GC expert digital panel discussion with our Brussels and DC team, discussing what the Inflation Reduction Act means for the EU, the US, other developed economies and their economic relations.
The key discussion points from the event include:
- The Inflation Reduction Act (IRA) represents the most significant federal intervention so far in the US clean energy transition. The extension of clean energy tax credits and the creation of new ones is expected by most analysts to spur clean energy investment – which has suffered from muted private interest due to concerns over project profitability. Beyond its specific incentives, the package is important for setting a new benchmark for US strategic subsidy policy – despite a gaping hole in the US budget. But it also leaves little doubt about how Washington weighs the relative importance of external criticism from allies and accusations of WTO non-conformity.
- Content requirements attached to several tax credits have prompted external criticism that the US has thus far brushed off. These include critical mineral and battery content requirements for EVs, as well as requirements that vehicles must have final assembly in North America – all of which have prompted sharp criticism from several US allies including the EU, Japan, and South Korea. The Biden Administration has shown a willingness to address some of these concerns, but the Administration has signalled that the US Treasury’s final implementation guidelines due in March 2023 are unlikely to significantly alter or relax these requirements.
- Lack of political consensus means that the EU response will be a collection of smaller initiatives likely to fail to convince industry it can match US incentives. The bulk of this is a mix of regulatory reviews designed to streamline investment, improvements to access to finance, investment in skills and the ongoing reshaping of the EU trade policy toolkit in areas such as the Foreign Subsidies Regulation. In the medium term, the EU will consider expanding a measure of centralised strategic investment through an EU Sovereignty Fund. Set against US largesse, this generally sensible suite of streamlining measures is likely to be judged by many in the EU as exemplifying the widening gulf between US and EU strategic approaches.
- Seen from Brussels, this will be seen as a major failure for the EU-US Trade and Technology Council. The IRA finishes off any residual aspirations from the EU side that the TTC might have a meditating influence on aggressive shifts in US industrial policy. However, it does not necessarily signal a wider problem for key immediate areas of cooperation in areas such as Ukraine and climate change mitigation. But from an EU perspective, it will reinforce the argument that the US is not interested in integrated approaches to industrial competitiveness or advanced technology cooperation – except on entirely US terms.