- Von der Leyen and Biden’s strong personal relationship proved instrumental in ironing out tensions after protectionist policies of the Inflations Reduction Act (IRA) caused worry for EU companies.
- The EU launched the Green Industrial Plan as a response to the IRA, it aims to enhance EU competitiveness and stimulate the green transition.
- With unconfirmed second terms for Von der Leyen and Biden, the future of transatlantic relations remains uncertain.
Why is Von der Leyen in Camaraderie with Biden?
Answer: Von der Leyen and Biden are ironing out transatlantic tensions following the launch of the Inflation Reduction Act.
In June of 2022, US President Joe Biden rolled out the Inflation Reduction Act (IRA) which is considered the most significant environmental act in American history. The IRA includes nearly $400 billion in federal funding towards clean energy and sustainable innovation. The majority of funding is through tax credits and tax deductions.
While the European Union was welcoming of the act’s climate orientation, the act’s protectionist policies caused worry about reducing EU market competitiveness. Much of the act is discriminatory towards foreign — thereby European — companies. For example: the IRA granted US $7,500 in tax credits for US consumers if they bought an electric vehicle, as long as 40% of the raw materials used in the vehicles’ batteries were extracted from the US or in a country with which the US has a trade agreement. Despite being major trade partners, the EU and the US do not have any such agreement. This way, US-based manufacturers would have an advantage compared to their European counterparts.
The protectionist nature of the IRA was met with disapproval across the EU. Von der Leyen expressed her concerns about the act creating unfair competition considering it violates WTO trade rules such as ensuring fair competition and non-discrimination. Von der Leyen stressed that the EU required a structural answer to mitigate competitive disadvantages created by the IRA.
Despite transatlantic tensions spiking as high as causing speculation over an EU-US trade war, Von der Leyen and Biden are finding a way to conciliate. A variety of transatlantic channels for negotiation have been established which aim to address concerns regarding the IRA, as well as the maintenance of climate action as a central pillar to their respective market policies. Simultaneously, the EU has launched the Green Deal Industrial Plan (EGIP) as a direct response to the IRA. It is important to note that the two leaders historically have a good relationship, their personal fondness of each other might have saved relations from spiralling.
What does von der Leyen want?
Answer: Ensuring a competitive EU market and sustaining constructive transatlantic relations.
Von der Leyen wants the EU to be the home of clean tech and industrial innovation on the road to a net-zero world. In her words, global climate action should happen in the spirit of cooperation rather than competition, on a level and fair playing field through dialogue and agreements. In reality, Von der Leyen’s primary goal is simply to ensure the EU market remains as- if not more competitive than that of the US.
As president of the EU Commission, Von der Leyen is tasked with ensuring dialogue and cooperation across EU member states, helping them find consensus and collective ways forward. The IRA resulted in diverging responses from different EU leaders. Particularly, the way through which the EU ought to respond has been up for debate. French president Macron for example felt that the EU ought to match the IRA with a EU subsidy package, whereas Dutch prime minister Rutte warned that the EU should focus on using existing funding streams rather than generating new sources.
Protecting the integrity and competitiveness of the single European Market is equally high on the agenda of Von der Leyen. A fragmentation of the market should be avoided as the internal market, even more so than the international market, has to abide by principles of fairness.
The invasion of Ukraine had already made transatlantic relations sensitive to tensions. Still, maintaining a good relationship with Biden seems to be high on Von der Leyen’s agenda, and the war has in many respects also incentivised her to strengthen their relations. The two are each other’s largest trading and investment partners. Von der Leyen has made it clear that this must not be taken lightly and that their relationship ought to be nurtured. Her leadership has helped maintain transatlantic relations on good footing, despite being tested by the IRA among other contentious topics such as Ukraine.
What does Biden Want?
Answer: Enhance competitiveness of the US market, as well as to live up to his climate action ambitions.
Biden has been highly vocal about climate action being a primary focus during his time in office, stressing the imminent dangers to American citizens and communities. The IRA can thus be seen as a practical application of his climate rhetoric as it stimulates the shift to cleaner forms of energy and the reduction of greenhouse gas emissions.
Americans are struggling to compete against foreign companies which get subsidies and other favours from their governments. Biden therefore aims to enhance US competitiveness in the international market through the IRA and simultaneously reduce reliance on foreign manufacturers. The IRA has been generally successful in doing so; especially the US-based battery manufacturing industry has significantly increased its competitiveness. On top of market competitiveness, the IRA reflects the wish to restructure global supply chains in order to account for geopolitical tensions as well as natural disasters.
Biden’s policies fit into a larger pattern of American policy trends. American foreign policy has a tendency to sway between isolationism and internationalism. The former implies the maintenance of a healthy detachment from the outside world where the latter refers to the promotion of American interests by actively pursuing their objectives abroad.
Currently, America finds itself in a more isolationist phase, especially Trump’s time in office represented a clear shift away from the liberal tradition of multilateralism. Trade policies are no exception to this trend, the IRA illustrates this nicely. The WTO is not useful in dealing with the rise of foreign subsidies and taking a path diverging from the WTO has therefore been chosen as the alternative way forward.
What is Von der Leyen doing?
Answer: The EU Commission led by Von der Leyen has launched a “European IRA” called the European Green Industrial Plan.
In February of 2023, Von der Leyen announced the launch of the EU Green Industrial Plan (EGIP) as a direct answer to the concerns raised by the American IRA. The deal aims to enhance the competitiveness of the EU’s net-zero industry and support a faster transition towards climate neutrality. It provides US $272 billion for green industries, in the form of investments and tax breaks. It builds on a variety of pre-existing EU climate policies such as the European Green Deal and REPowerEU.
So what’s in the deal? The elaborate answer is that it is based on four pillars. 1) Creating a predictable and simplified regulatory environment. This means that it should become easier for EU based companies to procure materials like rare earth elements. 2) Faster access to funding, meaning it will be easier for Member States to grant funding related to the green transition as well as more EU funds. 3) Enhancing the skills necessary for workers in sectors affected by the green transition. 4) Stimulating open trade and resilient supply chains, meaning working towards global trade cooperation for the green market which supports the principles of fair cooperation.
A more simple answer is that the deal attempts to preserve both the EU’s industrial ambitions and supply chain security while maintaining fairness of its internal and external trade.
Who is winning and what about you?
Answer: The US market is becoming more competitive and its economy is outperforming that of the EU. The future of transatlantic relations depends on what goes down in the 2024 elections.
Biden’s goal of improving US competitiveness globally and stimulating the economy has been more successful than EU efforts to do the same. The US has managed to sustain strong economic growth where the EU’s growth has been much slower, EU efforts to enhance competitiveness and prioritise economic growth are simply not up to par. However, this is not related to the IRA as much as some would like to think. In fact, repercussions of the IRA on the EU economy have been much more limited than initially speculated, and definitely did not lead to a trade war. The EU economy is also not likely to go into a recession.
With committed transatlanticists Biden’s and Von der Leyen’s terms coming to an end in 2024, the future of transatlantic relations is entering uncharted territories. If Trump, who openly questioned multilateralism and was highly critical of the EU in general, returns to office, EU-US relations might take a turn for the worse. Simultaneously, there is a very real chance of both leaders returning to their respective positions which will likely imply a prolongation of current state of affairs.
The increasing role of protectionism on both sides of the Atlantic have implications for the international trade order ruled by the WTO. This new era of global trade provides opportunities to those eying a way out of multilateralism.
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