Where in the world is “free trade” really free? The European Union, and maybe China… The number of countries that feel bound to the World Trade Organization (WTO) rules, especially considering the last “protective” measures of the USA, does not go beyond the fingers of one hand.
The Inflation Reduction Act (IRA), signed by Joe Biden, seems to be a continuation of Donald Trump’s “America First” policy to many. The law provides government support for the transition from seemingly innocent fossil fuels to green energy. It is no secret that the role of states in the transition to renewable energy should increase. It does not seem possible to make progress in such a large infrastructure transformation without public intervention.
In the IRA, the issue that bothers EU in particular is government incentives for electric cars. In addition to financial support to automotive companies producing in the United States, tax breaks are also foreseen for consumers. The summary is that an electric Ford, GM or Tesla may cost $7,500 less under this law than an electric Volkswagen or Hyundai, depending on where and how it is produced. Let’s also say that in the IRA, Canada and Mexico are granted exemptions.
South Korea and Japan are also concerned
Of course, this is not just about the EU. Japan and South Korea also have world-renowned automotive companies that produce electric vehicles. These countries also think that the US’s new industrial policy is a violation of international trade rules.
The Japanese government said in a note to the US Treasury Department in early November that the IRA would challenge the competitiveness of Japanese automotive companies in the North American market. Tokyo warned its interlocutor that the new law could deter Japanese manufacturers from making new investments in the United States, which could lead to unemployment in the United States.
The CEO of the Japanese huge company Nissan said the IRA must be given some time before its entry into force. Nissan has a factory in Canton, Mississippi, but according to the CEO, the number of these factories could increase with the IRA. Nissan expects its electric models to account for 40 percent of US sales by 2030.
The South Korean government also said that the implementation of the IRA should be given a minimum of three years. Seoul has also reported that the IRA may violate the free trade agreement signed between the United States and South Korea. Companies like South Korean Hyundai and Kia are expected to increase their investment in the US.
Speaking to Axios, a South Korean official said that the issue almost led to a diplomatic crisis. The United States and South Korea have discussed the issue twice at the presidential level, but it seems unlikely that the Biden administration will make any changes to the law.
South Korea thinks that they cannot meet every request from the USA, for example, they cannot unite against China. Some officials think that US-Japan-South Korea-Taiwan co-operation on the semiconductors issue would have been easier to move forward without the IRA.
Along with the IRA, it is stated that Hyundai Ioniq 5, Kia EV6, Subaru Solterra and Toyota bZ4X models are not impossible to compete in the USA market. Rivian Automotive, Hyundai Motor and Kia Corp recently suggested to the US that the pressure on them could be reduced by arranging “commercial clean cars” regulation for the IRA.
US barrier to chip trade angers Netherlands
Yet another trade that the Biden administration is trying to block with IRA is the chip trade.
The US has recently imposed tight barriers to the sale of advanced chip and chip-making equipment. Dutch and Japanese companies are among the leading companies in this regard.
The United States has not yet reached an agreement with these countries on banning the sale of chips. But it is reported that Dutch chip makers will resist moving out of the Chinese market.
The Netherlands-based ASML is one of the largest suppliers to the global semiconductor industry. A Dutch official told Bloomberg last month that they would protect their own economic interests when it comes to selling chip equipment to China.
Dutch officials have emphasized that the United States should not expect its own countries to unquestionably comply with Washington’s restrictions on China.
Despite this, the Netherlands refuses to sell extremely ultraviolet lithography machines to China under US’ pressure. But ASML continues to sell less advanced chip-making systems to China.
US pressure on ASML and Japanese firm Tokyo Electron continues. ASML told its staff in the US to stop doing business with Chinese customers as a result of a new regulation that came into force in the US in October.
Dutch Foreign Trade and Development Co-operation Minister Liesje Schreinemacher insisted last week that his government’s “national security interests are really important”.
Dutch Economy Minister Micky Adriaansens told the Financial Times last week that his country was “very positive” about relations with China and emphasized that Europe and the Netherlands “should have their own strategies” for controlling exports to China.
Macron’s visit and concern in Europe
“Joe Biden wants to strengthen the American economy – to the detriment of Europe,” wrote the German newspaper Die Zeit, while the French economic newspaper Les Echos cited “America First, Europe Last.”
The fact that French President Emmanuel Macron was greeted like a king in Washington last week does not seem to have solved the problem. US President Joe Biden admitted there may be flaws in the IRA, but then mentioned the negotiations of the US-EU trade delegations.
Describing the IRA as “super aggressive” during a closed-door meeting with US senators, Macron invited the EU to adopt its own “Europe First” law before heading to the US. French Economy and Finance Minister Bruno Le Maire also suggested that the United States was pursuing a Chinese-style industrial policy.
In a statement with Mr Biden, Macron said it was now time for Europe to “synchronise” itself with US’ steps. This word is thought to refer to the EU’s own state incentives.
French authorities are concerned that European companies, whose operational costs have already risen due to inflation, will start to migrate investment to North America. But Stefano Sannino, secretary-general of the EU’s Foreign Relations Service, who was in Washington for the visit, argued that a scenario in which the United States on one side, and the EU on the other, started to provide incentives would not be “rational”.
At the same time, Denis Redonnet, the EU’s trade chief, said they could report the IRA to the WTO. European Commissioner for the Internal Market Thierry Breton also announced that he will not attend the EU-US Trade and Technology Council meetings later this week. Breton argued that the meetings were insufficient to address the concerns of Europe’s industry and labour ministers, noting instead that Europe would focus on the urgent need to protect the competitiveness of its industrial infrastructure.
EU officials are considering negotiating a free trade agreement between the EU and the United States as another option. However, the fact that this process takes too long and the bureaucratic procedures reduce the possibility of this option.
Meanwhile, Italian automotive companies are more concerned about the entry of Chinese electric cars into the European market than the IRA, according to the Italian newspaper La Stampa. The Germans fear the IRA more than the Chinese.
Czech Trade Minister Jozef Síkela reminded in November that the People’s Republic of China would be the winner of the EU-US trade wars.
Giga factory investments multiply in the US
We can say that the fears of Germans and the French are coming true. While Europeans are worried about the US “sucking up” investment in Europe, alarm bells are ringing in battery production.
Until recently, Europe’s production of lithium-ion batteries was a league ahead of the United States. But with the rise in energy prices and the IRA, the picture seems to have changed.
Since the day the IRA was announced, there has been a 35 percent increase in capacity in the United States. That’s 17 percent in Europe. Despite all this, Europe is still far ahead of the United States in terms of capacity. In 2031, Europe’s annual production capacity is estimated to be 1,186.2GWh, and the US 957.6GWh.
The Turkish company Kontrolmatik announced that it is considering increasing the size of the giga factory in the United States, while Norway-based FREYR announced that it will accelerate its plans in the United States. In Europe, there are reports that such plans have been delayed.
Towards a European protectionism
“The new ambitious industrial policy from our competitors requires a structural response,” said European Commission President Ursula von der Leyen, delivering the message that the EU will start playing by the rules: “Europe will always do what is right for Europe.”
According to Estonian Entrepreneurship Minister Kristjan Järvan, the EU has always supported free trade, and this was a good thing, but “non-democratic forces” were now using free trade against the EU.
Trying to balance the trade wars between the US and China for a long time, Brussels may now start to change its attitude towards friendly fire as Joe Biden jumps on the “protectionist” train. Von der Leyen’s speech Sunday also suggested that the EU should reconsider its own state subsidies.
“There is a risk that the IRA will lead to unfair competition, close markets, and dismantle the same critical supply chains that have already been challenged by COVID-19,” Leyen said, bringing up the possibility that manufacturers will move from Europe to the US.
The fear of subsidies in the EU’s ultra-liberal and pro-free trade departments is at a heightened level. European Commissioner for Trade Valdis Dombrovskis, among them, argued that the subsidy race would be “expensive and inefficient”. EU competition chief Margrethe Vestager said no one wants a subsidy war.
However, the genie has definitely came out of the bottle. If EU takes a step towards government incentive, it will be the last nail to be put in the coffin of international free trade, which hasn’t been really practiced for a long time.
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