EU-US relations after the Inflation Reduction Act, and the challenges ahead.
Date: 2024-02-22
Institutions: Directorate-General for Parliamentary Research Services
Subjects: EU relations, United States, bilateral relations, cooperation policy, economic relations, inflation, international trade, report, trade relations

EU-US relations 
after the 
Inflation 
Reduction Act, 
and the  
challenges 
ahead 

STUDY 

EPRS | European Parliamentary Research Service 

Guest author: Bruce Stokes 
Members' Research Service 
PE 759.588 – February 2024 

EN 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EU-US relations after 
the Inflation Reduction 
Act, and the 
challenges ahead 

EPRS invites leading experts and commentators to share their thinking and 
insights  on  important  topics  of  relevance  to  debate  in  the  European 
institutions. In this paper, Bruce Stokes, visiting senior fellow at the German 
Marshall Fund of the United States, and associate fellow at Chatham House, 
offers an overview of US-EU relations since the passage of the US Inflation 
Reduction Act in 2022. This paper is based on the author's interviews with 
leading  European  and  US  experts  and  published  analysis  by  major  think 
tanks  and  journalists  on  both  sides  of  the  Atlantic.  The  paper  discusses 
current  efforts  to  manage  longstanding  pre-IRA  disputes,  the  Trade  and 
Technology Council, the US Chips and Science Act and the EU's response, 
looming issues such as CBAM and critical minerals, and how politics in both 
the US and Europe may affect the handling of these issues. 

EPRS | European Parliamentary Research Service 

 
 
 
 
 
 
 
 
 
 
AUTHOR 

This study has been written by Bruce Stokes, Visiting Senior Fellow at the German Marshall Fund Washington 
D.C.,  at  the  request  of  the  Members'  Research  Service,  within  the  Directorate-General  for  Parliamentary 
Research Services (EPRS) of the Secretariat of the European Parliament.  

ADMINISTRATOR RESPONSIBLE 

Gisela Grieger and Marcin Szczepański, External Policies Unit, Members' Research Service, EPRS. 

To contact the publisher, please e-mail eprs@ep.europa.eu 

LINGUISTIC VERSIONS 

Original: EN 

Translations: DE, FR 

Manuscript completed in December 2023.  

DISCLAIMER AND COPYRIGHT 

This  document  is  prepared  for,  and  addressed  to,  the  Members  and  staff  of  the  European  Parliament  as 
background  material  to  assist  them  in  their  parliamentary  work.  The  content  of  the  document  is  the  sole 
responsibility of its author(s) and any opinions expressed herein should not be taken to represent an official 
position of the Parliament. 

Reproduction  and  translation  for  non-commercial  purposes  are  authorised,  provided  the  source  is 
acknowledged and the European Parliament is given prior notice and sent a copy. 

Brussels © European Union, 2024. 

Photo credits: © motortion / Adobe Stock. 

PE 759.588 
ISBN: 978-92-848-1631-6 
DOI:10.2861/385275 
CAT: QA-05-24-111-EN-N 

eprs@ep.europa.eu  
http://www.eprs.ep.parl.union.eu (intranet) 
http://www.europarl.europa.eu/thinktank (internet) 
http://epthinktank.eu (blog)

 
 
 
 
 
EU-US relations after the Inflation Reduction Act, and the challenges ahead 

Executive summary 

The third decade of the 21st century has been marked by the re-emergence of industrial policy in 
the United States. Less than six months after the inauguration of U.S. President Joe Biden, Congress 
passed  the  American  Innovation  and  Competition  Act,  which  included  US$52  billion  to  boost 
domestic  manufacturing  of  semiconductors  and  US$200  billion  for  scientific  and  innovation 
research and development. But this was only the beginning. In 2022, Congress enacted the Chips 
and Science Act. Later that year it passed the Inflation Reduction Act (IRA). In April 2023, U.S. national 
security adviser Jake Sullivan elaborated on Biden Administration thinking, arguing that the IRA and 
its  sister  legislation  reflects 
'protecting  our  foundational 
'a  new  Washington  Consensus', 
technologies with a small yard and high fence'.  

Initially, the IRA in particular sparked frictions with the European Union. But European opposition to 
U.S.  economic  support  for  American  industry  rapidly  softened  as  both  Washington  and  Brussels 
have adapted to new challenges posed by climate change, the green and digital transitions, and 
China. This has led to a reassessment of long-held assumptions – both in the U.S. and in the EU –
about the role of government in the domestic economy and new European support for domestic 
production of semiconductors, batteries, and other critical industries.  

Yet  much  remains  to  be  done  and  there  are  challenges  ahead.  The  EU  and  the  U.S.  have  no 
agreement on permissible subsidies. The U.S.-EU Trade and Technology Council has produced few 
tangible results and has a lengthening agenda. Major transatlantic economic frictions loom: the EU's 
carbon  border  adjustment  mechanism,  competition  for  minerals  critical  to  the  needed  energy 
transition, privacy in an increasingly digital economy, and how better to coordinate export controls 
and  regulation  of  artificial  intelligence.  In  2024,  the  United  States  faces  Presidential  and 
Congressional elections, while the European Union will have elections for the European Parliament 
and EU member states hold nine national elections. Substantively and politically, the transatlantic 
debate over industrial policy has only just begun. 

I 

 
 
 
 
 
 
 
EPRS | European Parliamentary Research Service 

II 

 
 
 
 
 
 
EU-US relations after the Inflation Reduction Act, and the challenges ahead 

Table of contents 

1. Introduction  _________________________________________________________________  1 

2. A bit of history  _______________________________________________________________  3 

3. Clearing the brush  ____________________________________________________________  4 

3.1. Airbus-Boeing  _____________________________________________________________  4 

3.2. Steel and aluminium ________________________________________________________  4 

4. The current state of play________________________________________________________  6 

4.1. The Trade and Technology Council  ____________________________________________  6 

4.2. The Inflation Reduction Act ___________________________________________________  8 

4.3. The Chips and Science Act  __________________________________________________ 13 

5. The European response _______________________________________________________ 14 

5.1. The debate over subsidies ___________________________________________________ 20 

5.2. Trade policy ______________________________________________________________ 25 

6. Looming issues ______________________________________________________________ 31 

6.1. Export controls ____________________________________________________________ 31 

6.2. Privacy  __________________________________________________________________ 33 

6.3. Critical minerals ___________________________________________________________ 33 

6.4. CBAM ___________________________________________________________________ 38 

6.5. Artificial intelligence  _______________________________________________________ 39 

7. Potential for future technological cooperation _____________________________________ 40 

8. Elections and post-election politics in the US and the EU  ____________________________ 41 

III 

 
 
 
 
 
 
 
EU-US relations after the Inflation Reduction Act, and the challenges ahead 

1. Introduction 

When  American  President  Joe  Biden  came  into  office,  mindful  of  the  economically  destabilizing 
supply chain problems caused by Covid, he ordered a study1 of the U.S. economy's supply chains 
across a range of products. This report called for ambitious measures to strengthen semiconductor, 
electric  battery,  rare  earth,  and  pharmaceutical  supply  chains.  And  less  than six months  after his 
inauguration,  Congress  passed  the  American  Innovation  and  Competition  Act2,  which  included 
$52 billion to boost domestic manufacturing of semiconductors and $200 billion for scientific and 
innovation research and development. 

But this was only the beginning of America's newfound interest in industrial policy that the U.S. had 
long claimed to disdain. In 2022, Congress enacted the Chips and Science Act.3 Later that year it 
passed the Inflation Reduction Act4 (IRA). 

In  October  2022,  White  House  National  Economic  Council  director  Brian  Deese5  articulated  the 
Biden  Administration's  rationale  for  the  IRA  in  a  speech  to  the  City  Club  of  Cleveland:  'strategic 
public investments are essential to achieving the full potential of our nation's economy. It's also an 
idea as old as America itself. Alexander Hamilton, the first U.S. Treasury Secretary, insisted that "the 
public purse must supply the deficiency of private resource" to "prompt and improve the efforts of 
industry".'  Invoking  Hamilton  in  the  wake  of  the  highly  successful  Broadway  musical  about 
Hamilton's life gave the administration's embrace of industrial policy an immeasurably significant 
connection to a popular culture phenomenon that politicians intuitively recognize for its populist 
appeal, and economists will never understand.  

In April 2023, U.S. national security adviser Jake Sullivan further elaborated on Biden Administration 
thinking, arguing that the IRA and its sister legislation reflects 'a new Washington Consensus'6 that 
replaces  the  'Washington  Consensus'  that  evolved  in  the  Reagan  Administration.  'Our  goal  is  a 
strong, resilient, and leading-edge techno-industrial base [of] the United States and its like-minded 
partners,'  Mr.  Sullivan  said,  'protecting our  foundational  technologies  with  a small  yard  and  high 
fence.'  

Initially, the IRA in particular sparked frictions with the European Union, amid charges that the law's 
subsidies  and  domestic  preference  requirements  violated  multilateral  trading  rules,  that  the 
legislation abandoned longstanding U.S. opposition to the government picking business winners 
and losers, and that the IRA both discriminated against European auto exports and, more ominously, 
would lead European firms to invest in America not in Europe.  

Bernd  Lange7,  the  head  of  the  European  Parliament's  Trade  Committee,  called  for  filing  a  WTO 
dispute, while Thierry Breton, the European Commissioner for the Internal Market, indicated that 

1  
2  
3  
4  
5  

6  

7  

https://www.whitehouse.gov/wp-content/uploads/2021/06/100-day-supply-chain-review-report.pdf. 

https://www.congress.gov/bill/117th-congress/senate-bill/1260. 

https://www.congress.gov/bill/117th-congress/house-bill/4346. 

https://www.congress.gov/bill/117th-congress/house-bill/5376/text. 

https://www.whitehouse.gov/briefing-room/speeches-remarks/2022/10/13/remarks-on-executing-a-modern-
american-industrial-strategy-by-nec-director-brian-deese/. 

https://www.whitehouse.gov/briefing-room/speeches-remarks/2023/04/27/remarks-by-national-security-advisor-
jake-sullivan-on-renewing-american-economic-leadership-at-the-brookings-institution/.  

https://www.reuters.com/business/lawmaker-says-eu-should-complain-wto-over-us-inflation-reduction-act-2022-
12-04/.  

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the IRA could lead to retaliation. There were threats of a subsidy war. In a state visit to Washington 
in early December, French President Emmanuel Macron8 called the IRA subsidies 'super aggressive', 
warned that the IRA and the CHIPS law might 'fragment the West', and urged the transatlantic allies 
to 'resynchronize' their economic policies. 

But European opposition to the IRA and related U.S. economic support rapidly softened.  

The post-IRA transatlantic relationship is evolving as both Washington and Brussels adapt to new 
challenges posed by climate change, the green and digital transitions, and China. This has led to a 
reassessment  of  long-held  assumptions—both  in  the  U.S.  and  in  the  EU--about  the  role  of 
government in the domestic economy and the costs and benefits of an ever-more interdependent 
world economy.  

As Martin Wolf9, no critic of free markets, has written: 'global markets must be incentivized in new 
ways to prioritize not just the planet, but its people.' 

'Governments have now embraced a responsibility for shaping the structure of the economy and 
the direction of growth,' Martin Sandbu10 has written. 'This new activism applies to huge policy areas 
ranging from geopolitical resilience (building domestic microchip supply chains), decarbonizing the 
energy system, and managing the digital transition of our lives and livelihoods.' 

So, the U.S. initiative, initially resisted but then rapidly followed by the EU, may well be evolving into 
a new international consensus.  

'The old international  political  economic order  anchored  by  the United  States  was  "rule  bound",' 
argue  Laura  Tyson  and  John  Zysman11.  'Although  the  rules  themselves  were  built  from  debates 
about who would capture advantage, the new fragmentation and disorder are centred on national 
competitive advantage and self-sufficiency through onshoring, nearshoring and friend shoring. And 
the  new  economic  nationalism  is  reflected  in  growing  impediments  to  trade  and  global  capital 
flows.' 

If, in fact, both Europe and America are rethinking their post-World War II consensus about the evils 
of industrial policy and the merits of globalization, entering an era of more techno and economic 
nationalism,  the  dilemma  they  both  face  is  that  it  is  hard  to  understand  how  they  individually 
overcome  the  challenges they  share:  climate  change,  the  green  transition,  the  digital  revolution, 
and China, to name just a few. 

As  UK  Prime  Minister  Margaret  Thatcher12  so  presciently  told  the  1989  UN  General  Assembly  in 
warning  of  the  impending  peril  of  carbon  emissions:  'we  shall  only  succeed  in  dealing  with  the 
problems through a vast, international co-operative effort.' 

A generation later, in the wake of the IRA and the EU's response, the rise of economic nationalism 
and  the  profusion  of  shared  challenges  and  their  growing  severity,  Thatcher's  appeal  for 
international cooperation is even more salient today. 

https://www.washingtonpost.com/politics/2023/01/17/europe-not-happy-with-bidens-inflation-reduction-act/. 

https://www.ft.com/content/c8cf024d-87b7-4e18-8fa2-1b8a3f3fbba1. 

8  
9  
10   https://www.ft.com/content/cf38927e-6685-425d-b696-37645b638433. 
11   https://www.bruegel.org/sites/default/files/2023-08/Bruegel%20Blueprint%2033_chapter%205.pdf. 
12   https://www.margaretthatcher.org/document/107817. 

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EU-US relations after the Inflation Reduction Act, and the challenges ahead 

And both the EU and the U.S. recognize this. The joint statement issued after the October 2023 EU-
U.S.  summit13  concluded: 
'we  recognize  that  economic  resilience  requires  de-risking  and 
diversifying.  In  this  context,  we  will  invest  in  our  own economic  vibrancy  and  reduce  critical 
dependencies and vulnerabilities, including in our supply chains. We also recognize the necessity of 
protecting certain advanced technologies that could be used to threaten global peace and security, 
without unduly limiting trade and investment. We will foster resilience to economic coercion. We 
will address challenges posed by non-market policies and practices.' 

2. A bit of history 

EU-U.S.  differences  over  bilateral  trade  and  investment  stretch  back  to  creation  of  the  European 
Economic Community in 1957. 

In  1963,  Washington  imposed  a  25%  tariff  on  imports  of  light  trucks  in  retaliation  for  Europeans 
blocking imports of American frozen chickens. As a result, European light trucks practically vanished 
from  the  American  market,  as  did  all  other  imports  of  such  vehicles.  The  duty  still  remains  six 
decades later. 

In the 1990s, the U.S. and the EU had a long running battle over EU banana imports that favoured 
product from former European colonies over bananas shipped by American-owned producers. The 
dispute led then President Bill Clinton to complain to an aide in the run-up to an U.S.-EU summit, 
'do I really have to talk about bananas again?' 

To transcend these past bilateral disputes and in response to the failure of multilateral efforts to 
further promote trade through the failed Doha Round, the United States and the European Union 
launched negotiations for a Transatlantic Trade and Investment Partnership (TTIP) in 2013. The aim 
was to boost transatlantic commerce through harmonization or mutual recognition of regulations, 
reduction or elimination of already low tariffs and greater investment. 

The  initiative  built  on  the  1990  Transatlantic  Declaration,  the  1995  agreement  on  a  New 
Transatlantic  Agenda,  the  subsequent  creation  of  Transatlantic  Business,  Consumer,  Labor  and 
Environmental  dialogues  and  proposals  for  some  kind  of  transatlantic  free  trade  agreement, 
including,  among  others,  from  the  U.S.  Council  on  Foreign  Relations14  in  1996  and  in  2006  by 
German Chancellor Angela Merkel15.  

The TTIP negotiations sparked unexpectedly strong opposition, especially in Europe, and to a lesser 
extent in the United States, from consumer, environmental and labour groups worried that any deal 
would weaken regulations they favoured. The talks paused in 2018 and were terminated in 2019. 

This was the transatlantic trade and investment legacy inherited by U.S. President Joe Biden and 
European Commission President Ursula von der Leyen. And they were determined to break with the 
past.  

'The evolution over the last 10 years was driven by a lot of different factors, and we're not going 
back,'  former  USTR  Europe  negotiator  Dan  Mullaney16  said.  'It's  not  a  question  of  the  last 

13   https://www.whitehouse.gov/briefing-room/statements-releases/2023/10/20/u-s-eu-summit-joint-statement/. 
14   https://www.amazon.com/Open-Business-Creating-Transatlantic-Marketplace/dp/0876091877. 
15   https://www.spiegel.de/international/trans-atlantic-free-trade-merkel-for-eu-agreement-with-us-a-440335.html. 
16  https://www.politico.com/news/2023/06/03/us-europe-china-trade-00099954. 

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EPRS | European Parliamentary Research Service 

administration is out and now everyone can go back to the way things were before and heave a sigh 
of relief. Things were already changing, including in Europe, even before the last administration.' 

3. Clearing the brush 

3.1. Airbus-Boeing 

In June 2021, five months after Biden came into office, the U.S. and the EU agreed to suspend for 
five years reciprocal tariffs over alleged unfair subsidies for America's Boeing and the EU's Airbus, 
pausing a 17-year transatlantic trade dispute. Washington and Brussels pledged to use this cease-
fire to try to find a way to support their aircraft industry on market terms in a manner that does not 
harm the other side. 

Washington's  interest  in  resolving  this  longstanding  dispute  is,  in  part,  a  reflection  of  changing 
market dynamics. Airbus delivered more commercial jets than Boeing from 2019-202217, thanks, in 
part to safety problems with Boeings 737 Max and a 787-work stoppage. This followed nine years, 
from 2003 to 2011, when the European aircraft maker out-delivered its American competitor.  

But the major impetus for this breakthrough may have been growing concern in both Brussels and 
Washington over China's ambitions in the civil aircraft market. State-owned air plane manufacturer 
Commercial Aircraft Corporation of China (Comac) has reportedly received 1,200 orders for its first 
commercial jet, largely from Chinese carriers who currently fly Boeing and Airbus planes. Almost 
every  plane  supplied  by  Comac  is  a  lost  order  for  Airbus  or  Boeing.  And  that  pain  is  being  felt, 
especially in the U.S., where sales of aircraft, including related parts and equipment, were the largest 
single component of exports to China in each of the last three decades.  

'Our goal was clear – to forge a new, cooperative relationship in this sector […] that […] includes a 
commitment  for  concrete,  joint  collaboration  to  confront  the  threat  from  China's  non-market 
practices,' said European Commission Executive Vice-President Valdis Dombrovskis18 at the time of 
the agreement. 

3.2. Steel and aluminium 

Both  Europe  and  the  United  States  have  suffered  declining  steel  industries  for  decades,  with 
bankruptcies, consolidations, and falling employment. And they have grappled with China's rising 
steelmaking capacity. Chinese steel makers now account for 47%19 of global capacity, up from just 
14%  at  the  beginning  of  the  21st  century.  And  Beijing's  steelmaking  capacity  far  exceeds  its 
domestic needs, ensuring that China will export its excess, often at prices that many observers think 
is below the cost of production, a clear violation of international trade rules. 

Washington and Brussels have long tried, with no success, to find common understanding between 
themselves  and  with  others  through  the  OECD  Steel  Committee20  about  the  need  to  constrain 

17   https://www.statista.com/statistics/622779/number-of-jets-delivered-global-aircraft-fleet-by-manufacturer/. 
18   https://ustr.gov/about-us/policy-offices/press-office/press-releases/2021/june/ustr-announces-joint-us-eu-

cooperative-framework-large-civil-aircraft. 

19   https://stats.oecd.org/Index.aspx?DataSetCode=STI_STEEL_MAKINGCAPACITY. 
20   https://www.oecd.org/industry/ind/steel-committee.htm. 

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EU-US relations after the Inflation Reduction Act, and the challenges ahead 

global capacity, especially in China, to ensure a price level that enables various national producers 
to survive.  

In  frustration  with  the  inability  to  find  a  multilateral  solution  to  steel  overcapacity,  the  Trump 
Administration21 imposed a 25% tariff on imported steel and a 10% duty on imported aluminium, 
citing national security as a justification. While these tariffs were largely aimed at China, the duties 
also  applied  to  European steel  and  aluminium,  to  keep  displaced  Chinese  product  from  pushing 
European product into the U.S. market. The European Union saw itself as collateral damage in a trade 
dispute  between  Washington  and  Beijing.  So,  Brussels  imposed  retaliatory  tariffs  on  American 
bourbon whiskey, Harley-Davidson motorcycles, and motorboats. 

On 31 October 202122, the Biden Administration agreed to temporarily suspend the Trump tariffs on 
steel and aluminium and to work with Brussels to create a 'Global Arrangement on Sustainable Steel 
and Aluminium.'  

The idea was that the agreement would be open to other countries who want to collaborate in less 
carbon-intensive  steel  and  aluminium  production,  serving  as  a  blueprint  for  making  trade  more 
environmentally friendly. 

At their meeting in March 2023, in return for Washington dropping its 2021 tariffs on European steel 
and  aluminium,  von  der  Leyen  and  Biden23  agreed  to  complete  negotiations  on  a  Global 
Arrangement on Sustainable Steel and Aluminium by October 2023. They missed the deadline, in 
part because the parties' visions for this arrangement differed.  

The  Biden  Administration  wanted  to  form  a  'Green  Steel  Club'  whose  members  would  erect  a 
common external tariff on imports of steel and aluminium from third countries that had steel and 
aluminium production that emitted more carbon than production in the U.S. and the EU. The more 
carbon emitted in production, the higher the tariff. The U.S. plan was also to penalize countries that 
excessively  subsidized  their  producers  and  created  a  global  oversupply  problem.  This  latter 
objective  was  another  American  attempt  to  curb  the  longstanding  excess  capacity  in  the  steel 
industry, largely due to China. 

'What  the  Biden  administration is  trying  to  do is  essentially  convert  [it's  tariffs  based on  national 
security] […] into a climate-friendly system,' said Timothy Meyer24, a professor in international law 
at Duke University.  

But  there  is  no  accepted  methodology  for  calculating  carbon  intensity.  Once  there  is  such  a 
methodology, this arrangement would incentivize third-country governments to green their steel 
sectors. Critics note, however, that the U.S. largely relies on mini-mill electric-arc furnaces to make 
their steel, a technology that already produces less carbon than the coal-fired blast furnaces used in 
China, so the American approach would give U.S. steelmakers, already one of the lowest emission 
steel producers, a competitive advantage. 

21   https://www.nytimes.com/2018/03/01/business/trump-tariffs.html. 
22   https://www.euractiv.com/section/economy-jobs/news/eu-and-us-slash-tariffs-start-cooperating-on-green-steel/. 
23   https://www.whitehouse.gov/briefing-room/statements-releases/2023/03/10/joint-statement-by-president-biden-

and-president-von-der-leyen-2/. 

24   https://www.euractiv.com/section/economy-jobs/news/eu-us-green-steel-showdown-how-to-decarbonise-trade/. 

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Europeans argue they are making great strides toward decarbonizing their steel production. In her 
State of the Union 2023 address, European Commission President von der Leyen noted25: 'In the last 
five years, the number of clean steel factories in the EU has grown from zero to 38.'  

4. The current state of play 

4.1. The Trade and Technology Council 

As former British Prime Minister Harold MacMillan26 once observed: 'Jaw, jaw is better than war, war.'  

The size and volume of trade across the Atlantic is so vast, said U.S. Rep. Jim Costa and European 
Parliament member Danuta Huebner that 'we need a permanent dialogue involving all stakeholders 
before well-meaning policies trigger a trade war.' 

To  that  end,  the  U.S.-EU  Trade  and  Technology  Council  (TTC)  was  created  at  the  2021  EU-U.S. 
Summit. It involves -regular meetings of cabinet-level officials on the American side and European 
Commissioners to help grow the bilateral trade and investment relationship. The goal is to avoid 
new  unnecessary  technical  barriers  to  trade;  to  coordinate  and  seek  common  ground  on  these 
issues; and to strengthen global cooperation on technology, digital issues, and supply chains. The 
TTC also aims to support collaborative research and exchanges; to cooperate on compatible and 
international  standards  development;  and  to  facilitate  regulatory  policy  and  enforcement 
cooperation.  Moreover,  it  hopes  to  advance  the  resilience  of  transatlantic  supply  chains  in  key 
sectors  for  the  green  and  digital  transitions,  to  cooperate  on  standards  for  emerging  clean 
technologies, and to address common economic and national security challenges, which over time 
have included joint work on export controls and artificial intelligence.  

The fourth TTC meeting took place in June 2023 in Luleå, a small industrial city above the Arctic 
Circle that is a hub for 'green' steelmaking in Europe and home to U.S. tech giant Meta's data servers. 

'This [Sweden] TTC had good political sponsorship and high-level political visibility and presence,' 
observed Jeffries Briginshaw, a senior director at the Transatlantic Policy Network, 'with specific, on 
the spot, high level and trade association participation and the deliverables coming out of TTC were 
on the upside vis a vis expectations.' 

Yet, overall, the TTC has received mixed reviews. 

The  most  significant  substantial  achievement  has  been  the  work  of  the  TTC  in  producing  an 
agreement between the United States and the European Union on sanctions and export controls on 
Russia in the wake of its invasion of Ukraine.  

But critics contend that TTC communiques are mostly full of words about cooperation, coordination, 
partnership, information sharing, resilience, inclusivity, technical assistance, and capacity building 
rather than action.  

'One of the (few) specific outcomes of the May Trade and Technology Council meeting in Sweden,' 
complained William Reinsch27 of the Center for Strategic and International Studies in Washington, 

25   https://ec.europa.eu/commission/presscorner/detail/ov/speech_23_4426. 
26   https://quotefancy.com/quote/1306642/Harold-MacMillan-Jaw-jaw-is-better-than-war-war. 
27   https://www.csis.org/analysis/europe. 

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EU-US relations after the Inflation Reduction Act, and the challenges ahead 

'was a mutual recognition agreement on veterinary medicines. This is welcome news but very small 
cheese—we have a long way to go if we are to reconcile our many different practices.' 

'You  have  to  cook  with  the  ingredients  that  you  have,  which  right  now  is  TTC,'  observed  former 
European Commissioner for Trade Cecilia Malmström28. 'And they're trying to make the best out of 
it. [But] it's not a lot,'  

And American trade experts contend that there are too few of the major players arrayed around the 
table. 'Failing to include Congress in the TTC proved to have been a mistake,' argues Chad Bown29, 
'as industrial policy often takes the form of legislation (given Treasury's rule-writing function under 
the IRA and the fact that industrial policy is being implemented through the US tax code, it would 
also be helpful if the Treasury Department, not only the US Trade Representative, the Commerce 
Department, and the State Department, were part of the TTC).' 

Moreover,  observed  Costa  and  Huebner, 
institutional  grounding,  Congressional 
engagement, and a revival of the Transatlantic Business Dialogue, are needed to boost and enhance 
the TTC's effectiveness and its longevity.' 

'strong 

Nevertheless, progress has been made. The TTC's creation suggests a felt need on both sides of the 
Atlantic to have a forum in which pressing technical matters can be discussed. 'The TTC can […] 
make valuable contributions towards a transatlantic market for emerging technologies and digital 
transformation  based  on  common  values,'  argues  Julian  Ringhof30  of  the  European  Council  on 
Foreign Relations. 

The  fact  that  the  TTC  has  become  a  venue  for  new  deliberations,  such  as  AI,  suggests  that  both 
Washington and Brussels see value in having a pre-existing forum for consultation, one that is not a 
formal negotiation but that provides an opportunity to exchange views and approaches to mutual 
problem solving. But such ad hoc discussions have existed in the past and rarely survived more than 
one or two American or European administrations. The ultimate success of the TTC will, in part, not 
only be judged by what it produces, but if it survives.  

Institutionalizing the TTC should be a primary objective for both Brussels and Washington in 2024. 
This might be accomplished through a multipronged approach. Broadening the agenda would give 
more business interests a stake in the outcome of TTC deliberations. Artificial intelligence is already 
on  the  agenda  and  more  could  be  done  to  align  policy  with  regard  to  generative  AI  and  the 
employment challenges both Europe and America will face as a result. The shortcomings of export 
controls in the war in Ukraine suggest the TTC needs to double down on transatlantic coordination, 
especially on issues such as secondary sanctions. Synthetic biology is an emerging field with great 
implications both for dealing with disease and food production. But history suggests such scientific 
advances fuel transatlantic disputes31. The TTC should begin the dialogue on mutual recognition of 
standards before the science outstrips the regulation.  

The TTC might also become a forum for discussion with third countries about trade, technology and 
regulatory issues. In 202332, the EU and India created a Trade and Technology Council. This forum is 
charged with working on artificial Intelligence, 5G/6G, high performance and quantum computing, 

28   https://www.politico.com/news/2023/06/03/us-europe-china-trade-00099954. 
29   https://www.bruegel.org/sites/default/files/2023-08/Bruegel%20Blueprint%2033_chapter%2011.pdf. 
30   https://ecfr.eu/article/setting-the-tone-the-value-of-the-eu-us-trade-and-technology-council/. 
31   https://www.europarl.europa.eu/RegData/bibliotheque/briefing/2013/130518/LDM_BRI(2013)130518_

REV1_EN.pdf. 

32   https://ec.europa.eu/commission/presscorner/detail/en/ip_23_596. 

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EPRS | European Parliamentary Research Service 

semiconductors, cloud systems, cybersecurity, green technologies, the resilience of supply chains 
and access to critical components, energy, and raw materials. At the same time, Washington and 
New  Delhi  have  launched  an  India-U.S.  Strategic  Trade  Dialogue33  to  address  export  controls, 
explore ways of enhancing high technology commerce, and facilitate technology transfer between 
the two countries. While these two discrete fora have their own strategic rationales, many of the 
same officials will be participating in the U.S-EU TTC, the EU-India TTC and the U.S.-India dialogue. 
As  they  identify  shared  trilateral  concerns,  interests  and  objectives,  it  would  make  sense  to 
periodically  meet  together  in  an  effort  to  come  up  with  common  initiatives  or  regulatory 
approaches. 

Deeper engagement by both members of the European Parliament and the U.S. Congress—through 
establishing a formal TTC legislative participation—would create a legislators' constituency for TTC, 
making it harder for future administrations to abandon the TTC.  

This  would  be  particularly  helpful  because  of  the  fundamental  philosophical  and  practical 
differences  about  regulation  in  the  EU  and  the  U.S.  Americans  tend  to  believe  that  a  market 
economy  functions  best  with  only  light  regulation.  Europeans  believe  that  a  market  economy 
functions  best  within  a  regulatory  framework.  So,  TTC  discussions  must  first  overcome  that 
philosophical  difference.  Moreover,  the  European  Parliament  frequently  enacts  regulation  in 
anticipation of problems, while the American Congress often passes regulation after problems have 
manifested themselves.  

These  philosophical  and  practical  differences  are  likely  never  to  change.  But  more  structured 
engagement  between  members  of  the  European  Parliament,  members  of  Congress  and  TTC 
negotiators  should  help  manage  these  differences.  Not  only  should  legislators  attend  all  TTC 
meetings,  but  both  sides  could  designate  key  committee  or  other  committed  legislators  to  be 
rapporteurs  back  to  their  legislatures,  institutionalizing  parliamentary  engagement.  These 
designees might then be asked to testify to both their own legislatures but also to their counterpart 
on  the  other  side  of  the  Atlantic,  so  that  a  broader  number  of  legislators  might  understand  the 
difference between the EU and U.S. positions, in the hope of maximizing the potential to iron our 
negotiating differences and reach conclusions that will have political support at home.  

And, most importantly, the production of concrete results would demonstrate the value of the TTC, 
raising  the  likelihood  that  future  administrations  in  both  Washington  and  Brussels  would  find  it 
useful to continue TTC engagement. 

In  the  end,  the  success  of  the  TTC—and  more  broadly  the  deepening  of  transatlantic  trade  and 
technology—will not be measured simply by a growth in trade and investment in the technology 
sector. It will best be assessed by the degree of technological collaboration and subsequent success 
in  the  transatlantic  private  sector,  encouraged  and  sustained  by  the  alignment  of  European  and 
American regulatory and industrial policies. That will be the ultimate verdict on the TTC. 

4.2. The Inflation Reduction Act 

In August 2022, the U.S. Congress enacted the confusingly named Inflation Reduction Act (IRA). This 
legislation  was  the  third  piece  of  industrial  policy  pushed  through  by  the  Biden  Administration, 
following the Bipartisan Infrastructure Law and the CHIPS & Science Act. The IRA's goal was to build 

33   https://www.commerce.gov/news/press-releases/2023/03/joint-statement-india-us-commercial-

dialogue#:~:text=In%20that%20context%2C%20the%20U.S.,transfer%20between%20the%20two%20countries. 

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EU-US relations after the Inflation Reduction Act, and the challenges ahead 

domestic renewable energy production capacity, boost consumer uptake of electric vehicles and 
other renewable energy technologies and secure raw material supply chains for these technologies.  

The goal is to reduce American greenhouse gas emissions to 32% to 42% below 200534 levels by 
2030, which is up to 11 percentage points lower than estimated emissions without the IRA. This will 
enhance  the  likelihood  the  U.S.  will  meet  its  emission  commitments  under  the  Paris  Climate 
Agreement. 

To  that  end,  the  IRA  commits  the  U.S.  government  to  spending  $369  billion35  over  a  decade,  an 
unprecedented American governmental commitment to spur the energy transition. This headline 
figure sounds large, but on an annual basis it represents a little more than 0.1% of U.S. GDP. 

However, independent analysts predict the spending may go much higher. The IRA sets conditions 
under which consumers and businesses can receive tax credits for adopting green technology. And 
the estimated cost is based on an assumption of how many people will actually take advantage of 
these tax credits. But a report from Credit Suisse suggests that the credits might 'propel much higher 
activity levels' than Biden Administration projections. And there may also be a multiplier effect as 
private  firms  make  investments  complementary  to  those  directly  subsidized,  just  as  the  law 
intended.  In  that  case,  Credit  Suisse  suggests  that  public  and  private  spending  may  be  close  to 
$1.7 trillion over a decade. 

Moreover, the IRA builds on already significant U.S. public support for clean technology, including 
the  U.S.  Department  of  Energy's  Loan  Program,  or  ARPA-E,  for  research  and  development  and 
the 2020 Energy Policy Act. 

The IRA's energy transition incentives36 include a tax credit37 of up to $7,500 for the purchase of a 
plug-in or fuel-cell electric vehicle electric vehicle with a requirement that it is made by a qualified 
manufacturer, has been assembled in North America or by a free trade agreement partner of the 
U.S., and meets critical mineral and battery component requirements. The battery requirements are 
progressive:  60%  of  the  value  of  battery  components  must  be  produced  or  assembled  in  North 
America in 2024 to qualify. That percentage will increase to 100% starting in 2029. And 50% of the 
value of critical materials must be sourced from the U.S. or a free trade agreement country in 2024 
and 80% from 2027 to 2032. 

For  producers,  the  IRA  also  includes  a  credit  of  $35  per  kilowatt-hour  of  battery  manufacturing 
capacity, while the production of battery modules qualifies for $10 per kilowatt-hour. Companies 
can  also  be  reimbursed  10%  of  the  costs  incurred  due  to  the  production  of  electrode  active 
materials, like the cathode and anode. 

Moreover,  the Biden  Administration  has  combined these  federal investments  with  an  aggressive 
new regulatory proposal38 mandating pollution control standards to try to ensure that two-thirds of 
all new cars sold in the United States are all-electric by 2032, up from about 7% in 202339. 

34   https://www.nber.org/system/files/working_papers/w31267/w31267.pdf. 
35   https://www.democrats.senate.gov/imo/media/doc/inflation_reduction_act_one_page_summary.pdf. 
36   https://home.treasury.gov/news/press-releases/jy1379. 
37   https://www.irs.gov/credits-deductions/credits-for-new-clean-vehicles-purchased-in-2023-or-after. 
38   https://www.nytimes.com/2023/04/12/climate/biden-electric-cars-epa.html. 
39   https://www.coxautoinc.com/market-insights/q2-2023-ev-sales/. 

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While the IRA's impact on EV and battery production has received much of the public attention, the 
law provides other energy transition subsidies40. The IRA gives solar cell manufacturers a tax credit 
of 17 cents per watt of solar module production, leading to at least a 38% decrease in the delivered 
cost of solar PV modules, which contributed to 49 gigawatts of new module production capacity in 
the IRA's first year. The IRA also grants U.S.-based wind turbine manufacturers a tax break of up to 
70%  of  their  upfront  investment,  as  well  as  additional  tax  cuts  for  each  kilowatt-hour  of  power 
generated  by  wind  farms.  And  the  IRA  affords  Americans  a  tax  credit  of  up  to  $2,000  per  year 
covering 30% of the cost of energy conserving heat pumps. 

Overall, the Boston Consulting Group 41 estimates that the IRA could lower the cost of clean energy 
technologies across the board by around 15%, spurring their uptake.  

As  a  climate  change-fighting  tool,  the  IRA  has  received  positive  reviews. 'The  2022 United  States 
Inflation Reduction Act (IRA) is a significant and welcome climate law,' concludes a study 42 from the 
Brussels-based think tank Bruegel. And the European insurance giant Allianz 43 agrees: 'Without the 
U.S.,  any  attempt  to  limit  the  temperature  rise  below  2°C  –  not  to  mention  the  Paris  target  –  is 
doomed to fail. Building green industries at scale in the U.S. might also help similar efforts across the 
world via the price mechanism: such technologies are likely to become more affordable in a shorter 
time. In this context, the IRA deserves much praise.' 

And the IRA has been complemented by actions at the state level to incentivize renewable energy 
manufacturing  investment.  Pennsylvania 44  offers  grants,  loans,  and  loan  guarantees  for  facilities 
that manufacture or assemble solar panels, equipment, technology and similar incentives for the 
manufacture  of  wind  turbines  and  components.  In  2023,  Oklahoma45  passed  a  $180  million  tax 
incentive package that will bring new job opportunities to the state. After passage of the measure, 
Italy-based Enel Green Power unveiled plans for a billion-dollar solar cell and panel manufacturing 
factory in the state, citing 'tailwinds' from the IRA as a motivating force.  

But  renewable  energy  manufacturing  needs  a  market  to  encourage  consumers  to  take  up  clean 
technologies. In California46, for example, cities, counties, and public institutions can apply for low-
interest  loans  from  the  state  for  energy  efficiency  projects.  Colorado  offers  a  10%  tax  credit  on 
energy storage systems. Kentucky offers a sales tax exemption for solar energy systems that produce 
electricity for sale. Utah also exempts from sales tax wind turbines and power lines, among other 
renewable energy equipment. Nationwide, for wind power alone, there are 23 sales tax incentives 
and 57 property tax incentives. For solar there are 8 corporate tax incentives, 26 grant programs, 
and 70 property tax incentives.  

Less than two years after the passage of the IRA, evidence of its impact is emerging. 

As  of  31 July  2023, over $270  billion47 in  capital investment had  been  announced for utility-scale 
clean energy projects and manufacturing facilities since federal clean energy incentives were signed 

40   https://www.politico.eu/article/eu-united-states-inflation-reduction-act-subsidies-investment-threat-data/. 
41   https://media-publications.bcg.com/BCG-Executive-Perspectives-US-IRA-Global-Implications.pdf. 
42   https://www.bruegel.org/policy-brief/how-europe-should-answer-us-inflation-reduction-act. 
43   https://www.allianz.com/en/economic_research/publications/specials_fmo/inflation-reduction-act.html. 
44   https://www.areadevelopment.com/taxesIncentives/Nov09/renewable-business11.shtml. 
45   https://www.pewtrusts.org/en/research-and-analysis/articles/2023/08/11/states-rise-to-the-clean-energy-occasion. 
46   https://programs.dsireusa.org/system/program/detail/5131/energy-efficiency-financing-for-public-sector-projects. 
47   https://cleanpower.org/resources/clean-energy-investing-in-america-report/. 

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EU-US relations after the Inflation Reduction Act, and the challenges ahead 

into  law.  This  is  equivalent  to eight  years'  worth  of  past  American  clean  energy  investment, 
surpassing total investment into U.S. clean power projects commissioned between 2015 and 2022.  

And, in the 12 months ending in the first quarter of 2023, American consumers bought almost a 
million EVs. It had taken a decade for the U.S. to sell its first million EVs, two years to sell the second 
million and just over a year to sell the third. How much of these greater sales are due to IRA consumer 
subsidies  and  how  much  to  a  consumer  'bandwagon  effect'  is  unknowable.  But  initial  consumer 
enthusiasm  ebbed  a  bit,  thanks  to  prices,  despite  the incentives,  slow  deployment of  recharging 
stations  and  Americans'  love  affair  with  high-powered  gasoline-driven  vehicles.  Ford48,  General 
Motors, and Tesla all have delayed their factory ambitions due to this slowdown in demand. 

The IRA battery production and use incentives have been more successful, with both American and 
non-American  firms.  Automakers  and  battery  manufacturers  have  collectively  invested  and 
promised  to invest  close  to  $100  billion  in  building domestic cell  and module  manufacturing.  In 
2019,  just  two  battery  factories49  were  operating  in  the  United  States,  with  two  more  under 
construction. By mid-2023, there were about 30 battery factories either planned, under construction 
or operational in the country.  

To provide some perspective on the dramatic acceleration of renewable energy investment spurred 
by the IRA, investment in battery manufacturing technology in the second quarter of 2023 alone 
($9.99  billion50)  more  than  doubled  total  U.S.  investment  in  all  manufacturing  technology  for 
batteries, solar, wind, critical materials and zero emission vehicles in the second quarter of 2022. And 
in 2022 alone there was $213 billion in total new clean investment, a 37% increase from 2021. The 
most  rapid  investment  growth  has  been  in  clean  technology  manufacturing—with  annual 
investment growing 125% year-on-year to $39 billion—particularly within electric vehicle and solar 
manufacturing.  Investment  in  clean  energy  production  and  industrial  decarbonization  rose  15% 
year-on-year  to  $61  billion.  But  the  subsidies  have  also  impacted  household  and  retail  business 
behaviour, with purchasing and installing clean technologies such as heat pumps and zero-emission 
vehicles rising 32% year-on-year to $113 billion. 

Little  acknowledged  in  the  American  discussion  about  the  IRA,  but  certainly  unsettling  to 
Europeans, is the prospective competitiveness impact of clean energy use on energy bills for U.S.-
based  manufacturing.  The  Obama  Administration  tried  to  make  dirty  energy  more  expensive 
through carbon pricing, but Congress refused. Then the White House tried regulations, such as the 
Clean  Power  Plan,  to  accomplish  the  same  thing.  The  IRA  achieves  emissions  reductions  almost 
entirely by trying to lower the cost of clean energy and the cars and electric appliances that use it.  

The U.S. Department of Energy51 projects that the IRA will save businesses 13-15% on their electricity 
costs between 2022 and 2030. With U.S. energy bills already significantly lower than those in many 
parts  of  Europe,  the  IRA  may  give  American  manufacturers  a  cost-competitive  advantage,  while 
further enticing European companies to transfer production to the United States.  

In light of this challenge, the Franco-German Council of Economic Experts52 has concluded: 'Rather 
than  the  IRA  itself,  it  is  the  existing  and  sizeable  energy  price  differentials  that  are  likely  to 

48  https://www.ft.com/content/7d80627e-c6a6-4216-b4c8-275f089fc447. 
49  https://techcrunch.com/2023/08/16/tracking-the-ev-battery-factory-construction-boom-across-north-america/. 
50   https://www.cleaninvestmentmonitor.org/. 
51  https://thehill.com/policy/energy-environment/4154516-exclusive-federal-analysis-says-ira-infrastructure-law-

could-save-customers-billions-on-energy-bills/. 

52  https://www.sachverstaendigenrat-wirtschaft.de/fileadmin/dateiablage/Publikationen/FGCEE/CAE-

SVG_Joint_statement_IRA_2309.pdf.  

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substantially  impact  Europe's  attractiveness  and  the  competitiveness  of  its  industries.  Therefore, 
concerted endeavours to reduce energy prices within Europe are of paramount importance.' 

But even this competitive advantage derived from the IRA needs to be seen in perspective. At about 
$369  billion  over  10  years,  the  IRA  is  only  slightly  larger  than  a  quarter  of  the  accumulated  cost 
savings53 for U.S. industry from the American shale gas boom from 2008 to 2017, which did more 
than the IRA is likely to do to give U.S. manufacturing a competitive edge.  

The political dynamics surrounding the American auto industry were a major motivating factor in 
the Biden Administration's push for the IRA. Far more Americans are employed making auto parts 
and repairing cars than in assembling vehicles. The needed transition from an auto industry based 
on gas-fuelled vehicles to one dominated by electric vehicles, which need far fewer parts and far 
less repair, threatens hundreds of thousands of jobs. And many of these jobs are in states that have 
already  suffered  severe  job  losses  thanks  to  greater  competition  from  China  across  a  range  of 
manufacturing  sectors.  Moreover,  auto-producing  areas  such  as  Ohio  and  Michigan  are  major 
political  swing  states  that  could  determine  the  outcome  of  the  2024  presidential  election. 
Subsidizing the EV transition made good political sense for a President facing re-election in 2024.  

Whether  the  IRA  will  revive  American manufacturing  or  simply  slow its  decline  remains  an open 
question,  however.  Stronger  demand  for  electric  vehicle  batteries  and  energy  battery  storage 
systems is expected to result in rapid employment growth in battery production, according to54 the 
U.S. Department of Labor. But it projects that the total manufacturing sector will still 'lose 113,400 
jobs  over  the  2022−32  decade  as  manufacturers  continue  to  automate  processes  to  improve 
productivity and reduce defects.'  

The  need  to  address  climate  change  and  the  domestic  political  interest  in  more  government 
spending and manufacturing job creation have both existed for some time. What finally coalesced 
support for and gave impetus to the IRA was Washington's recognition of the China challenge. As 
U.S.-China tensions over Taiwan have worsened, and with the example of the disruptive effect of 
Europe's energy dependence on Russia as a reminder, the Biden Administration wanted to avoid 
the supply shocks the U.S. experienced in the 1970s, when tensions in the Middle East led to backups 
at gas pumps, rationing, inflation, recession, and Ronald Reagan's landslide election in 1980.  

A perceived need to limit U.S. dependence on Chinese clean energy technologies, such as batteries 
and electric vehicles, and semiconductors gave the Biden Administration a strong rationale for the 
IRA (and the Chips and Science Act). 

The U.S. relies on China for 35%55 of its large capacity batteries that are used in electric vehicles and 
stationary electrical storage. And, it has become deeply reliant on China for a range of materials used 
in  battery  production,  including  nickel  oxides  and  hydroxides  (China  provides  87%  of  American 
imports), unwrought manganese (83% of imports), and different forms of natural graphite, for which 
U.S.  reliance  on  Chinese  imports  ranges  from  54%  to  79%. Moreover,  America  is  also  becoming 
increasingly reliant on China for imports of neodymium magnets—a critical component for wind 
turbines—and nuclear power. 

In fact, both sides of the Atlantic are playing catch-up with China in a variety of renewable energy 
technologies. By 2030, China's planned battery-making capacity will be at least 2-4 times forecast 

53  https://www.sachverstaendigenrat-wirtschaft.de/fileadmin/dateiablage/Publikationen/FGCEE/CAE-

SVG_Joint_statement_IRA_2309.pdf. 

54   https://www.bls.gov/news.release/pdf/ecopro.pdf. 
55  https://www.atlanticcouncil.org/blogs/new-atlanticist/is-friendshoring-really-working/. 

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EU-US relations after the Inflation Reduction Act, and the challenges ahead 

demand. Experience with steel and other products suggests Chinese batteries and EVs will rapidly 
flood the global market at prices lower than the cost of production in Europe or the United States. 
This will call into question both the American and European ability to compete in the future. 

But Washington's rationale for the IRA cannot be divorced from a broader, growing share of U.S. 
manufacturing imports that either were made in China or contain a large share of Chinese-made 
parts. In 1995, 6% of U.S. manufactured imports came from China and 6% of manufacturing imports 
came with Chinese-made parts. By 2018, 65% of American manufacturing imports were Chinese-
made and 94% of all such imports had Chinese parts. This growing Chinese penetration of the U.S. 
manufacturing sector was accompanied by a sharp decline in manufacturing employment56 and a 
decline in average incomes.  

This growing dependence shaped a decisive political context for Administration and Congressional 
backing  for  the  legislation.  And  while  trade  experts  and  European  officials  might  dismiss  such 
sentiment as ill-informed nationalism or protectionism, Americans fear the destabilizing potential 
of such dependence on a geo-political competitor. 

Nevertheless, warned Richard Baldwin57 of the IMD Business School, 'disengaging with China will be 
much, much harder and much slower than many people think, and may be impossible.' 

4.3. The Chips and Science Act 

Prior  to  enactment  of  the  IRA,  the  United  States  Congress  passed  the  CHIPS  and  Science  Act  in 
August 2022. The principal goal was to spur investments in domestic semiconductor manufacturing 
capacity. It also hoped to jump-start research and development and commercialization of leading-
edge  technologies,  such  as  quantum  computing,  AI,  and  nanotechnology.  Over  a  decade,  it 
authorizes the expenditure of $278.2 billion58. The vast majority of this new spending is for scientific 
R&D  and  commercialization,  with  $52.7  billion  for  semiconductor  manufacturing,  R&D,  and 
workforce development, and another $24 billion worth of tax credits for chip production. 

The motivation for the CHIPS Act is clear. Covid-driven shortages of semiconductors reduced U.S. 
economic growth by nearly a quarter of a trillion dollars59 in 2021. Demand for chips, especially high-
end  chips,  will  grow  at  about  10%60  per  year  worldwide  in  the  coming  years.  In  the  face  of  this 
demand, while the U.S. is still a dominant player in the design of computer chips, accounting for 
46%  of  the  market  as  of  2020,  American  firms  make  just  12%  of  the  world's  semiconductors, 
compared with 37% in 1990. For the most part, semiconductors are largely being made elsewhere, 
in Taiwan, Korea, and China, with Taiwan currently cornering the market for high performance chips. 

The limitations of Washington's aid for its computer chip companies and American semiconductor 
ambitions  need  to  be  seen  in  perspective. When  4-nanometer61  production  begins  at  Taiwanese 
company TSMC's first plant in Arizona in 2026, TSMC will be mass-producing 2-nanometers at the 
Hsinchu Science Park outside Taipei. And U.S. chip investment pales in comparison to what other 

56   https://cepr.org/publications/dp16688. 
57  https://www.brookings.edu/articles/hidden-exposure-measuring-us-supply-chain-reliance/.  
58   https://www.mckinsey.com/industries/public-sector/our-insights/the-chips-and-science-act-heres-whats-in-it. 
59   https://www.mckinsey.com/industries/public-sector/our-insights/the-chips-and-science-act-heres-whats-in-it. 
60   https://www.alliedmarketresearch.com/computer-microchips-market-A31524.  
61  https://www.euractiv.com/section/industrial-strategy/opinion/tsmc-in-germany-the-successes-and-limits-of-the-

eu-chips-act/.  

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nations plan to spend on semiconductor manufacturing. Taiwan is now spending $120 billion62 and 
has 20 new plants under construction or completed. Korea has a $452 billion investment toward its 
own 'K semiconductor belt strategy' to compete with Chinese and U.S. investments. Even India has 
invested $30 billion to bolster its domestic semiconductor and technology supply chains. 

'The Chips Act is at once both a geoeconomic and a geostrategic initiative,' write Tyson and Zysman. 
'It is a response to substantive state actions abroad that have made the U.S. reliant on semiconductor 
fabrication by a few major suppliers headquartered in Asia.' 

Notably, however, on the one-year anniversary of passage of the CHIPS Act, the President, the Vice-
President, members of the Biden Administration cabinet and Democratic members of Congress all 
released statements lauding both the legislation's passage, the money disbursed, and the private 
investment  committed  since  passage.  Absent  from  these  statements  was  any  mention  of  the 
national security rationale for the legislation or any acknowledgement of the impact the legislation 
has  had  on  foreign  companies  or  relations  with  allies.  Such  statements  only  underscored  the 
political motivation for the subsidies, notwithstanding any security of supply impetus. 

5. The European response 

The European reaction to the IRA has been heated. 'You're hurting my country,' French President 
Emmanuel Macron63 told U.S. Senator Manchin in January 2023. 

'The  [Americans]  want  to  have  the  semiconductors,  they  want  the  solar  industry,  they  want  the 
hydrogen  industry,  they  want  the  electrolysers,'  complained  Robert  Habeck64,  Germany's  vice-
chancellor and economics minister. 'If we don't keep up, they'll have them [the key industries] and 
we won't. That's the brutal reality.' 

'Many of IRA policies that take a "America first" attitude will hurt competition and EU firms,' agreed 
Fredrik Erixon65, director of the European Centre for International Political Economy, 'and especially 
so in sectors where the EU is competitive, not least green industries and cleantech.' 

'Without  doubt,'  concludes  a  study66  by  Allianz,  'the  U.S.  has  become  a  more  attractive  place  to 
invest in green technologies. This presents a lot to fear for Europe, which tends to see itself as the 
vanguard of green industries. Adding insult to injury: Just at the moment when the IRA became law 
in  the  U.S.,  Europe  suffered  a  severe  blow  as  an  industry  location  because  of  the  energy  crisis 
triggered by the war in Ukraine.' For example, wholesale gas prices in Germany are roughly triple 
where they were before the Ukraine crisis, while U.S.67 prices are a fifth of those in Europe.  

Europe's worst fears about the impact of the IRA, coupled with higher energy costs, has been borne 
out by corporate investment decisions.  

62  https://cdn.cfr.org/sites/default/files/report_pdf/Rethinking%20International%20Rules%20on%20Subsidies_0.pdf. 
63   https://www.politico.com/news/2023/01/19/joe-manchin-davos-inflation-reduction-act-europe-00078510. 
64   https://www.ft.com/content/4bc03d4b-6984-4b24-935d-6181253ee1e0. 
65   https://www.cnbc.com/2022/11/09/europe-shows-a-united-front-against-bidens-inflation-reduction-act.html. 
66   https://www.allianz.com/en/economic_research/publications/specials_fmo/inflation-reduction-act.html. 
67  https://www.statista.com/statistics/673333/monthly-prices-for-natural-gas-in-the-united-states-and-europe/. 

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EU-US relations after the Inflation Reduction Act, and the challenges ahead 

'I know French and German businesses that are deciding on investments in the U.S., when they tell 
us they would have done them in France or Germany,' said French Energy Minister Agnes Pannier-
Runacher.68  

In the wake of the IRA, Volkswagen announced plans69 to build a $2 billion factory in South Carolina. 
BMW is building out a battery assembly facility in Woodruff, South Carolina and has invested funds 
in a battery cell plant in Florence, South Carolina to produce BMW's new sixth-generation round 
lithium-ion battery cells for its Spartanburg70 South Carolina-built EVs. Mercedes-Benz has opened a 
battery plant at its existing manufacturing facility in Alabama, which is its production site for the 
automaker's fully electric EQS SUV.  

'The US Inflation Reduction Act has revived Europe's deep-seated fears of de-industrialisation and 
of missing out on the growth opportunities of cleantech manufacturing,' write Simone Tagliapietra 
and Reinhilde Veugelers in a Bruegel study 71.  

'Where will all the future technologies — hydrogen, batteries, semiconductors — be based? That's 
what's  being  decided  right  now,'  said  Jens  Südekum72,  professor  of  international  economics  at 
Düsseldorf's Heinrich Heine University. 'The U.S. is taking the initiative on that and Europe has no 
choice but to respond. It can't just do nothing.' 

At  the  same  time,  Europe  faces  its  own  resource  challenges  meeting  its  needs  for  the  energy 
transition. European demand for lithium-ion batteries, and fuel cells necessary for electric vehicles, 
for example, is predicted to grow by up to 30-fold73 in the coming years. The EU relies heavily on 
China for both these cells and batteries. 'Without implementing strong measures,' advised a paper74 
prepared  by  the  Spanish  presidency  of  the  EU,  'the  European  energy  ecosystem  could  have  a 
dependency on China by 2030 of a different nature, but with a similar severity, from the one it had 
on Russia before the invasion of Ukraine.' 

Europe's reaction to the IRA is not simply a knee-jerk response to America's aggressive industrial 
policy. Europeans face economic challenges of their own. Economic growth is slowing—the IMF75 
expects the euro area to grow by only 0.9% in 2023 and the German economy, the lynchpin of the 
European economy, to shrink by 0.3%. Meanwhile EU unemployment is at 6.6%, and the European 
Central Bank assumes it will remain at that level for the foreseeable future.  

'One sometimes hears about 'creeping deindustrialization — well, it's not just creeping anymore,' 
said  Hans-Jürgen  Völz76,  chief  economist  at  BVMW,  an  association 
for 
Germany's Mittelstand.  

lobbies 

that 

68  https://www.ft.com/content/91d1242d-514a-4530-a4ec-ec7de862db3d.  
69  https://www.reuters.com/business/autos-transportation/volkswagens-scout-says-build-2-bln-manufacturing-plant-

south-carolina-2023-03-03/.  

70   https://techcrunch.com/2022/10/19/bmw-to-invest-1-7b-to-build-evs-in-south-carolina/.  
71   https://www.bruegel.org/policy-brief/rebooting-european-unions-net-zero-industry-act.  
72   https://www.ft.com/content/4bc03d4b-6984-4b24-935d-6181253ee1e0.  
73  https://www.euractiv.com/section/china/news/leak-eu-may-become-as-hooked-on-china-batteries-as-it-was-on-

russian-energy/.  

74  https://www.euractiv.com/section/china/news/leak-eu-may-become-as-hooked-on-china-batteries-as-it-was-on-

russian-energy/.  

75   https://www.imf.org/en/Publications/WEO/Issues/2023/07/10/world-economic-outlook-update-july-2023.  
76   https://www.politico.eu/article/rust-belt-on-the-rhine-the-deindustrialization-of-germany/.  

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In the face of this challenge, there has been a revival of some Europeans' belief in the efficacy of 
state  intervention  in  the  economy,  especially  among  the  French  with  their  longstanding  faith  in 
dirigiste economic policy going back to Jean-Baptiste Colbert under the rule of Louis XIV.  

French President Emmanuel Macron77 has called for more investment in the industrial transition: 'If 
I compare us Europeans to the other big actors, we are the ones who have regulated the most, […], 
but we sometimes invest less than those who regulate less. We have to invest more to accompany 
our industries and households.'  

And it is not just the French who see a need for more European investment. It has become quite 
clear, noted78 János Allenbach-Ammann, the economy editor at EURACTIV: 'You cannot regulate79 
your way towards an industrial transition without spending major money.' 

While the EU should not copy the IRA's production subsidies, Bruegel80 contends 'there is probably 
a  case  for  more  EU  subsidies  for  green  R&D,  innovation  and  early-stage  deployment  of  next-
generation  green  technologies,  in  which  EU  companies  could  build  and  maintain  globally 
competitive  positions.  Likewise,  there  is  likely  a  case  for  building  or  maintaining  within  the  EU 
minimum levels of capacity in certain critical areas for the green transition, to make the EU more 
resilient to natural or political shocks.' 

Such calls are echoed by others.  

'Without greater public investment,' write81 Sabine Nallinger, managing director of Stiftung Klima 
Wirtschaft,  an  alliance  of  German  CEOs,  and  Thomas  Pellerin-Carlin  of  the  French  Institute  for 
Climate  Economics  (I4CE),  'the  EU  will  fall  behind  in  the  global  cleantech  race  and  see  […]  the 
competitiveness of its historic industries falter.' 

So,  after  loudly  complaining  about  the  IRA,  its  subsidies  and  America's  newfound  embrace  of 
industrial  policy,  Europe  has  joined  the  subsidy  race,  albeit  slowly  and  without  America's  deep 
pockets.  

In March 2023, the European Commission set a goal that 40% of European clean energy technology 
will be made in the EU by 2030. It also set a similar target for the critical minerals needed for EV 
battery production. Brussels is also waiving EU state aid restrictions meant to prevent subsidy races 
and will permit nations to adopt 'matching aid' to compete with countries outside the EU. 

'From wind to steel, from batteries to electric vehicles, our ambition is crystal clear: The future of our 
clean tech industry has to be made in Europe,' President Ursula von der Leyen82 said in her State of 
the Union address in September 2023. 

In February 2023, the European Commission put forward a 'Green Deal Industrial Plan83' with the 
aim  of  enhancing  the  competitiveness  of  European  industry.  The  ambition  is  to  simplify  the 
regulation of production of batteries, windmills, solar panels and other technologies needed for a 

77  https://www.euractiv.com/section/economy-jobs/news/putting-money-behind-the-eus-industrial-policy/.  
78  https://www.euractiv.com/section/economy-jobs/news/putting-money-behind-the-eus-industrial-policy/.  
79   https://www.euractiv.com/section/economy-jobs/news/of-regulatory-bonds-and-money-bombs/.  
80   https://www.bruegel.org/sites/default/files/2023-02/PB%2004%202023_0_1.pdf.  
81  https://www.euractiv.com/section/energy-environment/opinion/call-for-a-european-green-industrial-policy/.  
82   https://ec.europa.eu/commission/presscorner/detail/en/speech_23_4426.  
83   https://ec.europa.eu/commission/presscorner/detail/en/ip_23_510.  

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EU-US relations after the Inflation Reduction Act, and the challenges ahead 

successful  energy  transition.  State  aid  rules  were  also  temporarily  relaxed,  'subject  to  conditions 
necessary to limit distortions to the Single Market.'  

To that end, in March 2023 the Commission put forward the Net Zero Industry Act (NZIA) and the 
Critical Raw Materials Act (CRM). The NZIA creates a list of strategic industries and sets a production 
target  for  those  domestic  industries  of  40%  of  EU  needs.  And,  among  other  things,  it  suggests 
policies to support those projects, such as accelerated permitting.  

That same month, the Commission adopted the Temporary Crisis and Transition Framework, which 
gives EU members more leeway in supporting their own industries in boosting and retaining clean 
tech investments in Europe. 

In support of these efforts, the EU has earmarked, among other funding, around €510 billion, largely 
from  the  NextGenerationEU  program  and  the  REPowerEU  fund.  In  addition,  the  Recovery  and 
Resilience Fund (RRF) allocates roughly €720 billion in grants and loans to the member states, with 
37% explicitly designated to facilitate the green transition.  

Thanks to these various funding streams, at 0.5% of GDP, EU financial backing for renewable energy 
is twice that provided by the IRA84. Moreover, EU support tends to be focused more on upstream 
activities than are the IRA's investment and production subsidies, with Brussels supporting early-
stage development, not specific projects. And, unlike the IRA, the NZIA's production targets only 
apply when a third country without a free trade agreement with the EU becomes a near-monopoly 
supplier for the EU. Thus, the NZIA is less protectionist than the IRA, while still helping diversity EU 
suppliers of strategic industries. 

And not to be outdone by the U.S. CHIPS and Science Act, Europe has its own Chips Act. The goal is 
to increase domestic chip production, doubling the EU's global share from the current 9% to 20% 
by 2030. 

The Chips for Europe Initiative85 will combine investments from Brussels, member states and the 
private  sector.  The  Chips  Act  also  authorizes  exemptions  to  the  prohibition  of  state  aid  for 
semiconductor  projects  if  companies  and  governments  demonstrate  that  a  project  is  'first-of-a-
kind'. 

'Europe  is  taking  its  destiny  back  into  its  own  hands,'  European  Commissioner  Thierry  Breton 
enthused. 

To that end, Germany plans to invest some €4 billion86 in 31 projects. 'The Federal Government, the 
federal states and the EU must therefore pull together on microelectronics. This is the only way we 
can position ourselves confidently and as independently as possible from imports and lead the way 
in  this  technology  of  the  future,'  said87  Winfried  Kretschmann,  Minister-President  of  Baden-
Württemberg. 

And there is evidence that these investment incentives are working. In April 2023, Spain announced 
a  €450  million  subsidy  for  ArcelorMittal  to  produce  steel  using  hydrogen.  France  has  offered 
€2.1 billion in subsidies for a floating offshore wind farm, and Paris has announced €2.9 billion of 

84   https://www.cae-eco.fr/staticfiles/pdf/cae-svg-joint-statement-ira-230921.pdf.  
85   https://www.european-chips-act.com/.  
86  https://www.euractiv.com/section/industrial-strategy/news/semiconductors-germany-to-receive-e4bn-from-eu-

programme/.  

87  https://www.euractiv.com/section/industrial-strategy/news/semiconductors-germany-to-receive-e4bn-from-eu-

programme/.  

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support88 for chipmakers GlobalFoundries Inc. and STMicroelectronics. In June 2023, Intel unveiled 
a €30 billion investment plan in Germany in an effort to 'create a first-of-its-kind, leading-edge end-
to-end semiconductor manufacturing value chain', according to its press release89. In August 2023, 
Taiwanese  semiconductor  giant  TSMC  announced90 it  will  invest  over  €10  billion  in  Germany,  to 
both build and operate a microchips plant, in return for €5 billion in subsidies. And Italy will provide 
a  €292.5  million  subsidy  for  the  construction  of  an  STMicroelectronics  silicon  carbide  substrate 
manufacturing plant in Sicily. 

These investments are unlikely to have taken place without the EU Chips Act. Unfortunately, new 
doubts have been raised about some German chip subsidies, at least, after a judgement91 by the 
German constitutional court that the subsidies exceed the German debt brake.  

But  Nallinger  and  Pellerin-Carlin  believe  what  has  been  done  is  not  enough.  'Attempts  at  an  EU 
response, namely the Green Deal Industrial Plan92, have so far proved insufficient to face the scale 
of  the  competitiveness  challenge  Europe  faces  […].  What  is  required  is  […].  First,  creating  an 
industrial policy that can put the Green Deal to work […]. Climate innovation should be supported 
to  scale  and  reach  the  market  quickly,  supply  chains  should  be  made  more  resilient  to  secure 
European energy security, and existing industries should be supported to decarbonize to ensure an 
economy-wide  transformation.  Second,  find  a  solution  to  close  the  climate  investment  gap, 
estimated  at €360bn  a  year93  […].  European  public  investment  options  currently  remain  too 
complex, too small – or both. For a truly European response, national budgets are not sufficient. A 
common  industrial  policy  must  create  the  space  for  more  European  funds  to  be  spent  quickly, 
simply, and strategically. In the short term, the best option is to increase public funding dedicated 
to the EU Innovation Fund. Third, a more effective European governance structure is required if the 
EU is to match American and Chinese peer institutions' ability to act […]. This will not be achieved 
overnight. Member States must empower the EU's institutions to take a more entrepreneurial, less 
risk-averse role in investing and transforming Europe's clean industrial sector.' 

The  NZIA  is  also  too  narrow,  argue  Simone  Tagliapietra,  Reinhilde  Veugelers,  and  Jeromin 
Zettelmeyer in a study94 for Bruegel, 'in that it does not tackle the central problem plaguing EU green 
industrial  policymaking:  lack  of  coordination.  Europe  has  a  multitude  of  green  industrial  policy 
initiatives at EU level, adding to the multitude of policy initiatives at national and regional levels. 
These  initiatives  are  generally  not  coordinated  and  may  even  conflict.  Uncoordinated  industrial 
policies fail to capitalise on EU economies and synergies scale and could undermine the level playing 
field  across  Europe.  While  the  NZIA  proposes  a  Net  Zero  Europe  Platform  to  coordinate  the 
preferential  treatment  of  projects  selected,  this  does  little  to  address  the  fragmented  state  of 
cleantech industrial policymaking in the EU and risks worsening this fragmentation further.' 

88  https://www.bloomberg.com/news/features/2023-07-25/global-subsidy-wars-force-us-allies-to-pay-up-for-chips-

evs. 

89  https://www.intel.com/content/www/us/en/newsroom/news/intel-german-government-agree-magdeburg.html

#gs.1nkhkb.  

90   https://www.euractiv.com/section/economy-jobs/news/tsmc-to-invest-e10bn-in-microchip-plant-in-germany/.  
91   https://www.ft.com/content/e36830bf-0fb4-4878-944c-0bf9088478d2.  
92   https://ec.europa.eu/commission/presscorner/detail/en/ip_23_510.  
93   https://www.eib.org/attachments/lucalli/20230024_economic_investment_report_2022_2023_key_findings_

en.pdf.  

94   https://www.bruegel.org/policy-brief/rebooting-european-unions-net-zero-industry-act. 

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EU-US relations after the Inflation Reduction Act, and the challenges ahead 

Jonathan Barth95, policy director at the economic think tank ZOE Institute, generally agreed with this 
sentiment.  'Without  proper  funding,  the  potential  of  industrial  policy  is  limited,'  he  said.  'In 
comparison  to  the  U.S.,  what  the  EU  lacks  right  now  is  a  bigger  vision.  We  need  to  move  from 
national to European level thinking and to re-imagine European industry across the continent.' 

Such  sentiments  have  been  echoed  by  some  European  politicians.  'I  think  we  are  getting  to  a 
situation where we really have to think about how serious our ambition for net-zero technologies 
is,' observed Christian Ehler96, a member of the European Parliament. 'The Inflation Reduction Act is 
a systematic challenge for the Green Deal. It's an alternative to the Green Deal because we never 
delivered on the deal part of the Green Deal. We are regulating our industry. We are co-creating the 
regulation […]. We are not investing to ensure in the business case for the transition. That's what 
the  Inflation  Reduction  Act  is  doing.  The  Inflation  Reduction  Act  creates  a  business  case  for  a 
sustainable transition. It offers an industry a deal, and our only possible reaction to it is to become 
furious about the deal part of the Green Deal.' 

Paolo Gentiloni, the European Commissioner for Economy, claims that the bloc had enough money 
on the table for the immediate future. In fact, in late 2023 the Commission offered battery makers in 
the EU €3 billion in subsidies. But Brussels will have to boost its financial commitment after the 2024 
European Parliament elections, he argued, potentially via the previously mooted idea of a European 
Sovereignty  Fund. How  this  fund  will  be  financed  remains  a  subject  of  debate.  Options  include 
money in the EU's Next Generation EU fund, or from the EU Emissions Trading System, the CBAM, or 
the new minimum tax on multinational companies' profits. 

In the interim, given limited EU funding and the desire of some national capitals with a history of 
supporting their industry and the resources to do so, the European Commission has relaxed state 
aid rules and approved €742 billion in such aid between February 2022 and September 2023. The 
only  requirement  is  that  such  measures  are  introduced  in  response  to  those  other  countries' 
subsidies. 

Approvals cover a range of initiatives at the national level. Germany wants97 to offer tax credits for 
solar, wind and grid investments. In September 2023, French electric battery maker Verkor secured98 
€2 billion in financing for a new plant, €650 million of which comes from government subsidies. In 
addition, Paris hopes to offer consumers incentives worth between €5,000 and €7,000 for new EVs 
that  have  been  assembled  in  an  environmentally  friendly  way. French  finance  minister  Bruno  Le 
Maire99 observed: 'It's not our role to use public funds to finance the development of factories in 
Asia. These measures will lead us to reserve that bonus to cars made in Europe'  

It's 'not a bad thing in itself' that governments are directing all this support to the green transition, 
commented  former  European  Commissioner  for  Trade  Malmström100.  The  risk,  she  said,  is  that 
'subsidies from one country hurt other countries.' 

95   https://www.euractiv.com/section/economy-jobs/news/putting-money-behind-the-eus-industrial-policy/.  
96   https://www.europarl.europa.eu/doceo/document/CRE-9-2022-12-14-INT-3-081-0000_EN.html.  
97  https://www.bloomberg.com/news/articles/2023-02-21/germany-wants-tax-credits-for-green-investments-to-

counter-ira.  

98  https://www.euractiv.com/section/economy-jobs/news/french-electric-car-battery-start-up-secures-historic-e2-bln-

financing/.  

99   https://www.ft.com/content/5cc8197f-cccd-4e61-ac2d-349c95bcc877.  
100  https://www.bloomberg.com/news/features/2023-07-25/global-subsidy-wars-force-us-allies-to-pay-up-for-chips-

evs.  

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'There's a profound divide between large countries and small countries in the EU,' warned former 
Italian Prime Minister Enrico Letta101. 'I don't think we can leave all of this just at the national level.'  

And,  writes  Mathieu  Duchâtel102,  'the  Commission  [has]  authorized  precisely  what  European 
competition law sought to prevent by prohibiting industrial subsidies: concentration in countries 
with sufficient budgetary leeway to support large-scale projects.' 

'There is a fundamental problem at the heart of this,' said Fabian Zuleeg103, chief executive of the 
European Policy Centre think-tank in Brussels, 'if we continue to do industrial policy at the national 
level we are going to risk the single market in the end.'  

'The US is one year ahead – but the EU has the power to catch up,' Bernd Weber, a German EPP 
member  of  the  European  Parliament,  and  Markus  Pieper,  CEO  of  the  think  tank  EPICO 
KlimaInnovation, wrote  in  Euractiv104.  'The  EU must  rev  up  its  competitiveness with  the Net Zero 
Industry Act (NZIA) […] while maintaining the driving seat of global decarbonisation we achieved 
thanks to the European Green Deal.' But, in an implicit warning about the transatlantic effects of the 
IRA,  they  argue:  'We  should  avoid  by  all means  a  clean  tech  race  from  becoming  a  subsidy  race. 
Unleashing broad subsidy spirals and protectionist measures in Europe in response to the IRA would 
have questionable effects on competitiveness in Europe as a business location. Subsidies carry high 
risks for trade policy. They can unexpectedly shift the paradigm to a race to the bottom, harming 
both the European and the global green transition.' 

5.1. The debate over subsidies 

The IRA, the CHIPS Act and Europe's multifaceted response have renewed an old debate on both 
sides of the Atlantic on the philosophical and practical aspects of industrial policy.  

In 1999, before the election of Joe Biden as American president, the United States devoted 0.4%105 
of its GDP to business in the form of direct subsidies, tax incentives, below market credit and state 
investment funds. German and France provided 0.5%, roughly comparable.  

But  China  committed  1.5%  of  its  GDP  to  government-funded  industrial  policy.  This  three-fold 
differential  in  subsidization  has  fuelled  much  of  the  support  for  transatlantic  industrial  policy, 
although this enthusiasm may be misplaced. 

A study106 by Lee Branstetter and Guangwei Lee concludes that, while Chinese firms receiving 'Made 
in  China  2025'  aid  exhibit  an  increase  in  R&D  intensity,  'there  is  little  statistical  evidence  of 
productivity improvement or increases in patenting or profitability […]. If Western countries view 
the 'Made in China 2025' initiative as a threat to the competitive positions of their firms, they may 
also begin to introduce more industrial policies as a response […]. The proliferation of these policies 

101  https://www.euractiv.com/section/economy-jobs/news/european-industrial-policy-and-capital-markets-union-

enrico-lettas-plan-for-the-single-market/.  

102  https://www.euractiv.com/section/industrial-strategy/opinion/tsmc-in-germany-the-successes-and-limits-of-the-

eu-chips-act/.  

103   https://www.ft.com/content/4bc03d4b-6984-4b24-935d-6181253ee1e0.  
104  https://www.euractiv.com/section/economy-jobs/opinion/one-year-on-europe-is-still-missing-a-business-case-for-

industrial-decarbonisation/.  

105  https://www.bloomberg.com/news/features/2023-07-25/global-subsidy-wars-force-us-allies-to-pay-up-for-chips-

evs.  

106   https://cepr.org/voxeu/columns/actual-effect-chinas-made-china-2025-initiative-may-have-been-overestimated.  

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EU-US relations after the Inflation Reduction Act, and the challenges ahead 

could take on the dynamics of an arms race and further undermine the rules-based international 
trading system and the political support for it.' 

Conservative,  free  market-oriented  American  economists  also  predictably  criticize  Washington's 
newfound love affair with industrial policy. 'Why should we expect the government to do a good 
job of picking winners and losers107, or to allocate scarce resources better than the market?,' asked 
Michael Strain108 of the American Enterprise Institute. 'In the real world, government planners simply 
lack  the  control  to  make  an  industrial  policy  succeed  over  the  long  term.  If  the  government 
intervenes in markets, how will it avoid mission creep, cronyism, and corruption?'  

'Bidenomics is much less a coherent approach to economic policy and much more a grab bag of 
subsidies designed to advance key interests of the Democratic Party coalition,' he concluded. 

Environmental subsidies can come at a high cost economically, if mixed with protectionist policies. 
'Such  trade  restrictions  cannot  possibly  enhance  global  welfare,'  writes  George  Washington 
University law professor Steve Charnovitz 109. 

Such criticism is borne out by American experience with past semiconductor industrial policy. The 
George W. Bush Administration created Sematech, to bolster the industry. The effort temporarily 
helped boost employment and exports, but those both faded once the program ended.  

IRA. 

Nevertheless,  some  conservatives,  such  as  Strain,  do  not  totally  discount  the  industrial  policy 
rationale  behind  the 
'Operation  Warp  Speed  (which  accelerated  COVID-19  vaccine 
development and deployment) and the Defense  Advanced  Research Projects Agency 110 are two 
good examples of the government successfully orienting a specific industry toward specific goals,' 
he  wrote.  '"Specific"  is  the  keyword,  here.  Restoring  the  entire  manufacturing  sector  […]  to  an 
unspecified semblance of its former glory is too vague, too broad, and too ambitious an objective.'  

Strain  suggests  that  Washington  should:  'identify  a  narrow  set  of  specific  goods  that  genuinely 
warrant export and investment controls. Second, it should invest public funds in basic research and 
infrastructure.'  

And in what is music to European ears, he endorses a Carbon Border Adjustment Mechanism: 'Third, 
it should adopt a carbon tax to lower the relative price of green technology. That would accelerate 
technological development and allow the market to determine which technologies are the most 
promising.' 

Much  of  the  political  backlash  against  the  IRA  and  the  Chips  Act  is  based  on  the  fear  that  such 
American  industrial  policy  will  trigger  a  race  to  the  bottom  between  Europe,  Japan,  the  United 
States,  and  others.  'In  seeking  to  draw  industrial  jobs  to  the  United  States  alone,'  write111  David 
Kamin and Rebecca Kysar, former Biden Administration officials, in Foreign Affairs, 'the government 
may do more harm than good. And by concentrating solely on domestic production capacity, rather 
than  working  in  concert  with  allies  and  partners,  the  government  may  incur  significantly  higher 
costs. This in turn can reduce living standards for workers because they are consumers, too.' 

107   https://www.wsj.com/articles/elon-musk-tesla-buffalo-new-york-solar-plant-1b634b9e.  
108  https://www.aei.org/articles/plan-vs-no-plan-my-chat-with-economist-michael-strain-on-when-industrial-policy-

makes-sense-and-when-it-doesnt/.  

109   https://scholarship.law.gwu.edu/cgi/viewcontent.cgi?article=2341&context=faculty_publications.  
110   https://www.darpa.mil/.  
111   https://www.foreignaffairs.com/united-states/industrial-policy-china-perils.  

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And American economists are not the only critics of the IRA. It has also become a partisan issue in 
recent American politics. 

Republican Speaker of the U.S. House of Representatives Mike Johnson112 has been highly critical of 
the Inflation Reduction Act, complaining it created 'green energy slush funds.' 

And Republican candidates in the 2024 presidential election have used the IRA as a foil for a range 
of criticism of the Biden Administration and the Democrats. Opposing electric cars, one of the IRA's 
primary  beneficiaries—and  the  auto  industry's  consequent  shift  away  from  internal-combustion 
engines to battery power—enables Republican candidates to bundle their criticism of Democrats 
into  one  neat  rhetorical  flourish.  Attacking  EVs  enables  them  to  go  after  China,  the  dominant 
economic force in the battery industry. It also pleases Republican voters still hostile to the notion of 
climate change and to all things environmental and 'woke.' And such attacks allow them to attack 
government bureaucrats in Washington as being out of touch with 'real Americans.'  

Moreover,  by  making  the  energy  transition  a  'woke'  exercise,  it  allows  Republican  politicians  to 
evoke a halcyon past of muscle cars built by their fathers and grandfathers. This is the same past 
that Trump conjured up in his victorious 2016 presidential campaign, a nostalgia that continues to 
exert appeal for many American voters. In the 2024 presidential race, Trump113 has complained that 
EVs run out of power in 15 minutes, are bad for the environment, and would destroy the domestic 
auto  industry  within  a  few  years.  Gov.  Ron  DeSantis114  of  Florida,  another  Republican  candidate, 
promised to roll back EV subsidies to 'support Americans' right to drive the cars they want.' 

Yet European subsidy policies also come in for criticism. Experts argue that it is not just the U.S. that 
has forsaken a commitment to free trade and reduced government involvement in the economy. 
'European leaders  have  abandoned,  in  part  or  in whole,  the  economic  and  ideological  principles 
they  once  held  sacred,'  claimed115  Europeans  Matthias  Matthijs  and  Sophie  Meunier  in  Foreign 
Affairs. 

Europe should not be too quick to respond to IRA subsidies with subsidies of its own, warned the 
Centre  for  European  Reform116.  Supply  chains  are  shortening  as  technologies  mature,  and 
companies are expanding production nearer consumers to reduce shipping costs, as has happened 
in  the  past  with  the  auto  industry.  The  EU  should  be  cautious  about  directly  subsidizing  green 
production where demand is robust, and markets are rapidly maturing. 'A subsidies race may also 
distort the EU single market, weaken incentives to innovate, and create excess production capacity,' 
CER scholars John Springford and Sander Tordoir conclude. Moreover, 'a protectionist backlash from 
other trade partners could slow the green transition by driving up the prices of inputs that the EU 
needs in order to decarbonize.' Rather, CER proposes that the EU focus subsidies on sectors where 
short-term assistance is needed to help infant European industries, such as hydrogen, achieve scale, 
while it supports markets for goods, like wind turbines, in which a global oligopoly or duopoly is 
likely to arise, and in which a dependence on China would be risky. 

Some European economists argue that Europeans who worry about the IRA 'doth protest too much,' 
in  Shakespeare's  words.  'The  overall  funding  level  of  the  various  programs  the  EU  has  already 
initiated  to  meet  climate  targets  and  facilitate  the  green  transition  is  comparable  to  the  IRA,' 

112  https://www.politico.com/news/2023/10/25/new-house-speaker-mike-johnson-on-the-issues-00123627.  
113  https://www.nytimes.com/2023/10/05/us/politics/republican-trump-electric-vehicles.html.  
114   https://www.nytimes.com/2023/09/20/us/politics/desantis-climate-energy-biden.html.  
115  https://www.foreignaffairs.com/europe/european-union-geoeconomic-revolution.  
116   https://www.cer.eu/publications/archive/policy-brief/2023/europe-american-chinese-green-tech.  

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EU-US relations after the Inflation Reduction Act, and the challenges ahead 

concluded a joint report by the Franco-German Council of Economic Experts117. More specifically, as 
Bruegel118 has pointed out, the IRA subsidy is roughly $7,500 per car. EU support is about €6,000 per 
vehicle.  

Therefore, the French and German economists argue: 'the subsidies under the IRA are expected to 
exert  minimal  overall  macroeconomic  impact  on  both  the  U.S.  and  the  EU  […].  While  specific 
industries  may  have  greater  incentives  to  invest  in  the  U.S.  rather  than  the  EU  under  this  new 
framework,  a  closer  examination  at  the  sectoral  level  fails  to  yield  evidence  linking  the  IRA  to 
significant risks for the EU. In this context, a subsidy race should be avoided with the U.S. as well as 
within  the  EU.'  And  they  conclude  that  the  EU's  green  industrial  policy  is  'clearly  a  superior 
approach.' 

While  European  economists  downplay  a  transatlantic  subsidy  race,  they  do  worry  about  the  IRA 
triggering an intra-EU subsidy war.  

Overall,  nearly  half  (48.4%)119  of  all  EU-approved  direct  green  transition  grants,  tax  breaks, 
preferential  loans  or  guarantees  have  been  provided  by  Germany,  with  France  (22.6%)  and  Italy 
(7.8%) a distant second and third.  

These numbers highlight the resource disparity within the EU. 'The problem,' complained120 Zach 
Meyers, a CER research fellow, 'is that the relaxed state aid rules benefit countries like Germany that 
have low public debt and can afford to lavish subsidies. These subsidies risk wasting public funds 
[…] and distort competition by encouraging investment to move within the EU.' 

Such sentiment is echoed by Olivier Blanchard121, the former chief economist at the International 
Monetary Fund: 'I worry more and more about the reliance [on] green subsidies where carbon taxes 
should instead be used. On paper, largely equivalent. In practice, much larger distortions, and the 
likely source of strong trade tensions.' 

This  concern  is  also  shared  in  the  United  States.  'The  question,'  asked  two  former  Trump 
Administration  officials  in  Foreign  Affairs122,  'is  whether  this  new  industrial  policy  will  set  off  a 
counterproductive  subsidy  race  against  friends  and  allies  or  can  instead  be  implemented 
cooperatively  with  them  […].  Without  new  forms  of  cooperation  or  coordination  with  allies  and 
friends, these U.S. measures could create a damaging contest.' 

Moreover,  there  is  danger  for  others  posed  by  competing  American  and  European  industrial 
policies, as justified as they may be. 'Large-scale industrial subsidies seem to be a luxury that rich 
countries can indulge,' writes123 economist Douglas Irwin. 'Just because the U.S., China, and the EU 
can afford subsidies does not mean that others should follow.'  

117  https://www.sachverstaendigenrat-wirtschaft.de/en/start/news/the-inflation-reduction-act-how-should-the-eu-

react.html.  

118   https://www.bruegel.org/sites/default/files/2023-02/PB%2004%202023_0_1.pdf.  
119   https://www.euractiv.com/section/economy-jobs/news/analysis-eu-subsidy-race-is-on-and-germany-is-winning-it/.  
120   https://www.euractiv.com/section/economy-jobs/news/analysis-eu-subsidy-race-is-on-and-germany-is-winning-it/.  
121   https://twitter.com/ojblanchard1/status/1702582502148198845.  
122  https://www.foreignaffairs.com/united-states/industrial-policy-china-perils.  
123  https://www.imf.org/en/Publications/fandd/issues/2023/06/the-return-of-industrial-policy-douglas-irwin?utm_

medium=email&utm_source=govdelivery.  

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But  criticism  of  the  European  response  to  the  IRA  is  practical,  as  well  as  philosophical.  Mathieu 
Duchâtel124 of the Institut Montaigne in Paris, has warned that the aim of doubling the current EU 
semiconductor global market share to 20% by 2030 'would require hundreds of billions of euros,' a 
far cry from the €43 billion Brussels hope to mobilize in both EU, state aid and private investment.  

Duchâtel's view is largely shared by Meyers. The doubling of current EU production to 20% relies on 
the 'unrealistic assumption that global production everywhere else stood still […]. Announced chip-
making investments in Europe do not come close to delivering these ambitions,' he said125. 

Moreover,  announced  chip  investments  are  not  cutting-edge.  TSMC's  new  European  factory  will 
manufacture 14-28-nanometer chips for the automotive sector. But these are a far cry from the 4-5- 
nanometer chips being made in Taiwan.  

Despite objections to industrial policy on both sides of the Atlantic, there is a need to address the 
underlying reason for new subsidies. 'We in the EU have decided the green transition is the biggest 
issue we face, and rightfully so,' argues Jacob Kirkegaard126 of the Peterson Institute. 'We are in a 
planetary emergency. If we are going to hit our 2030 [climate] targets, rather than railing against 
unfair  subsidies,  whether  they  are  being  doled  out  in  the  U.S.,  China  or  Europe,  maybe  this  is  a 
moment to accept them as a necessary part of an urgent drive to lower greenhouse gas emissions.' 

And  this  can  only  be  accomplished  through  the  EU  and  U.S.  working  together,  writes  David 
Kleimann127:  'International  cooperation  will  be  essential  to  defuse  such  tensions  before  they 
escalate  and  impede  effective  climate  policy  rollouts,  and  before  they  lead  to  economic 
countermeasures that create new barriers to trade in environmental goods. This requires agreement 
on permissible environmental subsidy practices that minimize distortions.' 

The debate over industrial policy and the transatlantic dilemma it poses is best summed up by Tyson 
and  Zysman128:  'With  'industrial  policy'  resurgent,  several  questions  arise.  First,  are  the  goals  and 
policies  of  green  and  chips  industrial  policy  in  inherent  conflict  with  each  other?  Green  has  the 
objective of a universal energy transformation. That requires a broad alliance, including China, even 
with competitive conflicts in green production and employment. Chips requires a more restricted 
alliance of allies and friends that confront China, in which the underlying purposes of the allies are 
not  all  the  same.  China's  ambition  to  establish  leadership,  indeed  dominance,  in  crucial  digital 
technologies  is  both  a  security  and  an  economic  challenge.  For  the  United  States,  the  security 
challenge is primary. The choices are not straightforward for other countries, which are trying to 
ensure  in  the  name  of  'sovereignty'  their  capacities  for  sustained  autonomous  technology 
development,  to  keep  pace  with  U.S.  technology  firms,  while  maintaining  access  to  the  Chinese 
market for their exports. An overarching question is whether the U.S.-driven policy of containing 
China  in  the  semiconductor  industry  will  undermine  China's  willingness  to  participate  in  global 
solutions and trading rules in green technologies and products. If China is identified as an enemy in 
the semiconductor industry, will it be an ally in green industries?' 

124   https://www.euractiv.com/section/economy-jobs/news/behind-shiny-new-semiconductor-investments-the-eu-

chips-act-needs-more-work/.  

125   https://www.euractiv.com/section/economy-jobs/news/analysis-eu-subsidy-race-is-on-and-germany-is-winning-it/.  
126   https://www.ft.com/content/4bc03d4b-6984-4b24-935d-6181253ee1e0.  
127   https://www.bruegel.org/policy-brief/climate-versus-trade-reconciling-international-subsidy-rules-industrial.  
128   https://www.bruegel.org/sites/default/files/2023-08/Bruegel%20Blueprint%2033_chapter%205.pdf.  

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EU-US relations after the Inflation Reduction Act, and the challenges ahead 

5.2. Trade policy 

The revival of industrial policy is not the only challenge to economic orthodoxy posed by the IRA. 
Transatlantic trade disputes and the policy differences that underlie them have long been a major 
irritant in U.S.-EU relations. And recent trade actions by both the Trump and Biden Administrations 
have Washington and Brussels at loggerheads.  

The Biden Administration's 'new Washington consensus' 'turns 40-plus years of foreign economic 
policy on its head,' Jennifer Harris129, a former White House National Economic Council member who 
is  one  of  the  architects  of  this  policy,  argues  approvingly.  'In  particular,  it  ends  decades  of 
unquestioning deference to trade rules that, even still, have not contended with either the realities 
of climate change or the crush of nonmarket practices from China.' 

The perspective within the Biden administration, as articulated by Sullivan130, is that 'in the name of 
oversimplified market efficiency, entire supply chains of strategic goods—along with the industries 
and jobs that made them—moved overseas.'  

This perception is backed by long-time trade critics. 'What we're seeing here to some degree is elite 
opinion  and  policymaking  catching  up  to  where  the  public's  lived  experience  of  these  policies 
already was,' said Lori Wallach131, director of trade at the American Economic Liberties Project. 'There 
was an elite consensus […] and it was obviously bipartisan […] and there were all these grandiose 
promises of things that everyone would want, but the deliverables did not come forward.' 

Wariness of trade has been growing for some time, dating back to at least the 1980s and America's 
trade  wars  with  Japan.  And  for  years  Americans  have  consistently  believed132that  trade  destroys 
jobs, lowers wages and does not lower prices. Successive U.S. administrations have been tough on 
individual trade issues, culminating in the Trump Administration's tariffs on Chinese imports, duties 
on  EU  steel  and  aluminium,  turning  its  back  on  the  World  Trade  Organization  and  forced 
renegotiations  of  both  the  Korea  Free  Trade  Agreement  and  the  North  American  Free  Trade 
Agreement. 

'The [current] U.S. approach is not to enter into comprehensive trade agreements, such as an FTA, a 
new TPP, or even a broader and shallower RCEP, but to selectively address some positive elements 
to  facilitate  trade  that  it  favours,  and  to  discourage  trade  which  it  disfavours.  It  downplays  the 
possibility of obtaining enforceable global rules,' Alan Wolff133, the former American deputy director 
general  of  the  World  Trade  Organization,  has  observed.  'It  acts  inconsistently  with  existing 
obligations requiring non-discrimination or national treatment where industrial policy objectives or 
strategic security interests exist.' 

Specifically, recent U.S. trade policy has broken with the past in ways that indirectly impact Europe. 
The aforementioned steel and aluminium tariffs are a prime example. But the IRA EV subsidies also 
pose a trade challenge for European automakers.  

129  https://rooseveltinstitute.org/wp-content/uploads/2023/04/RI_Industrial-Policy-Synergies-Reflections-from-Biden-

Administration-Alumni_Report_202304.pdf.  

130   https://www.whitehouse.gov/briefing-room/speeches-remarks/2023/04/27/remarks-by-national-security-advisor-

jake-sullivan-on-renewing-american-economic-leadership-at-the-brookings-institution/.  
131   https://thehill.com/business/4222035-how-trump-and-biden-killed-the-free-trade-consensus/.  
132   https://www.pewresearch.org/global/2018/09/26/americans-like-many-in-other-advanced-economies-not-

convinced-of-trades-benefits/. 

133   https://www.reuters.com/article/us-usa-trade-wto/world-trade-system-needs-full-u-s-participation-wto-official-

idUSKBN2A922I. 

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EPRS | European Parliamentary Research Service 

The Trump Administration imposed a 27.5% tariff on Chinese-made cars (a 2.5% duty on all auto 
imports plus the 25% China import-specific one), effectively pricing those vehicles out of the U.S. 
market, even if they qualified for IRA subsidies, which they don't. And no US-manufactured EVs that 
include Chinese-made battery components are eligible for the full subsidies. Nor will EVs qualify for 
IRA incentives134 if they are made by companies with significant ties to the Chinese government or 
produced with a licensing agreement with a China-based or Beijing-controlled operator. 

At the same time, the EU tariff on Chinese-made cars is only 10% and Chinese EVs qualify for national 
subsidies. With this tariff and subsidy differential it is little wonder that Chinese automakers have 
lifted their share of the EU EV market from 0.5% in 2019 to 8.2%135 in the first half of 2023.  

This may be good for the environment, but 1.7% of the EU workforce is employed in the automotive 
sector,  nearly  three  times  that  of  the  U.S.  (0.6%),  and  the  auto  sector  accounts  for  10%136  of 
manufacturing  activity.  Moreover,  auto  exports  have  generated  an  EU  trade  surplus  of  between 
€70 billion and €110 billion every year over the past decade, the Allianz report points out. The closed 
American market and the diversion of Chinese cars to the lucrative EU market puts all of this at risk.  

The  EU's  FTAs  with  South  Korea,  Mexico  and  Canada  mean  imports  of  their  EVs  pay  no  duty. 
Moreover, the phase-in period for Japan's FTA with the EU will result in the 3.8% EU tariff on its EVs 
disappearing in 2026. While U.S.-based EV makers will benefit from both consumer subsidies and 
protection  from  imports,  European  EV  makers  will  face  growing  competition  from  Chinese, 
Japanese and Korean automakers.  

A recent study137 by Allianz projected that, if current trends hold, European carmakers and suppliers 
could see their profits fall by tens of billions of euros by 2030, with German companies bearing the 
brunt. 'There's a danger that Europe will end up being the loser in this shift,' Klaus Rosenfeld, the 
chief executive of Schaeffler, a car-parts maker, acknowledged138 recently, adding that his company 
was likely to build its next plants in the U.S.  

This  has  not  gone  unnoticed  in  Brussels.  European  Commission  President  von  der  Leyen  has 
launched a probe into Chinese auto subsidies, complaining that the global auto market is overrun 
with cheap Chinese vehicles with prices kept artificially low by huge state subsidies. 

But the new departure in U.S. trade policy is not limited to tariffs. The Biden Administration has also 
doubled  down  on  Buy  American  preferences139  that  have  long  applied  in  U.S.  government 
procurement at both the federal and state level. It has increased the domestic content requirements 
to 55%, and the margin of price preference for domestic end products and construction material 
from  6%  to  20%  for  large businesses,  and  from  12%  to  30%  for  small  businesses.  In  the  IRA,  Buy 
American  is  required  in  numerous  tax  incentives,  including  the  clean  energy  production  and 
investment tax credits, the advanced manufacturing production credit, and the clean vehicle credit. 
For example, for buyers to utilize the EV credit of up to $7,500, the EVs must be assembled in North 

134  https://www.ft.com/content/7d80627e-c6a6-4216-b4c8-275f089fc447.  
135   https://www.theguardian.com/business/2023/sep/04/china-europe-electric-car-market-uk-sales-mg-tesla.  
136   https://www.politico.eu/article/china-us-europe-electric-cars-miles-apart-the-us-and-europe-diverge-on-car-

threat/. 

137   https://www.allianz.com/en/economic_research/publications/specials_fmo/european-automotive-industry.html.  
138  https://www.welt.de/wirtschaft/plus243971997/Autozulieferer-Schaeffler-Unsere-naechsten-Werke-bauen-wir-in-

Amerika.html.  

139   https://www.wto.org/english/tratop_e/tpr_e/s434_sum_e.pdf.  

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EU-US relations after the Inflation Reduction Act, and the challenges ahead 

America.  And  in  his  2023  State  of  the  Union140  address  Biden  reiterated  his  commitment  to  Buy 
American, arguably a political gesture, but one with important economic implications. 

This has drawn a sharp rebuke from French President Macron141: 'We need a Buy European Act like 
the  Americans,'  he  told  TV  Channel  France  2.  German  Economy  Minister  Habeck142  has  also 
suggested that new state aid should be used for the 'procurement of local products.' But the EU's 
proposed Net Zero Industrial Act does not favour European manufacturers over foreign ones; rather, 
it  tries  to  limit  dependency  on  Chinese  green  technologies.  'This  is  a  fortunate  and  reasonable 
development,'  David  Kleimann143  of  Bruegel  told  EURACTIV,  because  it  prevents  the  EU  from 
breaching WTO agreements. 

In December 2022, Bernd Lange, chair of the European Parliament's trade committee, called for144 
an EU lawsuit against the US due to its discriminatory 'local content' rules under the IRA. But he later 
acknowledged that, given subsequent EU-U.S. negotiations, such action was not timely. Lange told 
Euractiv145:  'The IRA  legislation  is  still  not WTO-compliant.  However, we  are  currently in  intensive 
talks with the U.S., including on a raw materials agreement and resolving the conflict over illegal 
tariffs on steel and aluminium. During these negotiations, WTO procedures should not be pursued.' 

Monika Schnitzer146, head of the German Council of Economic Experts, agreed: 'Maybe it's not in the 
spirit of pure doctrine, but it's more helpful for us concretely if we get the U.S. to treat us as if we 
were American companies.'  

The White House has also issued an executive order limiting U.S. investment in China in areas that 
pose national security risks: such as semiconductors, quantum computing and artificial intelligence. 
The  idea  is  to  expand  on  existing  export  bans  to  China,  as  well  as  impose  limits  on  Chinese 
acquisition  of  American  technology,  by  restricting  how  U.S.  investors  put  capital  into  the  most 
strategic  sectors  of  the  Chinese  economy.  The  goal  is  to  prevent  venture  capitalists  and  private 
equity funds from transferring important intangible assets—patents, data, software, and other kinds 
of intellectual property—along with their investments. These affected U.S. investors are unlikely to 
stand idly by and watch European investors take advantage of the investment opportunities now 
denied Americans by Washington's action. Just as with export controls, there is likely to be Biden 
Administration  pressure  on  Brussels  to  similarly  impose  outbound  investment  limitations.  The 
European Commission147 is actively considering just such export screening. And German Economy 
Minister Habeck148 has urged EU countries to adopt such a screening scheme, which he said was 

140  https://www.whitehouse.gov/briefing-room/speeches-remarks/2023/02/07/remarks-of-president-joe-biden-state-

of-the-union-address-as-prepared-for-delivery/.  

141   https://www.politico.eu/article/emmanuel-macron-buy-european-act-cars-united-states-china/.  
142  https://www.handelsblatt.com/politik/international/interview-habeck-kuendigt-starke-antwort-europas-auf-us-

subventionen-an/28827452.html.  

143   https://www.euractiv.com/section/economy-jobs/news/green-industry-buy-less-chinese-instead-of-buy-european/.  
144   https://www.reuters.com/business/lawmaker-says-eu-should-complain-wto-over-us-inflation-reduction-act-2022-

12-04/.  

145   https://www.euractiv.com/section/politics/news/german-top-adviser-cautious-about-possible-wto-case-against-

us/.  

146   https://www.euractiv.com/section/politics/news/german-top-adviser-cautious-about-possible-wto-case-against-

us/.  

147   https://www.herbertsmithfreehills.com/insights/2023-08/eu-seeks-new-controls-on-outbound-investment-as-

security-fears-mount.  

148  https://www.politico.eu/newsletter/china-watcher/brussels-trade-chief-warns-china-and-eu-could-drift-apart-over-

putins-war/.  

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EPRS | European Parliamentary Research Service 

'necessary' but should be done 'not so much by the European countries' and instead 'on a European 
level'. 

More fundamentally, Washington's sabotage and disdain for the World Trade Organization, which 
it was instrumental in  creating,  is  profoundly  disturbing in  Brussels  and  could  prove  a  long-term 
challenge to transatlantic trade cooperation.  

The clean energy subsidies that are at the core of the IRA violate WTO rules against state support for 
domestic industries, claim many critics.  

Of systemic importance, the United States has long complained about the decisions of the Appellate 
Body of the WTO's Dispute Settlement system, especially those rulings against U.S. anti-dumping 
penalties. In 2016, the United States blocked one proposed reappointment to the Appellate Body 
and, starting  in  2017,  it  has  blocked  every  proposed  appointment  or  reappointment,  effectively 
neutering the appeals process. The result has been 29 cases left in limbo.  

Keith  Rockwell149,  a  former  WTO  official,  says  the  WTO  is  'teetering  on  the  abyss  of  irrelevance. 
People are not feeling in any way constrained by their obligations to the WTO when it comes to 
policy.' And there is growing concern among officials, such as WTO Director-General Ngozi Okonjo-
Iweala,  that  the  world  trading  regime  is  devolving  into  a  power-based  rather  than  a  rule-based 
system.  

For its part, the Biden Administration has refused to participate in an alternative dispute settlement 
process set up by European partners and others. Instead, WTO members have told reporters that 
Washington has suggested a two-tiered dispute settlement system in which disputes would only 
advance beyond a first, non-binding judgement to a legally binding Appellate Body stage if both 
parties agreed to move ahead. This would, in part, return to the system under the GATT, in which 
losing parties to a dispute could refuse to implement a finding. It was Washington's frustration with 
that  arrangement  that  led  the  U.S.  to  insist  on  binding  dispute  settlement  during  the  Uruguay 
Round.  

Cynics can only marvel at the current irony. In the Uruguay Round, it was the Americans pushing for 
a juridical dispute settlement system in which decisions were enforceable. Brussels argued that the 
system needed to be more flexible because all trade commitments had political ramifications. Now 
the EU favours a binding dispute settlement system, and the Biden Administration wants a more 
flexible approach.  

The  Biden  Administration  insists  that  it  has  not  abandoned  the  WTO.  U.S.  Trade  Representative 
Katherine Tai contended in a speech in Washington in September 2023: 'I think that we should figure 
out how to make the WTO part of the solution.' 

And former USTR deputy Wendy Cutler150 disputes Europeans' concerns that Washington is absent 
without leave in Geneva. 'Yes, we are not playing the same leadership role as in the past but that 
does not mean we are missing in action,' she tweeted. 

But European concerns about American intransigence in Geneva were only confirmed when U.S. 
Trade  Representative  Tai151  also  told  Politico  in  September  2023:  'I  don't  have  enough  time  and 
money to waste resources in Geneva on a process that we don't actually believe in.'  

149  https://www.euractiv.com/section/economy-jobs/news/piling-up-of-unresolved-disputes-highlights-wto-crisis/.  
150   https://twitter.com/wendyscutler.  
151   https://www.politico.com/news/2023/09/22/tai-targets-china-climate-in-call-to-reform-wto-00117491.  

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EU-US relations after the Inflation Reduction Act, and the challenges ahead 

Moreover, in October 2023152 Washington withdrew proposals initially made in 2019 as part of the 
WTO's e-commerce negotiations that would allow free cross-border data flows and prohibit national 
requirements for data localization and reviews of software source code. The reversal was apparently 
in response to political antipathy toward big data companies and Congressional desire to regulate 
anti-competitive behaviour in the digital realm. 

However, in October 2023 the U.S.-EU Joint Statement153 pledged: 'We will work towards substantial 
WTO  reform  by  [Ministerial  Conference]13  in  2024  including  by  conducting  discussions  with  the 
view  to  having  a  fully  and  well-functioning  dispute  settlement  system  accessible  to  all  WTO 
Members by 2024.'  

Nevertheless, current U.S. trade policy is roundly criticized by many leading U.S. trade experts. 'We 
are favouring domestic production over imports. That's flatly prohibited in the rules of the WTO,' 
said Robert Lawrence, a professor of trade and investment at the Harvard Kennedy School, in an 
interview with The Hill154. 'It's illegal, what he's doing. We are violating rules which American foreign 
policy and trade policy tried to persuade other countries to adhere to for 75 years.'  

Former pre-Trump Republican officials agree. 'Biden's trade representative, Katherine Tai, embraces 
Trumpian  isolationism,'  complained  former  World  Bank  President  and  U.S.  Trade  Representative 
Robert  Zoellick155  in  the  Washington  Post.  'She  denies  the  power  of  deals  to  open  markets  to 
develop  international  standards  for  the  digital  economy  and  other  cutting-edge  sectors;  to  add 
resilience  to  nations  and  supply  chains;  and  to  encourage  developing  countries  to  improve 
environmental  and  labour  standards.  The  Biden  theorists  imagine  a  national  economy  that 
Washington designs without foreign involvement. Their industrial policy uses tariffs, rules of origin 
and 'Buy American' requirements to block foreign competition. They send a destructive message to 
our partners: Join the race to subsidize. If you are a poorer developing country, too bad.' 

And Washington's newspaper of record laments the administration's failure to engage with foreign 
partners.  'The  biggest  flaw  so  far  in  Mr.  Biden's  industrial  policy  is  it's  not  been  accompanied  by 
strong enough trade policies,' argued a Washington Post editorial156. 'There is still no trade deal with 
Europe. In the Indo-Pacific region, the 'economic framework' that is meant to counter China is not 
opening new markets or reducing trade barriers. Instead of embarking on a broad strategy for global 
trade, Americans are executing modest manoeuvres […]. The Biden team has to do more than just 
talk about partnerships.' 

However, American experts argue that it is not just the U.S. that has forsaken a commitment to free 
trade and reduced government involvement in the economy. 'European leaders have abandoned, 
in part or in whole, the economic and ideological principles they once held sacred,' claimed Matthijs 
and Meunier157 in Foreign Affairs.  

152   https://www.reuters.com/world/us/us-drops-digital-trade-demands-wto-allow-room-stronger-tech-regulation-

2023-10-25/.  

153   https://www.whitehouse.gov/briefing-room/statements-releases/2023/10/20/u-s-eu-summit-joint-statement/.  
154  https://thehill.com/business/4222035-how-trump-and-biden-killed-the-free-trade-consensus/.  
155   https://www.washingtonpost.com/opinions/2023/08/15/biden-economic-policy-revolution/.  
156   https://www.washingtonpost.com/opinions/2023/06/19/biden-industrial-policy-trade/.  
157  https://www.foreignaffairs.com/europe/european-union-geoeconomic-revolution.  

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And, as early as 2017, Jean-Claude Juncker158, former President of the European Commission, told 
the European Parliament that the EU was not a bunch of 'naive free traders' and that it 'must always 
defend its strategic interests.'  

But for all the Sturm und Drang and finger pointing about recent U.S. trade policy, the jury is still out 
about the consequences for world trade.  

The combination of buy national provisions with subsidies for local production, new tariffs, export 
controls and 'friend shoring', further aggravated no doubt by the interruption of trade by the war in 
Ukraine,  may  have  already  begun  to 
international  commerce.  The  World  Trade 
Organization's World Trade Report 2023159 noted that, even though global trade was at an all-time 
high in 2022, trade between blocs grew up to 6% slower than trade within blocs. And for the first 
time since 2003, in mid-2023 U.S. imports from Mexico as a share of overall U.S. imports exceeded 
the  percentage  from  China.  Those  former  Chinese  exports  to  the  U.S.  did  not  just  stay  home, 
however. Many ended up in other markets, competing with European exports to those consumers.  

impact 

However, as economist Noah Smith points out160, 'the global trading system is starting to rearrange 
itself, and it's mostly not Biden's doing.' As of yet there is little conclusive evidence that reshoring or 
new tariffs are dramatically altering global trade patterns. It may be too early.  

But  it  is  undeniable  that  the  IRA,  the  embrace  of  industrial  policy,  new  export  controls,  the 
disengagement  from  the  WTO  and  the  effort  to  solve  trade  disputes  bilaterally  reflects  a 
fundamental shift in America's approach to trade policy.  

This  approach,  with  all  its  nationalistic  implications,  its  failure  to  launch  meaningful  new  trade 
negotiations,  and its  lack of initiative in  helping  fix the  broken WTO  suggest  that  Sullivan's  'new 
Washington consensus' may not be more of the same, but a significant, lasting departure for the 
country that drove creation of the multilateral trading system in the post-World War II era.  

However, the jury is still out. The bilateral trade talks the U.S. has pursued, especially with Europe, 
on  steel  and  aluminium  and  on  Boeing/Airbus  subsidies,  are  unprecedented  efforts  to  resolve 
longstanding trade irritants, albeit bilaterally. This may not be ideal from a multilateral perspective, 
and the initiatives have yet to pan out. But they are a proactive trade policy.  

The  final  judgement  of  the  trade  policy  implications  of  a  'new  Washington  consensus'  awaits  a 
second Biden Administration, if there is one. The first Obama Administration had no major trade 
liberalizing  initiatives.  The  second  term  included  negotiation  of  the  Trans-Pacific  Partnership 
(TPP)—which  the  Trump  Administration  promptly  torpedoed—and  the  Transatlantic  Trade  and 
Investment Partnership (TTIP), which failed to materialize largely due to European public opposition. 
A  final  assessment  of  the  degree  of  change  in  American  trade  policy  wrought  by  the  Biden 
Administration requires more time to see if Washington becomes proactive in 2025 and beyond in 
opening  commerce  and  solving  trade  problems,  especially  in  addressing  the  broken  WTO 
negotiating and dispute settlement mechanisms.  

But Robinson Meyer161 offers a useful reminder that 'because clean energy is a growing and highly 
strategic industry, and trade conflict always arises from these very industries […]. Managing trade 

158  https://www.economist.com/finance-and-economics/2018/03/22/europeans-fret-that-chinese-investment-is-a-

security-risk.  

159   https://www.wto.org/spanish/res_s/publications_s/wtr23_s.htm.  
160   https://www.noahpinion.blog/p/decoupling-isnt-phoney?utm_source=profile&utm_medium=reader2.  
161  https://www.nytimes.com/2023/04/07/opinion/electric-vehicles-europe-trade-wars.html.  

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EU-US relations after the Inflation Reduction Act, and the challenges ahead 

disputes  isn't  some  sideshow  to  the  real  work  of  fighting  climate  change.  It is fighting  climate 
change. Once you accept that […] the United States, Japan and those in the European Union need 
to calm down about the existence of climate-related trade spats. They're here. They're not going 
away.' 

6. Looming issues 

The IRA has certainly helped frame U.S.-EU relations since its passage. But there are other ongoing 
issues that Brussels and Washington are wrestling with, and looming challenges that will continue 
to preoccupy officials and complicate the bilateral economic and diplomatic relationship, however 
the IRA-related subsidy and preferential treatment issues play out.  

6.1. Export controls 

America and Europe cooperated closely through the Wassenaar Arrangement in the wake of the 
Cold War, imposing export controls on military armaments and dual use equipment that might be 
used by adversaries. But the Ukraine war and growing concern about China has led to even greater 
reliance on such controls by both the U.S. and the EU.  

The  Trade  and  Technology  Council  quickly  became  a  forum  for  discussion  of  unprecedented 
coordination of EU and U.S. technology export controls against Russia and Belarus, although in the 
end it was member states that negotiated and decided upon the measures in the EU's Foreign Affairs 
Council. Russia's  military-industrial  complex  and  defence  supply  chains  have  been  significantly 
degraded. Export controls have created major supply shortages for Russia's armed forces and forced 
Moscow  to  struggle  to  import  semiconductors  and  other  key  components  for  its  military. 
Unfortunately, trade diversion has enabled Russian allies to meet much of Moscow's needs and have 
limited export control effectiveness. 

Similar challenges face coordination and cooperation on export controls on trade with China.  

In  September  2022,  Jake  Sullivan162,  in  a  speech  at  the  Global  Emerging  Technologies  Summit, 
announced  that  the  United  States  can  no  longer  stay  only  a  couple  of  generations  ahead  on 
technology  and  'must  maintain  as  large  a  lead  as  possible.'  He  noted  that  three  families  of 
technology  will  be  of  particular  importance  in  the  coming  decade,  including  computing-related 
technologies such as microelectronics, quantum information systems and AI, biotechnologies and 
biomanufacturing, and clean energy technologies. 

In  pursuit  of  maintaining  the  American  lead  ahead  of  China,  in  October  2022  Washington 
announced new rules prohibiting U.S. companies from exporting to China the technology, software, 
and  equipment  used  in  producing  advanced  computing  chips  and  supercomputers.  The  new 
measures  also  bar  U.S.  persons  from  supporting  certain  China-based  chip  companies  without  a 
license. 

After pressure from Washington, ASML, the global leading Dutch supplier of key equipment needed 
to produce high-end computer chips, agreed to163 seek licenses before shipping any such machines. 

162   https://www.whitehouse.gov/briefing-room/speeches-remarks/2022/09/16/remarks-by-national-security-advisor-

jake-sullivan-at-the-special-competitive-studies-project-global-emerging-technologies-summit/.  

163   https://www.reuters.com/technology/amid-us-pressure-dutch-announce-new-chip-equipment-export-rules-2023-

06-30/.  

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This  was  a  reminder  of  the  extraterritoriality  of  many  U.S.  export  controls,  an  issue  that  has 
bedevilled EU companies for decades.  

In October 2023164, the Biden Administration announced a ban on most shipments of advanced U.S. 
semiconductors to Chinese data centres. U.S. companies seeking to sell China these advanced chips, 
or the machinery used to make them, will be required to obtain a license, as will firms who want to 
ship to dozens of other countries that are subject to U.S. arms embargoes. 

German scholars Tobias Gehrke and Julian Ringhof165 of the European Council on Foreign Relations 
argue that the European Union must update its strategic approach to export controls in the wake of 
the new American policy. 

For its part, in October 2023 the European Commission announced that it would start collective risk 
assessments  together  with  member  states  on  four  technologies—advanced  semiconductors, 
artificial  intelligence,  quantum  technologies,  and  biotechnologies.  This  review  could  lead  to 
restrictive  measures  such  as  export  controls.  But  it  also  might  simply  lead  to  subsidies  for  these 
technologies. 

'We've all seen what can be the risks of too much dependency, be it during the Covid pandemic or 
now with the Russian war in Ukraine. Europeans have paid the price for this,' European Commission 
Vice-President Věra Jourová166 said. 

While China is not an explicit target of this risk assessment, it is clearly what Brussels has in mind.  

And, commented Agathe Demarais167, a senior fellow at the European Council on Foreign Relations: 
'Through the release of this list, the EU is also keen to show that it is carving its own, European de-
risking strategy, instead of merely following the lead of the United States in this field.' 

But, rather than suggesting to comprehensively reduce ties to China in the technology sector, the 
EU's decision to include only a few technologies in its list underscores the bloc's willingness168 to 
reiterate that its goal is to de-risk, not decouple, from China. Moreover, the omission of clean tech 
in the EU's list also illustrates the fact that the U.S. approach169 to de-risking is broader than that of 
the EU. 

Nevertheless,  at  the  2023  U.S.-EU  Summit170  both  sides  noted  that:  'Export  control  regimes  are 
central  to  maintain  international  security  and  stability,  and  necessitate  cooperation  between 
actors—including in multilateral fora—to ensure our dual-use technology protection ecosystem is 
continuously improved upon and cannot be exploited. We will cooperate and share lessons as we 
work to maximize the effectiveness of our economic security toolkit to achieve our shared interest.' 

164  https://www.nytimes.com/2023/10/17/business/economy/ai-chips-china-restrictions.html.  
165   https://ecfr.eu/article/caught-in-the-crossfire-why-eu-states-should-discuss-strategic-export-controls/.  
166  https://www.euractiv.com/section/economy-jobs/news/stricter-eu-controls-on-critical-technologies-possible-from-

spring-2024/.  

167  https://www.euractiv.com/section/economy-jobs/news/stricter-eu-controls-on-critical-technologies-possible-from-

spring-2024/.  

168   https://www.nytimes.com/2023/05/20/world/decoupling-china-de-risking.html.  
169   https://www.whitehouse.gov/briefing-room/speeches-remarks/2023/04/27/remarks-by-national-security-advisor-

jake-sullivan-on-renewing-american-economic-leadership-at-the-brookings-institution/.  

170   https://www.whitehouse.gov/briefing-room/statements-releases/2023/10/20/u-s-eu-summit-joint-statement/.  

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6.2. Privacy 

Data flows underpin $7.1 trillion171 in U.S.-EU economic activities, the biggest such exchange in the 
world.  With  the  manipulation  of massive  amounts of  data  an  increasing  driver of  the  creation  of 
economic  value  for  American  and  European  companies—be  it  BMW  and  Volkswagen  analysing 
feedback  from  the  computers  in  its  cars  in  order  to  build  better  vehicles,  or  Master  Card  and 
American Express analysing consumer purchases—establishing a legal framework for transatlantic 
data  flows  is  of  paramount  importance  for  competitiveness  in  the  future  data-driven  global 
economy.  

But this has proven exceedingly difficult because of differences in regulatory philosophy creating 
persistent legal uncertainty. 

EU privacy law forbids the movement of its citizens' data outside of the EU, unless it is transferred to 
a location which is deemed to have 'adequate' privacy protections in line with those of the EU. In 
2000,  Washington  and  Brussels  signed  a  'Safe  Harbor'  agreement.  It  allowed  companies  such  as 
Facebook,  Google,  and  Amazon  to  self-certify  that  they  would  protect  EU  citizens'  data  when 
transferred and stored within U.S. data centres. 

The Safe Harbor Agreement was struck down by the European Court of Justice in 2015. Brussels and 
Washington then negotiated a Privacy Shield. In 2020, the Privacy Shield was also struck down by 
the  EU  court,  which  cited  the  risk  of  massive  surveillance  and  spying  on  EU  citizens  by  U.S. 
intelligence agencies. 

So, for the third time, the EU and the U.S. have agreed to what they call a Data Privacy Framework, 
designed  to  address  some  of  the  EU's  data  protection  concerns  and limit  the  ways  in which U.S. 
intelligence  agencies  can  obtain  information  about  EU  citizens.  In  addition,  the  framework 
agreement contains other conditions for the collection of personal data. EU citizens will also have 
recourse  to  a  U.S.  Civil  Liberties  Protection  Officer  and  the  independent  Data  Protection  Review 
Court. And this court will allow European residents to bring claims against U.S. government agencies 
if  they  believe  their  data  was  not  gathered  in  a  'necessary'  and  'proportionate'  way  for  national 
security. 

Privacy advocates are still not satisfied. And this third transatlantic data transfer agreement is again 
under attack172 in Europe. The European Data Protection Board, a group of privacy activists, claims173 
the  new  agreement  showed  'substantial  improvements'  compared  with  previous  pacts,  but  still 
lacked  some  safeguards.  The  European  Parliament  has  opposed174  the  new  pact,  arguing  it  still 
allowed some bulk-collection of personal data and included insufficient protections for Europeans' 
privacy. With multiple lawsuits anticipated, the Court of Justice is expected to have to rule again.  

6.3. Critical minerals 

Both Washington and Brussels had an early warning of the vulnerability and potential strategic use 
of critical minerals when, in 2010, China vowed to halt exports of rare earths to Japan over a fishing 

171   https://www.whitehouse.gov/briefing-room/statements-releases/2022/03/25/fact-sheet-united-states-and-

european-commission-announce-trans-atlantic-data-privacy-framework/.  

172  https://www.euractiv.com/section/data-protection/news/new-eu-us-data-transfer-deal-also-faces-criticism-in-

germany/.  

173  https://pro.politico.eu/news/eu-privacy-watchdogs-worried-about-eu-us-data-flows-deal.  
174   https://pro.politico.eu/news/eu-lawmakers-oppose-new-data-flows-deal-with-the-us.  

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EPRS | European Parliamentary Research Service 

dispute. While there is some doubt175 as to whether Beijing ever acted on this threat, the signal was 
sent  and  resent  again  when,  in  early  August  2023,  China  imposed176  restrictions  on  two  metals 
crucial  for  semiconductors—gallium  and  germanium.  In  October  2023,  Beijing  limited  exports  of 
graphite177,  which  is  used  in  EV  batteries.  The  U.S.  is  the  largest  buyer  of  Chinese  graphite.  And 
Beijing has not been alone in exerting its leverage. In 2023, Indonesia banned exports of nickel, a 
key component of stainless steel. 

The  EU  and  U.S.  transition  to  a  greener  economy  based  on  renewable  energy  resources  is 
dramatically increasing the need for a range of raw materials, such as lithium, cobalt, gallium, and 
nickel, used for everything from electric vehicles to wind turbines. The market for these materials 
has  doubled  in  size  between  2017  and  2022,  according  to  IEA178  estimates,  and  is  set  to  at  least 
double again by 2040 amid anticipated surging demand for EVs and battery storage, as well low-
emission power generation and electricity networks. Batteries, to cite just one example, may raise 
global  demand  for  lithium  by  500%  to  800%179  by  2030.  And  there  are  currently  just  11  lithium 
mines180 in the world, only one of which is in the U.S.. Demand for EVs and other uses suggests the 
world will need 60 lithium mines within a decade.  

But  both  the  U.S.  and  the  EU  are  deeply  dependent on  China  for many  critical minerals.  Chinese 
production of rare earth elements roughly doubled in the last half decade. Moreover, rare earths 
must be separated from the oxides, refined, and forged into alloys in a complex, highly specialized, 
multi-stage  process.  China  is  a  world  leader  at  each  step  of  this  process,  thanks  to  a  concerted 
industrial policy fuelled by generous subsidies.  

While China has cornered the market for much of the mining and processing of critical minerals, 
neither the EU nor the U.S. has a sufficient supply of many of the minerals necessary for the green 
transition.  

U.S.  energy-transition-related  demand  for  the  critical  minerals  lithium,  nickel  and  cobalt,  taken 
together, will be 23 times higher in 2035 than it was in 2021181, thanks to the IRA.  

However, the IRA is strangely quiet about how to ensure a sufficient supply of critical raw materials. 
This  lack  of  attention  to  these  building  blocks  of  the  green  transition  was  another  unfortunate 
consequence of the closed-door, political horse-trading legislative drafting of the IRA.  

Moreover,  the  IRA  imposes  three  improbable  conditions  on  the  sourcing  of  critical  minerals 
contained  in  newly  purchased  vehicles  qualifying  for  tax  credits.  These  requirements  set  the 
percentages  of  these  minerals  by  value  that  must  be  extracted  or  processed  in  the  U.S.  or  in  a 
country with which America has a free trade agreement. Moreover, it further stipulates that they 
cannot be sourced from a 'foreign entity of concern', an oblique reference to China. The FTA country 
percentages increase annually: 50% for a vehicle in service before 2024; 60% for a vehicle coming 
into service in 2024 or 2025; 70% in 2026; and 80% after 2026. A very rapid transition.  

175  https://cepr.org/voxeu/columns/revisiting-china-japan-rare-earths-dispute-2010#:~:text=In%202010%2C%20China

%20halted%20exports,(New%20York%20Times%202023).  

176   https://www.politico.eu/article/china-europe-chip-industry-faces-new-reality-of-weaponized-supply-chains/.  
177  https://www.ft.com/content/8af8c05c-8e54-40e9-9051-5a0b2b036c32.  
178   https://www.iea.org/topics/critical-minerals.  
179  https://dgap.org/en/research/publications/europes-green-industrial-policy-and-united-states-ira.  
180   https://source.benchmarkminerals.com/article/more-than-300-new-mines-required-to-meet-battery-demand-by-

2035.  

181   https://cdn.ihsmarkit.com/www/prot/pdf/0823/Impact-IRA-Metals-Minerals-Report-FINAL-August2023.pdf.  

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EU-US relations after the Inflation Reduction Act, and the challenges ahead 

The significance of the FTA sourcing requirement is seen in U.S. dependence for critical minerals 
from  nations  with  whom  it  has  no  FTA.  Currently,  47%182  of  US  nickel  imports  are  from  non-FTA 
countries. Non-FTA countries together will account for 92%183 of expected global nickel production 
in 2035, ensuring that the U.S. projected sourcing requirement will not be met by FTA countries. 
Almost all American lithium imports are from Argentina (44%) and Chile (53%). But Argentina is not 
an FTA country, and much of Chile's production is exported to China. In addition, the U.S. currently 
sources  78%  of  its  refined  cobalt  from  non-FTA  countries.  How  Washington  meets  its  own  FTA 
sourcing requirement is unclear. 

Moreover,  how  this  politically  attractive,  but  practically  impossible  requirement  became  law 
highlights American lawmakers' inattention to the international implications of their actions. Sen. 
Joe Manchin184, a Democrat from West Virginia, who played a major role in the drafting of the IRA, 
dubiously claimed at the World Economic Forum in Davos in 2023 that 'I did not realize the EU is not 
a free trade agreement.' This certainly was no surprise to USTR, but they were not in the room when 
the legislation was drafted. 

The Biden Administration has moved rapidly to try to clean up this oversight.  

First, in December 2022, the U.S. Internal Revenue Service issued an interpretation exempting leased 
imported  vehicles  from  the  IRA  requirements  regarding  location  of  assembly,  battery  origin  and 
income level. Effectively, someone who leases an imported BMWi4 qualifies for the subsidy. Given 
the ease of leasing, this exception means that for many European automotive producers the local 
content requirement may have limited practical effect. 

Second, the U.S. has free trade agreements with 20 nations, accords that have all been approved by 
Congress. But for the purposes of the IRA, the Biden Treasury has chosen to define an FTA country 
very broadly as it applies to the IRA to include deals in which the U.S. and other countries reduce, 
eliminate or refrain from imposing tariffs and export restrictions, and aim to raise standards in areas 
such  as  labour  rights  and  environmental  protection.  This  enables  EVs  from  these  nations  to  be 
eligible for subsidies thanks to the needed critical minerals in their batteries. 

Jealous of its trade agreement prerogatives under the U.S. Constitution, Treasury's new definition of 
an FTA does not sit well with some members of Congress. 'I've said it before and I'll say it again so 
there  is  no  confusion:  Congress  will  not,  under  any  circumstance,  forfeit  our  constitutionally 
mandated oversight responsibility of all trade matters,' said Rep. Adrian Smith185 (R-Neb.), chair of 
the House Ways and Means trade subcommittee. 'This is unacceptable and unconstitutional, and I 
intend to use every tool at my disposal to stop this blatant executive overreach.' 

Moreover, in June 2023, arguing that under the Constitution all trade-related agreements must be 
submitted to Congress for its approval, the U.S. House of Representatives unanimously prohibited 
the Biden Administration from designating a U.S.-Taiwan Agreement as a 'free trade agreement' for 
purposes of the IRA tax credits. Eventually the U.S. Supreme Court may have to rule on whether the 
White House can circumvent Congress' Constitutional power.  

182   https://cdn.ihsmarkit.com/www/prot/pdf/0823/Impact-IRA-Metals-Minerals-Report-FINAL-August2023.pdf.  
183   https://cdn.ihsmarkit.com/www/prot/pdf/0823/Impact-IRA-Metals-Minerals-Report-FINAL-August2023.pdf.  
184  https://www.bloomberg.com/news/articles/2023-01-19/manchin-says-he-didn-t-know-us-eu-lacked-free-trade-

agreement.  

185   https://www.politico.com/news/2023/03/31/washington-brussels-pushback-patch-trade-rift-00089941.  

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EPRS | European Parliamentary Research Service 

Moreover,  since  any  non-FTA  deals  were  never  approved  by  Congress  and  thus  do  not  contain 
enforceable, binding provisions, a new U.S. administration could invalidate them on its first day in 
office.  

Nevertheless, said John Podesta186, senior adviser to President Joe Biden for clean energy: 'We have 
an all-of-government approach. We need to develop ready supply chains with friends and allies, like 
the free trade agreement with Japan and the negotiations with the European Union. It's strategically 
challenging to be totally dependent on China.' 

To that end, in February 2023 the White House convened representatives of 19 nations and the EU 
as part of a Mineral Security Partnership187 with the goal of developing global supply chains with 
allies  and  mineral-rich  countries.  In  March  2023,  President  von  der  Leyen  and  President  Biden 
directed their officials to begin talks on critical minerals. 'The goal,' said von der Leyen188, 'is to have 
an agreement on critical raw materials that have been sourced or processed in the European Union, 
that  these  strategic  supply  chains  are  able  to  access  the  American  market,  as  if  they  had  been 
sourced in the United States.' 

But  European  Parliamentarians,  while  supportive  of  transatlantic  negotiations  on  critical  raw 
materials,  have  had  questions  about  the  U.S  negotiating  position.  'The  United  States  has  50  raw 
materials  that  it  sees  as  particularly  critical,' observed Bernd  Lange189, in  September  2023.  'In  the 
offer that the United States has now made to us, they are only offering us five in terms of access. 
And the question naturally arises: why is this the case and how does the Commission react to it? 
Especially  since  we  are  of  course  in  particular  trouble  with  two  raw  materials,  gallium,  and 
germanium, where China is now apparently setting up supply restrictions.' 

The EU faces a similar challenge in sourcing critical minerals for the green transition.  

Of the 30 materials190 of high economic importance with significant supply risk. the EU imports 100 
percent  of  14  of  these.  Particularly  vulnerable  is  Germany,  Europe's  largest  economy,  which 
imports 100% of 20 of the 30191, some exclusively from China. 

In March 2023, the European Commission unveiled the EU's Critical Raw Materials Act192, with the 
aim of increasing Europe's capacity for the extraction, processing, and recycling of key minerals. And 
in September 2023, the European Parliament approved plans for the EU to secure its own supply of 
critical raw materials. The goal193 is for the EU to extract 10% domestically, process 40%, and recycle 
15% of its annual critical mineral demand by 2030. It implicitly counters China's dominance over 
mineral supply chains by aiming to reduce dependence on any country supplying over 65% of a 
particular mineral. 

186   https://www.houstonchronicle.com/business/energy/article/critical-minerals-shortage-nickel-copper-

18297217.php.  

187  https://www.state.gov/minerals-security-partnership-governments-engage-with-african-countries-and-issue-a-

statement-on-principles-for-environmental-social-and-governance-standards/.  

188   https://www.ft.com/content/257f7d0d-cf9d-472b-9c49-e9aafa7977de.  
189   https://www.europarl.europa.eu/doceo/document/CRE-9-2023-09-13-INT-3-267-0000_DE.html.  
190   https://single-market-economy.ec.europa.eu/sectors/raw-materials/areas-specific-interest/critical-raw-materials_en.  
191  https://www.diw.de/de/diw_01.c.861639.de/publikationen/wochenberichte/2022_50_1/deutschland_kann_seine_

versorgungssicherheit_bei_mineralischen_rohstoffimporten_erhoehen.html.  

192  https://www.euractiv.com/section/economy-jobs/news/eu-unveils-critical-raw-materials-act-aiming-to-lessen-

dependence-on-china/.  

193   https://www.europarl.europa.eu/doceo/document/TA-9-2023-0325_EN.pdf.  

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EU-US relations after the Inflation Reduction Act, and the challenges ahead 

The  Act  also emphasizes  'strategic  projects194'  with  partner  countries  such  as  Australia  and  Chile, 
which have large reserves of minerals such as cobalt, lithium, manganese, and rare earths. 

Europe is not devoid of some of the minerals needed for EV batteries and other green transition 
technologies. France, Germany, and Portugal are rich in lithium and France is preparing to open a 
large lithium mine. Substantial unexploited cobalt resources exist throughout Europe. But, as in the 
United States, launching a mining project typically takes 10-15 years in the EU, making it unlikely 
that new mines can make a significant contribution to raw materials' needs by 2030. The Critical Raw 
Materials  Act  aims  to  expedite  critical  minerals  mining  through  streamlined  permitting  and 
facilitated finance, with permits to be issued within two years.  

But both EU and U.S. self-sufficiency in critical raw materials is out of the question in the short run, if 
ever. Of the 32 minerals that the U.S. and the EU consider critical, 21 are deemed critical by both 
regions. This could lead to growing competition for scarce resources and new transatlantic tensions.  

'Competition  for  these  minerals might  disrupt  geopolitics  and  alliances',  concluded  the  Allianz195 
study. 'In recent years, around 10% of the global value of (Critical Raw Materials) exports faced at 
least one export restriction measure by governments. China, India, Argentina, Russia, Vietnam, and 
Kazakhstan were the top six countries in terms of new export restrictions from 2009 to 2020, and 
some also account for the largest production share of many CRMs.' 

Yet, amid such scepticism on both sides of the Atlantic about the feasibility of both the U.S. and the 
EU de-risking their sourcing of critical minerals, there is some optimism. A study by the Net Zero 
Industrial  Policy  Lab  at  Johns  Hopkins  University  concludes  that,  given  existing  reserves,  'it 
is possible for the United States and its key partners to significantly friend shore production,' said 
Bentley  Allan196  of  the  Carnegie  Endowment,  as  envisioned  in  the  proposed  plurilateral  Minerals 
Security Partnership. 'However, given current production in democratic countries, it would require 
an unprecedented build-out of the mining industry to achieve 2030 clean energy targets.' 

This will only be achieved, with some difficulty, the study concludes, through a joint industrial policy 
that identifies priorities in a targeted and strategic approach. This would necessarily include nations 
with strategic mineral reserves such as Indonesia197 (which has large reserves of nickel and tin), Peru 
(silver), Brazil (graphite), and Türkiye (graphite and chromium). These countries already partner with 
the United States and the EU to deal with security and economic challenges. But cooperation on 
critical minerals will require the EU and the U.S. to double down on these partnerships.  

As  a  first  step,  in  July  2023  the  Council  of  the  EU  authorized  the  European  Commission  to  start 
negotiations on a 'Critical Minerals Agreement' with the U.S. The rationale for such a transatlantic 
deal is to enable EU-made electric vehicles to claim IRA subsidies by becoming the equivalent of a 
free trade agreement country with the U.S.  

Moreover, there are other opportunities for transatlantic cooperation on critical minerals. The rapid 
rise in EV production and sales will eventually create a supply of used batteries, and they may prove 
one  future  source  of  needed  minerals.  To  maximize  this  potential  may  require  incentives  for 

194  https://www.euractiv.com/section/circular-economy/news/parliament-to-bolster-eus-strategic-projects-for-critical-

minerals/. 

195   https://www.allianz.com/en/economic_research/publications/specials_fmo/critical-raw-materials.html. 
196   https://carnegieendowment.org/2023/05/02/friendshoring-critical-minerals-what-could-u.s.-and-its-partners-

produce-pub-89659. 

197   https://carnegieendowment.org/2023/04/11/how-indonesia-used-chinese-industrial-investments-to-turn-nickel-

into-new-gold-pub-89500. 

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recycling  (something  the  EU  has  stressed  as  a  general  goal  in  its  2020  Circular  Economy  Action 
Plan)198, standardization of battery design and components, and rules on what can and cannot be 
done with batteries after they have been extracted from used cars. 

6.4. CBAM 

As of October 2023, foreign firms that export iron and steel, cement, fertilizers, aluminium, electricity 
generation,  and  hydrogen,  all  of  which  produce  carbon-intensive  emissions,  have  to  collect 
emissions  data  and  report  them  to  the  European  Commission  in  order  to  continue  exporting  to 
Europe.  In  2026,  they  will  then  have  to  pay  an  'adjustment'  fee  to  cover  the  carbon  price  gap 
between non-EU and EU products.  

'CBAM will encourage industry worldwide to embrace greener technologies,' contended European 
Commissioner for Economy Paolo Gentiloni199. 'It will also prevent so-called carbon leakage, or the 
relocation of production outside our borders to countries with lower environmental standards.' 

CBAM has been welcomed by some EU industries who see it as levelling the playing field. 'The EU 
steel  industry  has  been  shouldering  a  CO2  price  for  several  years  while  steel  imports  from  third 
countries, which on average have a significantly higher CO2 footprint, have been exempted thus 
far,' complained Axel Eggert, director general of Eurofer, the European steel association. 

But Sara Murray200, international managing director at The Conference Board, warned: 'Our Europe-
based  members  are  clear  that  implementing  CBAM  will  increase  prices  of  carbon-intensive 
products, possibly with knock-on effects for consumers.' 

Despite concern about CBAM, the United States has neither formally supported nor opposed it. And 
any American reaction to CBAM was notably absent from both the President's proposed fiscal 2023 
budget and the Office of the US Trade Representative's 2022 Trade Policy Agenda and 2021 Annual 
Report to Congress. This is likely because the U.S. does not export a significant amount of CBAM- 
covered goods to the EU. Estimates of CBAM's economic impact on the United States are quite small. 
American  exports  impacted  by  the  initial  list  of  CBAM  products  amount  to  around  $1  billion,  or 
roughly  0.4%201  of  the  $260 billion in  U.S.  exports  to  the  European  Union.  And in  June  2022,  the 
United States joined other G7 countries in supporting work on a climate club that could mitigate 
concerns about carbon leakage among club participants. 

But the de minimis impact on the U.S. economy does not ensure that CBAM will not become a major 
issue in post-IRA transatlantic relations. The U.S. exported no bananas to the EU in the 1990s and 
that still became a major contretemps.  

The looming problem is that Europe places a price on carbon emissions and the U.S. does not. The 
U.S.  Commerce  Department  has  ruled  'to  treat  certain  free  allowances  under  the  EU's  Emission 
Trading  System  as  a  countervailable  subsidy.'  This  applies  to  only  a  small  group  of  European 
producers. But it poses a potential point of friction as the sectors covered by CBAM increase over 
time. 

198   https://environment.ec.europa.eu/strategy/circular-economy-action-plan_en. 
199  https://www.euractiv.com/section/energy-environment/news/europes-carbon-border-tariff-starts-applying-

causing-jitters-for-trade/.  

200  https://www.euractiv.com/section/energy-environment/news/europes-carbon-border-tariff-starts-applying-

causing-jitters-for-trade/.  

201   https://www.piie.com/sites/default/files/2022-10/pb22-14.pdf.  

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6.5. Artificial intelligence 

Artificial intelligence promises previously unimaginable advances in data analysis, automation of 
repetitive tasks, higher precision with fewer human errors and performance of tasks hazardous to 
humans. At the same time, it may displace jobs, violate privacy, and possibly operate beyond human 
control.  

The maximization of the benefits of AI and the limitations of its downsides will be one of the major 
technology and transatlantic challenges in the next decade.  

In 2023, the European Parliament and the Commission adopted the Artificial Intelligence Act202, the 
first EU legislation to regulate AI, which could become fully effective in 2026. It constitutes a two-
tiered  approach203,  with  a  transparency  requirement  for  all  general-purpose  AI  and  stronger 
requirements for powerful models with systemic impacts.  

Regulation of artificial intelligence through the AI Act comes through three baskets of activity. There 
is a complete ban on uses that pose unacceptable risks to fundamental human rights, health, and 
safety, such as social scoring of people's behaviour or characteristics. Rules will apply to AI use in 
power systems, hospitals, employment, credit ratings, activities that impact the environment and 
Generative AI used in ChatGPT and similar systems. But AI use in activities such as translation, image 
recognition, and weather forecasting will have minimal transparency requirements.  

In  the  future,  AI-related  issues  will  likely  emerge  that  could  require  action  by  the  European 
Parliament.  These  include  use  of  copyright-protected  content  in  AI  training,  broader  use  of 
generative AI, and cybersecurity, all of which could touch on issues Washington is also wrestling 
with in terms of regulation. 

The United States204 has made far less progress in dealing with AI, and what has been accomplished 
is not very meaningful. America is only at the beginning of what is likely to be a long and difficult 
path toward the creation of AI rules. Seven tech companies have announced a set of principles for 
making  their  AI  technologies  safer,  including  third-party  security  reviews  and  watermarking  AI-
generated content to combat its use to generate misinformation.  

But these suggestions are not new. Many of the practices that were announced had already been in 
place at OpenAI, Google, and Microsoft, or were on track to take effect. They don't represent new 
regulations. Promises of self-regulation also fall short of what consumer groups had hoped. 

In late 2022, the White House introduced a Blueprint for an A.I. Bill of Rights, a set of guidelines on 
consumer protections. The guidelines also aren't regulations and are not enforceable.  

Congress  has  held  hearings  on  AI  and  plans  more.  But,  admitted  Senate  Majority  Leader  Chuck 
Schumer205, '[i]n many ways we're starting from scratch.' 

Such voluntary guidelines reflect, in part, the slow American response to the challenges posed by AI 
and the influence in Washington of technology companies that are wary of regulation and its impact 
on their innovation.  

202   https://www.mwe.com/insights/the-eu-artificial-intelligence-act-whats-the-impact/.  
203   https://www.ft.com/content/d5bec462-d948-4437-aab1-e6505031a303.  
204   https://www.nytimes.com/2023/07/21/technology/ai-united-states-regulation.html.  
205   https://www.nytimes.com/2023/07/21/technology/ai-united-states-regulation.html.  

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'Voluntary  commitments  are  not  enough  when  it  comes  to  Big  Tech,'  complains  Caitriona 
Fitzgerald206,  deputy  director  at  the  Electronic  Privacy  Information  Center,  a  privacy  group. 
'Congress and federal regulators must put meaningful, enforceable guardrails in place to ensure the 
use of A.I. is fair, transparent and protects individuals' privacy and civil rights.' 

At the 2023 TTC meeting in Sweden, U.S. and EU representatives voiced their intention to bridge the 
transatlantic regulatory gap on AI. While the TTC will not produce full regulatory alignment in AI 
policy, it can develop common terminologies and metrics to assess the trustworthiness and risks of 
AI. 'An agreement on a common taxonomy and approach to risk management could pave the way 
for joint AI standards,' argues Julian Ringhof207 of the European Council on Foreign Relations. 'This, 
in turn, would strengthen the positioning of the EU and the U.S. in international standards bodies 
and help disseminate transatlantic standards across the globe.' 

7. Potential for future technological cooperation 

The  future  holds  not  only  challenges  but  also  opportunities  to  build  on  current  technological 
cooperation. 

Europe and the United States could cooperate in pre-competitive research and development and 
testing on a range of new technologies through the creation of a Transatlantic Advanced Research 
Project Agency (TARPA), with designated funding streams for specific technologies. TARPA can be 
modelled on the highly successful U.S. Defense Advanced Research Project Agency (DARPA), which 
has been instrumental over the years in developing the internet, GPS, the computer mouse, and 
Apple's  voice-recognition  system  Siri.  To  maximize  resources,  Washington  and  Brussels  might 
consider creating a public-private technology venture fund that would use government funds to 
mobilize private investment in TARPA projects.  

If  European  and  American  firms  are  to  keep  pace  with  Taiwanese,  South  Korean  and,  most 
importantly, Chinese chip makers, Brussels and Washington need to bring together their scientific 
talent and jointly shoulder some of the financial burden of cutting-edge R&D, not simply compete 
with each other through mutually exclusive subsidies.  

A Transatlantic Advanced Research Products Agency-Chip (TARPA-C) effort should be jointly created 
to conduct precompetitive R&D for next generation chips.  

At the same time, small, powerful, rapidly rechargeable batteries are needed for the digital world, 
for  modern  manufacturing,  and  for  consumer  products  such  as  cars.  This  market  is  currently 
dominated by Asian, especially Chinese, producers. The European Union has already taken steps to 
increase  its  battery  supply  through  the  European  Battery  Alliance,  supported  by  the  European 
Commission  and  the  European  Investment  Bank.  The  United  States  has  created  a  Federal 
Consortium for Advanced Batteries. Washington and Brussels should take their efforts to the next 
level and create a Transatlantic Advanced Research Products Agency-Batteries (TARPA-B) to pursue 
joint pre-competitive research and development. 

Finally, if the Covid pandemic has taught anything, there is a pressing need to be better prepared 
for the inevitable pandemics of the future.  

The McKinsey Global Institute estimates that as much as $83 billion needs to be spent on infectious 

206   https://www.nytimes.com/2023/07/21/technology/ai-united-states-regulation.html.  
207   https://ecfr.eu/article/setting-the-tone-the-value-of-the-eu-us-trade-and-technology-council/.  

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EU-US relations after the Inflation Reduction Act, and the challenges ahead 

disease R&D over the next decade. Much more public funding is needed to make the economics of 
producing new treatments work for drug makers. 

In  2022,  Washington  created  an  Advanced  Research  Projects  Agency  for  Health  (ARPA-H).  The 
European Union should join this effort, with an initial focus on developing new pandemic vaccines. 
By pooling resources and scientific talent, ARPA-H will maximize the potential for developing life-
saving therapeutics.  

8. Elections and post-election politics in the US and the EU 

The future of transatlantic relations in the wake of the IRA and, by extension, the rationale for 'the 
new  Washington  consensus'—to  fight  climate  change,  compete  with  China  and  secure  supply 
chains through an embrace of industrial policy and friend shoring—may ultimately depend, not on 
the  long-term  economic  effectiveness  of  America's  actions  and  Europe's  reactions,  but  on  the 
outcome of the 2024 American presidential contest, and to a lesser extent Congressional elections, 
and on the 2024 European Parliamentary elections and the creation of a new European Commission. 

Another America First president could lead to renewed disagreement on climate action, economic 
sanctions, and how to engage in commercial competition. Candidate Trump has promised to scrap 
the IRA tax credits208 on day one of his second administration. He has claimed that climate change209 
would  raise  sea  levels  only  1/8th  of  an  inch  over  the  next  350  years.  His  election  would  raise 
legitimate European fears about U.S. security commitments to Europe and continued membership 
in  NATO210.  Such  renewed  American  questioning  of  transatlantic  relations  would  fuel  the  EU's 
appetite  to  pursue  greater  strategic  autonomy.  A  Democratic  presidential  victory  in  2024  would 
potentially smooth the way for greater cooperation on trade and technology. 

The politics underlying the Biden administration's embrace of the IRA and the 'new consensus' is 
often attributed to the Democratic Party's political roots in the American union movement and the 
electoral importance of manufacturing states, such as Michigan, Ohio, and Pennsylvania. The 81-
year-old Joe Biden formed his world-view decades ago when American manufacturing and unions 
were under assault from the twin threats of free-market economics and globalization.  

But the American public is disinterested in trade. Many take globalization as a fact of life. Trade as a 
discrete  issue  that  periodically  dominated  policy  and  political  debates  in  the  1980s  and  1990s 
around relations with Japan, and then with regard to China, is no longer a salient political concern. 
And six in ten Americans211see trade as an opportunity, not a threat.  

Moreover, the Democratic party is no longer the party of working-class Americans whose livelihoods 
have  been  adversely  impacted  by  trade.  Nor  do  Democratic  voters  oppose  trade.  The  party  is 
increasingly  a  party  of  better  educated,  higher  income,  service  workers  whose  livelihoods  are 
relatively unaffected by trade. And, since at least 2011212, Democrats have been more supportive of 
trade than Republicans. The Biden 2020 campaign pledge of a 'foreign policy for the middle class' 
was,  in  part,  based  on  a  Carnegie Endowment study213  that  showed  that,  while U.S.  international 

208   https://www.taxnotes.com/featured-news/ill-scrap-ira-tax-credits-day-1-trump-says/2023/09/28/7hdjq.  
209   https://www.cnn.com/2023/04/24/politics/fact-check-trump-sea-levels-ocean-climate-change/index.html.  
210   https://www.nytimes.com/2023/12/09/us/politics/trump-2025-nato.html.  
211   https://news.gallup.com/poll/390614/views-foreign-trade-nearly-back-pre-trump-levels.aspx. 
212   https://news.gallup.com/poll/390614/views-foreign-trade-nearly-back-pre-trump-levels.aspx.  
213   https://carnegieendowment.org/specialprojects/usforeignpolicyforthemiddleclass/.  

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economic  engagement  did  feel  threatening  to  some  in  Ohio,  in  Nebraska  it  was  seen  as  an 
agricultural  export  opportunity  and  in  Colorado  voters  supported  it  because  the  state  benefited 
from military spending.  

The  IRA  also  has  evoked  mixed  public  interest  and  backing.  In  July  2023,  only  four  in  ten214 
Americans supported the IRA, while an equal portion opposed it. But this divided opinion reflects 
both the partisan nature of almost every issue in American public life and a good dose of ignorance. 
Seven in ten claimed to have heard little or nothing about the landmark legislation, including many 
of the climate-related tax incentives that have troubled Europeans most. Only a third had heard of 
the buy-American tax incentives to purchase electric vehicles, and just a quarter knew about the tax 
incentives to manufacture solar panels and wind turbines. This ignorance poses a political problem 
for  the  Biden  Administration.  But  it  belies  the  underlying  support  Americans  have  for  the  IRA's 
climate-related industrial policy when they see personal benefits from the legislation. Two-thirds of 
respondents  also  supported  tax  incentives  for  the  installation  of  solar  panels  and  half  or  more 
backed tax benefits for building solar panels, windmills or buying an electric vehicle. 

The Biden Administration's avowed goal of reviving American manufacturing may help stem the 
erosion of Democratic support among working-class voters. But recent political trends suggest the 
populist  appeal  of  any  'new  consensus'  rests  in  the  Republican  Party's  voting  base,  which  is 
increasingly among white, less educated males. And a Republican victory in the 2024 presidential 
election  may  usher  in  even  more  'new  consensus'  policies—such  as  those  pursued  by  President 
Donald Trump—not their scaling back.  

The American elections are not the only electoral challenge facing post-IRA transatlantic relations. 
The 2024 European Parliament election and the subsequent new European Commission will also be 
a test of Europe's response to the new circumstances reshaping recent economic orthodoxy.  

Sabine Nallinger and Pellerin-Carlin argue215 that the 2024 European Parliament election should lead 
to a shift in focus 'from currently pursuing domestic visions of industrial policy in splendid isolation 
towards a common European approach.' 

But  early  public  opinion  polling  suggests  that  transition  may  prove  challenging.  The  European 
Parliament's recent grand coalition of the EPP, S&D and Renew, which spans the centre left to centre 
right, may keep its majority, even though these parties may lose seats, according to early polling 
data216. But their influence will be curbed by the rise of the right-wing European Conservatives and 
Reformists (ECR), which could become the third-biggest group in the Parliament, and a potentially 
strong showing by the far-right Identity and Democracy (ID) group. 

'A pause for thought on the Green Deal and the Fit for 55 package would [be] useful', opined ECR 
shadow rapporteur Carlo Fidanza217. And the ECR has also questioned CBAM. 'CBAM is nothing more 
than  an  additional  levy,'  said  ECR  shadow  rapporteur  Hermann  Tertsch218,  'the  cost  for  which 
will ultimately have to be borne by EU customers.' The ECR's potential Parliamentary partner agrees. 
The Commission's efforts toward the green transition are a 'total failure,' complained Marco Zanni219, 
president of the far-right Identity and Democracy (ID) group in the European Parliament. 

214  https://www.washingtonpost.com/climate-environment/2023/08/07/biden-white-house-climate-policy/.  
215  https://www.euractiv.com/section/energy-environment/opinion/call-for-a-european-green-industrial-policy/.  
216   https://www.politico.eu/article/european-election-2024-polls-right-wing-big-gains/.  
217   https://ecrgroup.eu/article/fidanza_all_electric_philosophy_may_be_making_us_more_dependent_on_china.  
218   https://ecrgroup.eu/article/tertsch_ecr_an_energy_crisis_is_no_time_to_introduce_cbam.  
219   https://www.euractiv.com/section/elections/video/identitydemocracy-eu-commissions-green-transition-a-total-failure/.  

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EU-US relations after the Inflation Reduction Act, and the challenges ahead 

With respect to post-IRA-related issues, the most pertinent trade question for the next European 
legislative cycle may well be what 'de-risking' means. Former Latvian Prime Minister Krišjānis Kariņš 
has called it the 'million-euro question', although measured by the volume of EU-China trade it is a 
€230  billion  question.  At  the  same  time,  parliamentarians  will  also  be  expected  to  address  the 
energy transition's funding challenge and how to raise those funds jointly or to leave the energy 
transition funding largely to national governments.  

Who the next European Commission President is and whether that is Ursula von der Leyen could 
matter greatly for transatlantic relations. Von der Leyen has built a solid relationship with Joe Biden, 
has  been  a  strong  transatlanticist  and  has  done  as  much  as  she  could  to  contain  transatlantic 
disputes.  She  has  supported  the  creation  and  ongoing  work  of  the  TTC.  A  different  Commission 
President would require the establishment of new working relationships and could mean greater 
transatlantic tension, depending on who is America's president. 

And, as has been the case repeatedly in U.S.-EU relations over the years, economic and geopolitical 
reality may interfere with the best-laid plans and ambitions of officials on both sides of the Atlantic. 
The IRA and related technology and economic issues have been handled fairly well. For all of the 
finger pointing about the IRA and differences on how to deal with privacy, critical minerals, AI, steel 
and aluminium, commercial aircraft and so forth, Washington and Brussels have worked closely to 
manage their differences and may, in fact, find solutions to at least some of them. 

But the domestic political ramifications of potential differences over the war in Ukraine, renewed 
hostilities in the Middle East and ongoing tensions with China could easily make it more difficult to 
resolve bilateral economic and technological frictions. Politics has repeatedly trumped diplomacy 
in transatlantic relations in the past and could always do so again.  

But the shared challenges remain. And, if anything, they are becoming more numerous and more 
important. The U.S and the EU have no choice but to find ways to overcome their differences, not 
be deterred by their domestic politics, and to work together to deal with problems that are too big 
for either party to resolve alone.  

And there is reason to believe both Brussels and Washington realize they must work together. In 
March 2023, in an effort to head off a transatlantic subsidy bidding war, von der Leyen and Biden 
agreed to launch a Clean Energy Incentives Dialogue220, as part of the TTC. The goal is to 'coordinate 
investment incentives and make them mutually reinforcing'. Notably, the dialogue is intended to 
also coordinate action on third-country distortive policies, such as Chinese subsidies.  

Such a transatlantic initiative in response to the IRA is much needed. For, as the American statesman 
Benjamin Franklin remarked in 1776 after signing the U.S. Declaration of Independence: 'We must, 
indeed, all hang together or, most assuredly, we shall all hang separately.'  

While the consequences Franklin alluded to were obviously more immediately dire, the warning is 
still applicable today to both Washington and Brussels. The climate, economic, technological, and 
China-related  problems  both  face  are  too  big,  too  complex,  and  too  important  to  be  dealt  with 
successfully on their own. The U.S. and the EU need each other. And how they deal with their shared 
post-IRA differences will go a long way to determining whether they succeed. 

220   https://www.whitehouse.gov/briefing-room/statements-releases/2023/03/10/joint-statement-by-president-biden-

and-president-von-der-leyen-2/.  

43 

 
 
 
                                                             
EPRS | European Parliamentary Research Service 

MAIN REFERENCES 

Allianz, A Faustian Bargain – Europe's Answers to the US IRA, February 2023. 

Boston Consulting Group, US Inflation Reduction Act: Global Implications, December 2022. 

Brookings Institution, Hidden Exposure – Measuring Supply Chain Exposure, Richard Baldwin et al, 
September 2023. 

Bruegel, Sparking Europe's New Industrial Revolution, July 2023. 

Bruegel, Rebooting the European Union's Net Zero Industry Act, June 2023. 

Carnegie Endowment for International Peace, U.S. Foreign Policy for the Middle Class, 2018, 2019, 
2020. 

Centre for European Reform, Europe Can Withstand American and Chinese Subsidies for Green Tech, 
June 2023. 

Congress.gov, S.1260 – United States Innovation and Competition Act of 2021. 

Congress.gov, H.R.5376 – Inflation Reduction Act of 2022. 

Cyber Risk GMBH, The European Chips Act. 

European Commission, The Green Deal Industrial Plan, February 2023. 

European  Commission,  2023  State  of  the Union  Address  by  President  von der  Leyen,  September 
2023. 

Franco-German  Council  of  Economic  Experts,  The  Inflation  Reduction  Act,  How  Should  the  EU 
React?, September 2023. 

McKinsey & Company, The Chips and Science Act: Here's What's in It, October 2022. 

Whitehouse.gov,  Remarks  by  National  Security  Advisor  Jake  Sullivan  on  renewing  American 
economic leadership at The Brookings Institution, 27 April 2023. 

Whitehouse.gov,  Building  resilient  supply  chains,  revitalizing  American  manufacturing,  and 
fostering broad-based growth, June 2021. 

Whitehouse.gov Briefing Room Statements, Joint statement by President Biden and President von 
der Leyen, March 2023. 

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EPRS  invites  leading  experts  and  commentators  to 
share their thinking and insights on important topics of 
relevance to debate in the European institutions. In this 
paper, Bruce Stokes, visiting senior fellow at the German 
Marshall Fund of the United States, and associate fellow 
at  Chatham  House,  offers  an  overview  of  US-EU 
relations since the passage of the US Inflation Reduction 
Act  in  2022.  This  paper  is  based  on  the  author's 
interviews  with  leading  European  and  US  experts  and 
published analysis by major think tanks and journalists 
on  both  sides  of  the  Atlantic.  The  paper  discusses 
current  efforts  to  manage 
longstanding  pre-IRA 
disputes,  the  Trade  and  Technology  Council,  the  US 
Chips and Science Act and the EU's response, looming 
issues  such  as  CBAM  and  critical  minerals,  and  how 
politics  in  both  the  US  and  Europe  may  affect  the 
handling of these issues. 

This is a publication of the Members' Research Service 
EPRS | European Parliamentary Research Service 

This document is prepared for, and addressed to, the Members and staff of the European 
Parliament as background material to assist them in their parliamentary work. The content of 
the document is the sole responsibility of its author(s) and any opinions expressed herein should 
not be taken to represent an official position of the Parliament. 

PE 759.588 
ISBN 978-92-848-1631-6 
doi:10.2861/385275 
QA-05-24-111-EN-N