At Davos, European Distress Over a ‘Made in America’ Law

"The U.S. Inflation Reduction Act stirred talk of a trade war, but also proposals for a similar E.U. initiative to stimulate green investment.

A cautious optimism ran among the Europeans gathered high up in the Swiss Alps for the annual meeting of the World Economic Forum this past week. There were hopes that the region might cast off the gloomiest economic forecasts and avoid a recession this winter, helped by lower natural gas prices.

But when pondering Europe’s longer-term future, there was plenty of fretting over President Biden's Inflation Reduction Act.

The concern was voiced loudly in the ski town of Davos, Switzerland, that the law’s provision for $369 billion toward low-emissions energy and green technology would draw vast sums of investment and jobs away from Europe, cementing fears of deindustrialization on the continent.

Simmering for months, the complaint punctuated speeches and informal discussions from the main conference center to the back meeting rooms.

The Europeans fear that companies will choose to build battery factories and electric vehicle assembly plants and other major projects in the United States to benefit from the tax credits and other incentives in the law that encourage local manufacturing. That could mean that production in Europe would be diverted to the United States, or businesses could simply pick the United States over Europe for future projects.

The new law, for example, provides buyers of electric vehicles a federal tax credit of up $7,500 — but only if those vehicles are made in North America.

“It is no secret that certain elements of the design of the Inflation Reduction Act raised a number of concerns in terms of some of the targeted incentives for companies,” Ursula von der Leyen, the president of the European Union, told delegates on Tuesday.

The next day, Olaf Scholz, the chancellor of Germany, said the local content requirements in the law “must not result in discrimination against European businesses.”

While he said he welcomed the plans for clean energy investments, he added that “protectionism hinders competition and innovation and is detrimental to climate change mitigation.” European Union members “are talking to our American friends about this.”

Outside the conference center, the tone was less diplomatic: The phrase “trade war” came up more than once.

Solveigh Hieronimus, a senior partner at McKinsey based in Germany, said the law was “protectionist” and “probably more extreme” than the types of trade actions former President Donald J. Trump took against the European Union.

The European complaints have prompted President Biden to promise to make “tweaks” to the law, and on Tuesday, Katherine Tai, the U.S. Trade Representative, met with Europe’s trade commissioner in Brussels, before she headed to Davos.

But many delegates, including Ms. Hieronimus, said the focus should be on the European Commission coming up with a united and strong response to the American law to supercharge investments in clean tech and energy, with specific industrial targets. This could include changes to state aid rules and funds to increase grants and loans to emerging technologies, but some warned against more subsidies that could worsen trade tensions.

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Workers assembling Volkswagen ID.5 electric cars in Zwickau, Germany, last year. The U.S. Inflation Reduction Act offers a tax incentive for electric cars, but only if they are made in North America. Credit...Jens Schlueter/Getty Images

 

The European Union should use some of the money from a 700 billion euro ($760 billion) post-pandemic recovery fund to strengthen the region’s competitiveness, Ms. Hieronimus said.

It’s “important to double down on a few critical industries,” she said.

On stage at the forum on Tuesday, Ms. von der Leyen announced a plan for a “Net-Zero Industry Act,” that would focus investment on projects to meet clean tech goals by 2030, as well as temporarily changing state aid to “keep European industry attractive.”

The European Union was already considering other measures that some have argued will benefit European companies at the expense of those overseas, such as a new carbon tax on imports that may shield E.U. companies subjected to strict environmental rules from competition with businesses from countries with weaker emissions rules.

British and South Korean officials have also expressed concerns about the American legislation, and on Thursday, Grant Shapps, the British business secretary, said on a panel that the Inflation Reduction Act could be “dangerous” because it “could slip into protectionism.”

While the risk of lost investment in Europe is evident, some delegates said it was more important to praise Washington for its huge investment plans in clean energy and technology, after the nation had been berated in the past for not taking enough action on climate.

“In my view, the Inflation Reduction Act is, by far, the most important climate action after the Paris Agreement 2015,” Fatih Birol, the executive director of the International Energy Agency, said in an interview. “I understand that many countries, including the European countries, see that it may create some challenges for them.”

Though they have legitimate concerns, he added, “I would say that Europe can develop its own clean energy industrial framework as a complementary tool.”

Andrea Fuder, the chief purchasing officer for Volvo Group, the Swedish company that builds trucks, buses and construction equipment in the United States and other locations around the world, said her company appreciated the American legislation and expected it to help the company reach its net zero goals.

“There is now some noise in Europe about it but I think it’s now up to the European Union to find good answers to that,” Ms. Fuder said.

Ann Mettler, the vice president for Europe at Breakthrough Energy, an investment fund backed by Bill Gates, and a former director general at the European Commission, praised the Inflation Reduction Act for its simplicity and said it made a lot of sense because the United States needs to “accelerate the energy transition” and shift production of essential clean technologies away from China.

The law should lead to an investment boom in the United States, Ms. Mettler predicted, and potentially lead to breakthroughs in emerging technologies such as green hydrogen.

One of the challenges Europe faces is that its own subsidies and programs for targeted investments are more complicated.

“The lack of competitiveness we now face can’t be blamed on the Americans,” Ms. Mettler said.

She added that the Inflation Reduction Act presented an “existential question” for Europe, and the response requires a balance between Europe’s industrial needs and maintaining close ties with its allies, while there is still a military operation in its region. Getting the response wrong could have “devastating consequences,” she said.”