Hello and welcome to Trade Secrets. This week’s newsletter comes from a sweltering Brussels. Alan will be back for the next edition on September 5.
The dispute between the US and the EU about subsidies for electric vehicles tells you a lot about how they view climate change. For Brussels, it is an existential danger to the planet requiring global action involving some short-term economic pain to prevent worse in the longer term.
For the Biden administration, it is an existential danger that provides a chance to favour domestic industries and erect trade barriers against China. Climate policy as industrial policy, if you will.
“Folks, when I think about climate change . . . I think jobs,” said US president Joe Biden last month. Given the threat of a Donald Trump run for re-election in 2024, he rarely thinks of anything else.
“We have to outcompete China and the world, and make these [low carbon] technologies here in the United States — not have to import them.”
His Inflation Reduction Act, passed by Congress on August 12, would restrict the $7,500 bung consumers get for buying an electric vehicle to those assembled in North America.
Canada and Mexico were originally excluded, but the nature of supply chains built up under the North American Free Trade Agreement (now renegotiated as USCMCA) and Ottawa’s complaints changed the policy.
It also links the subsidy to vehicle batteries whose critical minerals are produced or recycled in the US or countries with which the US has a preferential trade deal. By 2026, the level required will hit 80 per cent.
EU gripes did not have the same effect as Canadian ones, despite Biden’s clear goal of restoring relations eroded by Trump’s “America First” policies.
Brussels has called on Washington “to remove these discriminatory elements from the bill” as they “appear to violate WTO rules” by discriminating between foreign and domestic manufacturers. It points out that its own subsidy schemes are available to vehicles made anywhere.
The US may have learned lessons from this approach. From the late 1990s, the German government paid feed-in tariffs to generators of renewable energy — paid for by consumers — in a green push that eventually became the Energiewende, the “energy turnround”.
Energy expert Daniel Yergin noted in his book, The New Map: “While the solar market created by the Energiewende may have been in Germany, the panels could come from anywhere.”
“In time, most of them would come from the new solar juggernaut that would rise in China and eventually extinguish German manufacturers.”
Chinese national and local governments provided cheap land, low-cost loans and other subsidies to foster a photovoltaic panel industry. Between 2010-18 its capacity increased fivefold, swamping the market and even threatening the Chinese industry’s own survival. Beijing’s response was to install solar energy at home. By 2017, it accounted for half of global demand.
Trade purists would defend the German approach as the best way to keep costs down. But the rise of populism has led many governments to prioritise domestic industrial jobs over lower prices. They also fear overreliance on certain countries that could impose controls for political reasons — as Russia has done by turning down gas taps to the EU.
As a recent paper from the Peterson Institute in the US found: “These risks become clear when comparing the supply chains of carbon-based energy and clean energy.
“For oil and gas, the United States dominates the supply chain (upstream, refining, and consumption). In contrast, the United States is only a minor player in the supply chains of clean technologies, in which China is the dominant actor.”
Within the EU, France shares the US view. But many liberal, free-trading members are happy to prioritise imports. Thierry Breton, the French EU commissioner, wants the billions to be spent on the green transition to boost industries. He notes the EU imports from China 98 per cent of the rare earths used in electric vehicles, wind turbines and rockets and relies on a few countries for lithium, copper and other vital green resources.
He told Trade Secrets he would launch a plan later this year to include mining, processing and recycling minerals domestically.
“There is no point in extracting all these raw materials in Europe or obtaining them through strategic partnerships if they are then sent to the other side of the world to be processed. And then sold back to us in finished products.”
Overall EU-US trade relations have warmed under Biden. The long-running dispute over subsidies for aircraft makers Airbus and Boeing was parked. A deal was struck on a global minimum tax, leading European governments to drop their digital taxes on US tech groups. And the US suspended Section 232 tariffs on EU aluminium and steel. The two sides also set up a Trade and Technology Council to discuss aligning regulation.
Next year might be trickier. Washington lifted the steel tariffs until the end of 2023 pending a deal on a mechanism to put tariffs on Chinese steel, which is more carbon intensive. But negotiators have yet to find a way to make this WTO-compliant.
The EV tax credit sidelined the TTC entirely. It was not mentioned to EU officials at the meeting in May. The next meeting is not yet in the diary.
Brussels also sees China as a necessary ally in fighting climate change, and is reluctant to join the US effort to frame everything as part of its rivalry with Beijing.
Adam Hodge, spokesman for the US Trade Representative, said: “The [Inflation Reduction] bill provides strong incentives to reduce our dependence on China for the critical materials that will power this key industry, and we look forward to working with allies and partners to advance our climate goals, strengthen and diversify our supply chains, and address our shared concerns with China’s non-market policies and practices.”
Jonathan Branton, a subsidy expert at law firm DWF, said the bill was a “prima facie breach” of WTO local content agreements. Few in Brussels are seeking a direct confrontation with Washington, however.
Other countries could bring cases (including China, though it might not want to open its own can of subsidy worms), but they are more likely to use diplomatic lobbying as the first step, he said.
Indeed, there could be pushback from the US car industry itself. Only about 20 models are eligible for the tax break — here’s a list — and probably none will meet the battery requirements that kick in from 2024.
EU car manufacturer lobby group ACEA points out that it is unrealistic to expect any carmaker to build a localised battery supply chain in a year. US policy might be based on wishful thinking, leading to a softening of approach when reality bites.
Get in touch. Email me at firstname.lastname@example.org
Have fertiliser prices passed their peak? Six months into Russia’s war in Ukraine, the disruption to the supply of commodities is still weighing on farmers around the world. Growers have cut their fertiliser usage to ease some of the pain, but the crisis is far from over.
Today’s chart shows how fertiliser prices have steadily risen since mid-2020, hitting record highs after western sanctions against Moscow curbed Europe’s supply of natural gas, which makes up 15 per cent of global crop nutrient supplies.
My colleagues Andres Schipani, Emiko Terazono and Heba Saleh explain the realities of reduced crop production on the world’s poorest continent, Africa, which has already been facing droughts across regions. As nations face shortfalls in food, the shadow of social unrest looms. (Jennifer Creery)
To find out more about how China dominates the supply chain for raw materials used in electric cars, read this on how Ganfeng Lithium is dealing with political pressure from Beijing and Washington.
The US and Taiwan have begun formal trade talks, putting further strain on relations with China. China believes it has sovereignty over the island and has increased military activity nearby since US House Speaker Nancy Pelosi visited this month.
Exports to Russia from Turkey, which has not joined western sanctions over the war in Ukraine, are up by nearly half. Western diplomats believe Turkish companies are filling the gap left by sanctions and blunting their impact.
Trade Secrets was edited by Jennifer Creery today. Jonathan Moules will be back next time.
Recommended newsletters for you
Europe Express — Your essential guide to what matters in Europe today. Sign up here
Britain after Brexit — Keep up to date with the latest developments as the UK economy adjusts to life outside the EU. Sign up here