November 29, 2022

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Europe is fighting subsidies to save its industry from the United States and China

The energy crisis and the rising cost of living risk making protectionism fashionable again. The moves of China and the United States are pushing the European Union towards adopting a maximum plan to support European industry to prevent companies from fleeing the old continent. The trade deficit between the EU and China, which in 2021 approached 250 billion euros (about 700 million per day), is far from ‘Made in Europe’. Brussels is also grappling with a subsidy “war” with the United States, which could have devastating effects on European industry. Hence the need to respond to an assistance scheme tailored to companies producing in the European Union.

Biden’s bazooka

In mid-August, the Joe Biden administration launched the Inflation Reduction Act, which includes a “bazooka” of subsidies for US industry worth $369 billion (about 355 billion euros) to support a “green” transformation of manufacturing. The move includes tax breaks for electric vehicles made in North America and easing US battery supply chains. The requirement to receive subsidies excludes EU companies, many of which may be tempted to move production to the United States. According to the French Industry Lobby MedifThe flight of EU companies across the Atlantic could be accelerated by energy tariffs imposed by the United States, which are now much lower than those applied in Europe.

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Brussels replied

Europe could respond to the Biden Act to lower inflation by appealing to the World Trade Organization (WTO) by opening a legal dispute against subsidies that European industry defines as “discriminatory”. But the judicial road is long and full of unexpected events, and it is not practical to avoid the short-term effects of the American measure. Hence the idea of ​​responding to subsidies with other subsidies by launching the European Sovereignty Fund, a fund that was proclaimed in Ursula von der Leyen’s State of the Union address as a tool for ensuring “the future of industrialization in Europe”. As explained by the Inland Market Commissioner, Thierry BretonThe fund should work to “invest heavily” in transforming the European energy mix but also in digital capabilities, common defense and other strategic sectors.

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The declarations have not yet been translated into a legislative proposal from the commission. But there are signs that we are heading in this direction. For example, the European Commissioner for the Economy, Paolo Gentiloni, announced yesterday that the EU executive is “working” on “new common European tools to support our competitiveness and reduce the risks of fragmentation.”

Save the single market

The danger lies, in addition to the flight of EU companies, precisely in the not quite coordinated reaction within Europe with countries with purchasing power, such as Germany, that could intervene massively to facilitate their companies by creating imbalances in the single market. A scenario is already taking shape with Berlin’s €200 billion plan to deal with the energy crisis. Hence the urgent need for Brussels to intervene to save the entire European industry, even at the cost of sacrificing some principles of the free market.