Germany plans to break subsidy taboo to avoid trade war with Biden – POLITICO

BERLIN — With just six weeks to avoid a transatlantic trade showdown over green industries, Germans are frustrated that Washington is not offering a peace deal and are increasingly eyeing a taboo-busting response: European subsidies.

Europe’s fears hinge on the US’s $369 billion program of grants and tax breaks to support US green businesses, which will take effect on January 1. American” when it comes to buying an electric vehicle – which infuriates major EU car-making countries like France and Germany.

The timing of this protectionist move could hardly be worse, as Germany is openly freaking out that several of its key businesses – partly spurred by soaring energy costs following Ukraine’s invasion of Ukraine Russia – are closing their domestic operations to invest elsewhere. The last thing Berlin needs is even more encouragement for companies to leave Europe, and the EU wants the US to strike a deal in which its companies can enjoy US benefits.

A truce, however, seems unlikely. If this squabble gets out of control, it will lead to a trade war, which will terrify beleaguered Europeans. While the first step would be a largely symbolic protest at the World Trade Organization (WTO), the showdown could easily descend precipitously back to the tit-for-tat tariff battles of former US President Donald Trump’s era.

This means that momentum is building in Berlin for a radical Plan B. Instead of an open tariff war with America, the increasingly discussed option is to tear up the classic free trade rulebook and play Washington at its own game by funneling public funds to Europe. . industry to raise local green champions in sectors such as solar panels, batteries and hydrogen.

France has long been the main advocate of bolstering European industry with state largesse but, until now, the more economically liberal Germans have been unwilling to launch a subsidy race against America. The sands are shifting now, however. Senior officials in Berlin say they are increasingly leaning towards French thinking, if talks with the United States do not lead to an unexpected last-minute solution.

Berlin is the economic powerhouse of the 27-nation bloc, so it will be a watershed moment if Berlin finally decides to throw its power behind the state-directed subsidy approach to an industrial race with the United States.

To not have enough time

Time is running out for a truce with Biden that is looking increasingly unlikely.

Recent attempts by a special EU-US task force to address EU concerns have met with little enthusiasm from the US side to change the controversial legislation, the European Commission told EU countries this week.

“There are only a few weeks left,” warned Bernd Lange, chairman of the European Parliament’s trade committee, adding that “once the law is implemented, it will be too late for us to make any changes.”

Lange said failure to reach an agreement would likely trigger EU legal action against the US at the WTO, and that Brussels could also retaliate against what he sees as discriminatory US subsidies in imposing punitive tariffs. Warnings of a trade war are already overshadowing preparations for a high-level EU-US meeting in Washington on December 5.

This is precisely the kind of spat the German government wants to avoid, as Chancellor Olaf Scholz hopes to forge unity among like-minded democracies amid Russia’s war and growing challenges from China. . Earlier this month, Scholz’s government made an overture to Washington suggesting a new EU-US trade deal could be negotiated to resolve the differences, but that proposal was quickly rejected.

There are sympathizers for the subsidy approach in Brussels, with EU executive officials saying powerful internal market commissioner Thierry Breton is a key proponent. Breton is already pleading for a “European Solidarity Fund” to help “mobilize the necessary funding” to strengthen European autonomy in key sectors such as batteries, semiconductors or hydrogen. Germany’s backing could help Breton gain the upper hand in internal EU strategy talks over the more cautious trade commissioner Valdis Dombrovskis.

Breton will travel to Berlin on November 29 to discuss the implications of the Inflation Reduction Act as well as industrial policy and energy measures with the Scholz government.

The German considerations even echo calls from senior Biden administration officials, including US Trade Representative Katherine Tai, who are urging the EU not to engage in a transatlantic trade dispute and instead deploy its own industrial subsidies; a strategy that Washington also sees as a way to reduce dependence on China.

Plan B

Scholz first indicated late last month that the EU may have to respond to US law with its own tax cuts and state support if negotiations with Washington fail to reach a solution, lending his support to similar plans articulated by French President Emmanuel Macron, who will meet Biden on December 1 in Washington.

Although Scholz does not approve of Macron’s definition of the initiative as a “Buy European Act” (which seems too protectionist for the Germans), the Chancellor agrees that the EU cannot sit idly by if it does facing unfair competition or lost investments, people familiar with his thinking said late last month.

Negative economic news, such as automaker Tesla putting plans for a new battery factory in Germany on hold and investing in the United States instead, or steelmaker ArcelorMittal partially shutting down operations in Germany, have spurred calls. in Berlin to consider more state support to counter a negative trend caused by both the US regime and high energy prices.

Although the official government line remains that Berlin still holds out hope for a negotiated solution with Washington, officials in Berlin say it may be possible to increase incentives for industries to locate green technology production in Europe.

A spokesperson for the German Economy Ministry said that in the face of the challenges arising from the Inflation Reduction Act, “we will have to find our own European response that puts our strengths first…The goal is to competitively relocate the creation of green value in Europe and strengthen our own production capacities.

The spokesperson, however, warned that the US and EU “must ensure that there is no subsidy race that prevents the best ideas from prevailing in the marketplace”, and added: ” Green technologies, in particular, thrive best in fair competition; protectionism cripples innovation.”

An important condition that could help Germany and the EU preserve said fair competition and prevent the global free trade system from descending into protectionist tendencies would be to ensure that any EU state subsidies remain compliant. to WTO rules. This means, contrary to US law, that these subsidies would not discriminate between local and foreign producers.

Above all, support also comes from German industry.

“In the area of ​​industrial policy and subsidies, we could consider WTO-compatible measures, as the EU is already doing in the chip sector,” said Volker Treier, head of foreign trade at the German Chamber of Commerce.

Treier also stressed that “there should be no discrimination” against foreign investors, but added: “This does not explicitly exclude the possibility of settlement premiums, which in turn should be available to investors of all countries that would be interested in such investment commitments in Europe.”

In Brussels, the Commission’s competition department also made it clear that it was examining the forthcoming proposals with an open mind.

“There are no excluded instruments a prioriregarding the EU’s response to US subsidies, State Aid Department Deputy Director General Ben Smulders said Thursday.

Barbara Moens, Suzanne Lynch and Pietro Lombardi in Brussels and Laura Kayali and Clea Caulcutt in Paris contributed reporting.