Energy and technology: the incoming economic war between Europe and United States

Fair is fool and fool is fair: we must fish out Shakespeare and Macbeth to read the economic competition between the US and Europe that emerged after the approval of the Inflation Reduction Act by the Biden administration. The White House preaches the unity of the Western camp in the face of global crises, pleads it in the midst of the Ukrainian crisis, speaks of common values and democracy but promotes an economic intervention that moves a real economic war on strategic sectors to what would be its main partner, Europe.

It seems contradictory, almost unthinkable, but it is so: Biden signed the IRA in August hailing the rule as the most “incisive” action the country had taken to address the climate crisis. In fact, the law provides for 370 billion dollars of subsidies to critical technologies and the energy transition with the reference to the decarbonization objectives promoted at the COP26 in Glasgow. But for Brussels, the incentives “discriminate against the EU’s automotive, renewable, battery and energy-intensive industries.” Word of the rigorist hawk Valdis Dombrovskis, who in his position as vice-president of the Commission combines both the control over the accounts of the countries and the delegations to trade. For example, the IRA provides $ 7,500 subsidy for the purchase of electric vehicles bought by American citizens, as long as they are assembled in the large economic space ex NAFTA (Canada, USA, Mexico).

The American challenge

Subsidies became a central talking point at the recently held Trade and Technology Council in Washington. On Monday 5 December, Commissioner Dombrovskis met at the US-EU transatlantic meeting with US Secretary of State Tony Blinken. The two said Washington and Brussels had discussed the future of U.S. industrial policy on climate, but had not announced any agreements.

The US philosophy was made known by Biden’s Treasury Secretary, former Fed Governor Janet Yellen, who speaking at the DealBook Summit indicated the IRA as an act capable of guiding a new phase of industrial policy and that can help create “adequate supply chains” around the rare raw materials needed for green technologies, obviously controlled from Washington. “This is a form of ‘friendshoring,'” said the top economist on Biden’s team.

The IRA goes beyond any incentive policy promoted by the Union which, recalls the Financial Times, “is already disbursing its €800 billion NextGeneration EU programme” (including the complementary fund and allocations for plans such as Horizon EU), which requires each member state to “devote at least 37% of national recovery spending to climate-related investment and reforms”. The EU is also allocating money to “green projects under its regional aid scheme, as well as supporting initiatives in areas such as hydrogen and batteries. And it is looking to increase the firepower of its RepowerEU energy plan, which aims to wean the EU off Russian fossil fuels and improve energy infrastructure. But no plan provides for direct subsidies comparable to those in the US.

The combined IRA and the Chips Act, the $52 billion maneuver to subsidize the domestic semiconductor industry, may open a wedge between the US and Europe. The Chips Act, after all, is functional to the IRA and could be the largest effort by the U.S. government in decades to shape a strategic industry from scratch. The New York Times recalled how much resources it will mobilize: “About $28 billion from the so-called CHIPS for America Fund should go toward grants and loans to help build facilities for manufacturing, assembling and packaging some of the world’s most advanced chips. An additional $10 billion will be dedicated to expanding production for previous generations of technology used in automobiles and communications technology, as well as specialty technologies and other industry suppliers, while $11 billion will go to industry-related research and development initiatives.

Industrial reshoring and political capitalism based on the massive return of state dirigisme even in liberal economies such as the US mark a phase of de-globalization and can at the same time corner Europe. That does not want to be overwhelmed by what it considers to be a surreptitious wave of protectionism.

How to respond to the American challenge

German Economy Minister Robert Habeck recently hinted that Europe’s leading industrial power, Germany, supports symmetrical responses and is ready for a trade war with the US. Emmanuel Macron has promoted the idea of a “Buy European Act” in response to US moves. Commission President Ursula von der Leyen also said she was in favor of responses to the American move. The idea that the US is waging an economic war to promote its supremacy in frontier technologies and make Europe a satellite emerges from many sides in the EU public discourse. With one hand, Washington invests in the European race for technologies directly in the Old Continent: it builds plants such as Intel’s chips based in Italy; gets its hands on the European sovereign cloud with Big Tech; with its funds, it participates in the race of the energy transition and in the game of LNG and regasification terminals. With the other, it raises the barriers to entry into its market.

The fact that Joe Biden has in fact followed Donald Trump in his tariff plans and overtaken him on the industrial policy front speaks for itself. On December 10, the World Trade Organization (WTO) ruled that former President Donald Trump violated global trade rules in 2018 when he invoked national security reasons to impose tariffs on aluminum and steel, triggering the “tariff war” in response to subsidies declared illegal by the WTO provided by the European Union to the Airbus consortium. The WTO rejected the US appeal, explaining that the tariffs were not introduced “in a period of war or other emergencies”. But the Biden administration condemned the decision and reiterated that it will not remove tariffs, which are believed to be central to defending the internal market and Washington-centered value chains.

Biden has made it clear that his friend-shoring will initially be a near-shoring that aims to exploit the regionalization of value chains by shaping around the US a vibrant and competitive system with the great poles of the global economy. From this point of view, Europe appears more like a second-rate satellite precisely because it is perceived as lagging behind in all key areas: from batteries to chips, from the common energy agenda to the innovation agenda. Dependence in strategic sectors as a derivative before political subordination, in a phase in which the war in Ukraine has had the great defeat in European autonomy and in the ability to imagine an Old Continent protagonist of globalization: the Biden agenda applies with ruthless lucidity what, moreover, the president had written in his dirigiste and interventionist electoral program.

Europe must not die of laziness

Crushed between competition with China, Russia’s energy and psychological war and the will of its major ally (on paper) to attract it as a geo-economic satellite after ensuring its geopolitical minority, Europe can and must react. And it can only do so by thinking big: from semiconductors to the race for critical raw materials, the EU must play like great power. By investing, planning and changing paradigms: less regulatory rigorism at Domborvskis and more frontier vision at Thierry Breton, the super-commissioner French for Industry among the few to imagine the policies that are keeping Europe in the game on batteries, microchips, innovation, artificial intelligence.

In general, in Europe, Alessandro Aresu told Data Manager, “it is as if the will to do or to be able to do something great, to create important institutions, which mainly involve European countries, no longer materializes. ESA and CERN were born between the fifties and seventies in response to the great tensions of the Cold War that also involved science and technology. After that, we didn’t build anything really comparable. Not even in the response to the current crisis.” From European transition projects to challenges such as the ITER nuclear reactor and European infrastructure corridors, the basis exists. We need to think about the industry of the future and what will determine tomorrow’s balance of power on a global scale. In order not to die of laziness in the face of the challenges brought by rivals and, most worryingly, allied countries.