demand for EVs, and manufacturers will have to compete hard for limited supplies of the rare earth and processing capacity outside China.
However, faced with this cost, risk and hassle, Western car companies will prefer to gradually and partially disengage from China – if at all – and many are likely to decide that the cost and cost of supply chains is too high. The risks outweigh the benefits some years. of subsidy. Companies invest for the long term and develop supply chains. For example, former US President Donald Trump’s aggressive but temporary corporate tax cuts did little to attract new foreign investment.
In other words, IRA subsidies may make less of a difference in investment decisions than Brussels fears.
Perversely, the IRA could help European firms gain a competitive advantage over some of their US counterparts, solidifying European firms’ leadership in the EV sector. Many large European auto makers already have manufacturing facilities in the US and are less dependent on China than many US EV producers.
Overall, the administration of US President Joe Biden has been relatively sympathetic to Europe regarding the IRA. In fact, many in Washington are genuinely baffled by the Europeans’ concern and response, as they watch the continent maintain high tariffs on imported EVs, squander taxpayer money on its own “strategic” industries such as chips, And instead reduces reliance on American big tech. breaking away from China. Despite all this, the administration is working with the European Union to help ensure that the policy is implemented in ways that still allow European-made EVs to benefit.
In response to these extreme fears about the future of European industry – which is already grappling with high energy costs – some EU member states want to permanently loosen Brussels’ restrictions on state aid. However, such a decision would pose huge risks to the EU, sparking resentment from the bloc’s poorer members who – unlike France and Germany – cannot afford to subsidize national champions.
It could also contribute to a futile subsidy race with the US that the EU is not equipped to win – see its flimsy attempt to compete with US microchip industry subsidies: The EU hopes its Chips Act Will generate €43 billion in investment, but much of this relies on heroic assumptions about existing chips funding and private investment. The plan doesn’t even come close to matching the US $53 billion campaign,
The EU cannot assume that businesses make long-term investments based on short-term sweeteners like IRAs. And even if that is true, it is not a game the European Union is ready for. Instead, Europe should adopt a more restrained and less radical approach towards China than the US – focusing on trade diversification and deepening its single market rather than resorting to protectionism.
Europe may eventually prove itself a more stable bet for business than the politically polarized US – but it means avoiding the temptation to react to US policies.