The Green Subsidy War Accelerates

"The global green trade and subsidy war is accelerating, and last week the European Union fired a return salvo at the U.S. The Green Deal Industrial Plan -- that's really the name -- is a direct answer to last year's U.S. Inflation Reduction Act (IRA), and as with all trade wars both sides will lose.

Europeans are understandably upset at the IRA's raw protectionism. The biggest flash point is the consumer tax credit of up to $7,500 that is available only for electric vehicles assembled in North America. Eligibility for half of the credit is tied to buying a car with battery components made in North America and the other half depends on having a battery with minerals extracted in the U.S. or a country with a free-trade agreement with America.

Europeans have also noticed the bill's tens of billions in subsidies for a wide range of U.S. industries, from carbon capture to wind power. The fear is that this will entice such investment away from Europe.

Hence the Brussels we-too response. The proposed policy offers 250 billion euros (repurposed from unspent pandemic aid) to subsidize Europe's green industries. Brussels also will offer a pass until 2025 for EU countries that violate the bloc's usual anti-subsidy rules for green projects. This blesses aggressive French and German subsidy efforts, while the new EU kitty makes sure smaller countries with shallower pockets get a crack at their own carbon-neutral boondoggles.

Don't feel too much sympathy for the EU concerning U.S. green subsidies, since the EU was moving to impose a carbon border tax on imports before the IRA. But rather than fighting that tax for the good of manufacturers and consumers on both sides of the Atlantic, the Biden Administration escalated the green trade war with the IRA.

What a political mess this is becoming, as well as a new threat to global growth. The U.S. had long objected to the trade-and-investment-distorting consequences of European industrial subsidies -- and Europeans came to agree. That's why the EU long ago introduced the anti-subsidy rules Brussels now is abandoning.

But the Biden Administration has pursued U.S. industrial policy with a fervor that Donald Trump never imagined. This risks returning the world to the bad old days of nationalist production, less competition, and higher costs for consumers. Green-energy subsidies and border taxes will lead to a misallocation of investment that means higher costs and slower growth. Subsidized companies like GM and other EV makers will become political hostages in the green trade wars.

This is happening even after the pandemic delivered an inflationary lesson in the danger of snarling global trade and supply chains, and as rapidly escalating prices highlight the need for cheap and abundant energy in the West. The force-fed green transition to nowhere is emerging as the greatest economic and strategic mistake since the credit mania of the 2000s. Consumers will pay and pay again." [1]

 

To make the life of our consumers a bit easier, we exported our factories to China. If we will think only about our consumers now again, the green economy factories will end up in China too. This how you come up with subsidies and border taxes. Poor our consumers...

1. The Green Subsidy War Accelerates
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 06 Feb 2023: A.16.