Together in electric dreams
Stop the (Green Trade) War
Until Brexiteers and Trumpists set fire to our crusty but trusty political maps, we knew (or thought we did) where left and right stood on free trade.
The right – and, let’s face it comrades, that included not just conservatives like Angela Merkel but “neolibs” like Barack Obama – was for it. The left was against it or for it only if trading partners matched our regulatory, labour and environmental norms.
It’s only been seven years since American and British conservatives outed themselves as trade nationalists and abandoned attempts to green their brands. But this has been long enough for the outbreak of hostilities between the post-2016 “goodies” – a Democratic administration in Washington and a Britless EU – over climate policy, of all things, to bring on a collective centre-left migraine.
It shouldn’t. It’s also only been seven years since the European left sank Obama’s dream of a Transatlantic Trade and Investment Partnership (T-TIP) – a US/EU common market based on an earlier blueprint (a New Transatlantic Marketplace or NTM) from the mind of centre-right European commissioner Leon Brittan. Today, the boot is on the other left foot. In the best example yet of his skilled coalition management, president Joe Biden got his Inflation Reduction Act (IRA) through Congress last summer – buying off both his left/green and right/industry wings with subsidies worth more than $350 billion to incentivise domestic production of electric vehicles (EVs), batteries, solar panels and an assortment of green technologies.
An American EV buyer can now claim a $7,500 tax break but only if 40% of the battery’s materials were extracted in the US – or in a country with which it has a free-trade agreement (FTA) – and half its components are made or assembled in USMCA1 states. Six years from now, that component threshold rises to 100%. As always, China is the intended target but it is Europe – the manufacturer of a quarter of global EVs and a world leader in green technology – that faces the most immediate challenge.
In a pre-Christmas editorial, Anne Osborn Krueger, a legendary 88-year-old trade economist and corruscating critic of Trump’s commercial policies, warned that the Biden administration was “sleepwalking into a global trade war”. The US "started dismantling this source of shared prosperity under Donald Trump,” she warned, “and it has now accelerated the process under Joe Biden".
“Not designed to hurt”
Unlike Trump and his steel and aluminium tariffs, Biden’s trade assault on Europe was unintentional. It was literally thoughtless, as Biden reassured French president Emmanuel Macron in December. "I never intended to exclude folks who were cooperating with us. That was not the intention … [W]e are going to continue to create manufacturing jobs in America, but not at the expense of Europe”. Keeping the transatlantic relationship sweet is especially important when the US and EU are fighting a proxy war on the union’s eastern border. But Biden can offer little more than “tweaks” to the IRA‘s application because of his Rizla-width majority in the Senate.
The obvious palliative solution would be to class the EU as the equivalent of an FTA partner given the two sides’ close alliance – effectively awarding the union the T-TIP status it refused Biden’s former boss. But this would be opposed by two protectionist senators - Joe Manchin (West Virginia) and Sherrod Brown (Ohio) - who are critical to sustaining the Democrats’ majority in 2024. It was Manchin who designed the EV tax breaks, ensured the IRA’s passage and who represents a state Trump won by 39 points in his otherwise unsuccessful 2020 re-election bid. Like Biden, Manchin was awfully sorry. In a letter to the Treasury secretary explaining his opposition to softening the IRA, the senator wrote: “Let me be clear, this bill was not designed to hurt any of our allied partners, but it was designed to help this country and make us stronger”.
Gang of two
The solution to this stand-off is clear to everyone concerned and has been helped – like so many advances in the past year – by the political clarity provided by emergent Russian expansionism and Chinese authoritarianism. Democrat-led Washington and most EU member states share a vision of the need to accelerate the green transition, re-shore some critical supply chains, and pre-regulate technologies of the future. They need to act in concert as they did in 1991-93 to close the most difficult parts of the Uruguay Round of multilateral trade negotiations and then effectively impose them (in performative consultation with smaller allies) on the rest of the world.
Away from the IRA headlines, this work has been underway for some time. The two sides settled the Trump-era steel and aluminium dispute by affirmative action in support of product with a low carbon footprint – a nifty bit of joint protectionism. On semiconductors, they have established early-warning mechanisms to foresee supply-chain disruptions and set up a hotline to prevent a subsidy escalation.
Officials on both sides want to go further and identify new and unregulated sectors (autonomous vehicles and artificial intelligence, for example), jointly regulate them to establish a global standard, and take this to the UN Economic Commission for Europe (Unece). The EU has long experience in standards imposition – in mobile telephony, for instance. Acting jointly with the Americans would establish a regulatory duopoly and help bring Washington back into the multilateral trade process. This could be encouraged by accelerating the work of the “Trilateral” – the EU, US and Japan – to boost the credibility of the World Trade Organization by tightening rules on industrial subsidies and state-owned enterprises, and against forced technology transfer to domestic companies and theft of intellectual property.
In the meantime, it’s only a matter of time until the EU joins rather than beats Manchin. Loosening state-aid rules to allow member states to accelerate the transition through public investment is only a start since this would favour governments with healthier public finances and lower debt-servicing costs. Yet again, German resistance to joint EU debt issuance to finance a common project is about to crumble. A Euro-IRA is on its way.
Both sides need to get a move on. From mid-2024, the US presidential election campaign will be running at full throttle and the EU institutions will be going through their five-year transition. Only a centre-left Democrat with an enhanced Senate majority would provide a more favourable backdrop, and something worse is more likely.