Solution in the dispute over US subsidies for cars

Dhe dispute over discrimination against European automobile manufacturers in the US $369 billion green technology subsidy package has apparently been settled. Like their US competitors in Europe, European manufacturers have free access to subsidies. Commission President Ursula von der Leyen wanted to announce the agreement on Friday evening after a meeting with US President Joe Biden. The EU and the US want to conclude a bilateral trade agreement for critical raw materials. This allows the US government to classify the EU as a trading partner and to exempt it from the provisions of the “Inflation Reduction Act” (IRA) for electric cars, which the EU has criticized.

In essence, it is about a clause in the Inflation Reduction Act that only grants buyers the full subsidies for electric cars if critical materials in the drive battery are initially 40 percent (later 80 percent) from the United States come – or a country with which they have a trade agreement. That is Canada and Mexico, but not the EU. The US Treasury Department pointed the way to a solution when it made it clear that the term free trade agreement is not defined in law.

Technical details are still missing

The US government could fix such a raw materials agreement by government decree (executive order), the EU member states would have to ratify it. The procedure would have the advantage of leaving out the US Congress, in which there are critical voices against “watering down” the IRA requirements. The negotiations between the Commission and the US government on the exception for the EU, which have been going on since last year, were therefore also carried out with the utmost discretion. The time pressure was great to find a solution. The US Treasury Department plans to make public how it intends to interpret the rules later this month.

The solution announced on Friday is only a basic political agreement. The technical details have yet to be worked out. That and the subsequent ratification would drag on for a few more months, it said in Brussels.

At the end of last year, the EU and the USA had agreed on another exception to the IRA requirements for the auto industry. It stipulates that the rules on the proportion of local production for electric vehicles do not apply to leased vehicles. The German automobile manufacturers in particular will benefit from this. The share of leasing vehicles in the overall car market in the USA is traditionally just under a quarter. According to Commission estimates, however, it is between 50 and 60 percent for exports by German automobile manufacturers, and in individual cases even up to 80 percent.

Brussels fear

However, the agreement is unlikely to do much to calm the discussion about the IRA and the appropriate response to it. For one thing, the $7.5 billion in aid for the auto industry is only a fraction of the total funding. On the other hand, the debate has long since shifted from the initial excitement about discrimination against EU manufacturers to the question of whether the EU should counteract the US subsidies with subsidies of a similar amount.

Analyzes by the Brussels think tank Bruegel, for example, show that US aid compared to that in Europe The aid paid is not that high – whether from EU funding pots or via national programs. Nevertheless, the Commission has presented or announced several proposals on how to prevent a potentially looming shift of investments from Europe to America.

This includes that it effectively suspends the EU rules for the allocation of subsidies until 2025. The new “crisis and transitional regulations” that came into force on Thursday even allow the member states to take on up to 100 percent of the investment sum in extreme cases. The prerequisite for this is that companies in a third country have the prospect of aid of the same amount – whereby the funding amount should, at least in theory, be limited to the absolutely necessary minimum in order to prevent emigration.

In the coming week, the Commission also intends to present two legislative proposals to secure the EU’s supply of strategically important raw materials and the production of green technology in the EU. A European sovereignty fund is to follow in the summer. The heads of state and government want to deal with the IRA again at the summit at the end of March.