“The United States is currently no champion of free trade”. That’s the message from Anna Stellinger, Deputy Director General and Head of International and EU Affairs at Swedish Enterprise, who adds that it has never been more important to engage constructively with the US. When the EU now seeks to react to the Inflation Reduction Act, we need to keep a good dialogue across the Atlantic and not lose sight of the long-term challenges, according to Stellinger.
Since President Joe Biden unveiled the Inflation Reduction Act (IRA) last autumn, fears have been growing over the future of global free trade. What happens to the rest of the world when one of the largest trading nations turns inwards and focuses exclusively on itself?
The IRA is the largest ever climate package to be approved by Congress. However, it is also an initiative that discriminates against foreign production and most likely violates international trade rules. It is for these reasons that Stellinger believes that parts of the legislation are problematic.
– There are clearly several reasons to welcome Biden’s climate package. It is the first time that the US has introduced a federal climate law, and it will have a positive effect on US commitments made under the Paris Agreement, and on the climate globally. In addition, it is a law based on incentives, or on carrots rather than sticks, and it focuses on the power of businesses and consumers to contribute to the green transition,” says Stellinger.
However, there are several fundamental problems in the way the legislation is designed, Stellinger argues, especially in terms of its discriminatory aspects.
Risks triggering a trade conflict
– “In order to receive support under the IRA, a considerable proportion of products’ input must be manufactured in the US or a small number of other countries; and in the case of electric cars, they have to be assembled in North America to meet the requirements. In other words, there is a distinction where production takes place and a discrimination against all other production. This is incompatible with our common rules in the World Trade Organization (WTO) and risks triggering a trade conflict.
–“Furthermore, it’s rarely the environment you have top of mind in these situations – if the environment really is the focus, then domestic production is not necessarily always the best, cheapest for consumers, nor the most climate-smart.”
The US has shifted its position
The question is, has the US changed its position on free trade and competitiveness with the IRA? Stellinger argues that the US has continually changed its view on free trade.
– ’’At times, the US has been a driving force for free trade and for common global rules, for example through the WTO. But for several years – under Biden and Trump – that position has definitely shifted. Both presidents have focused on domestic production, on job creation, and American workers in the US.”
There are several reasons for the shift, Stellinger explains. Among other factors, she points to the threat from systemic rival China, to the security agenda entering into trade policy, and Trump’s previous conflict with and distrust of the EU.
– “The United States is currently no champion of free trade. On the contrary, it has weakened the WTO, stalled several free trade negotiations, and failed to start new trade talks. And now, with the IRA, the US has introduced legislation that most likely violates international trade rules.”
At the same time, the US continues to emphasize the importance of good and strong relationships with allies. This is why discussions with the EU under the auspices of the Trade and Technology Council are so important, the trade policy council established between the EU and the US in June 2021. This must be preserved, Stellinger says.
Violates WTO rules
Stellinger’s main objection to the IRA is that it creates a general challenge to international trade rules agreed on by the 164 member countries of the WTO.
– ’’If a country the size of the US doesn’t respect the rules, why should other countries respect them? It also undermines other ongoing negotiations at the WTO. There are no winners in this.
– “There’s also the risk of what we might refer to as a subsidy race, that is, other countries or regions making their own IRA laws in response to the US legislation. This could result in politically initiated and controlled regionalisation, which is not necessarily optimal for the climate, trade or consumers. On this point, the EU’s response to the IRA is key in our view. The EU needs to keep its cool and a sense of proportion and try to avoid a conflict with the US. When the world is as challenging as it is now, we need a strong transatlantic relationship.”
It is unclear precisely how the IRA will affect Swedish businesses.
– “While some Swedish businesses will be entitled to receive support under the IRA, there may be others that export from Sweden and the EU that will be negatively affected, regardless of whether they produce input goods or finished products. At the moment, we don’t know with certainty how businesses will be hit or helped; sections of the IRA still need to be clarified with guidelines.”
Stellinger believes that there are several ways forward for the EU, ranging from taking the issue to the WTO, to the EU acting unilaterally and introducing rapid reforms of its own.
Stellinger breaks down the options into five main tracks:
Stellinger sees the first two options as fruitless och counterproductive.
– “Taking this to the WTO would drag on, and potentially result in a decision that the US wouldn’t respect anyway. We’ve seen recently how the US has ignored a panel ruling from the WTO. Neither does a case like the famous Airbus-Boeing dispute offer a good solution. We remember how the decade-long dispute between the EU and the US – with each accusing the other of illegally subsidizing their own industries – benefited no one. Except possibly countries not taking part in the conflict, like China.”
In recent weeks, various EU countries and EU commissioners have reacted to the IRA. On February 2, Ursula von der Leyen presented the EU response to IRA, a Green Deal Industrial Plan. There are parts of the plan that are positive, such as the idea of a simpler regulatory framework, more focus on skills and competences and open trade with third-party countries.
On the other hand, the part of the plan that has to do with funding, such as more flexible state aid rules, can be problematic. More state aid in member states can create imbalance and distort the EU’s single market. At the same time, a European response to the IRA will most likely mean more common EU funding in the form of a new, joint European sovereignty fund. The risk with such a response from the EU is that we create a global subsidy race – which does not benefit trade, businesses, consumers, or the climate. In addition, it is not necessarily subsidies and state aid that creates long-term competitiveness”.,
It is thus the fourth and fifth options that Stellinger wants to underline at the moment.
– “Even though the IRA has been passed, not all guidelines are put in place for the implementation,” she points out. “Dialogue with the US is crucial to remove some of the discriminatory and regrettable aspects of the IRA.”
“Doing nothing is not an option”
According to Stellinger and the expert organisation she oversees, there are already certain openings on the US side, including with regard to electric cars that are leased in the US.
– “The US guidelines for the implementation of the IRA are not expected to be ready until March; so until then we need to work constructively with the US to see if it is possible to include European businesses in the IRA. That window is still open.”
But Stellinger also believes that the EU needs to continue to improve conditions at home as much as possible, too.
– “The EU needs to do its homework and we need to do it right here, right now. There’s a lot we can and must improve at home in the EU in terms of simplifying rules, significantly accelerating permit processes, removing barriers already known in the EU single market, as well as putting in place the strategically important free trade agreements that are already negotiated and generally have a greater focus on EU competitiveness.”
Can the Swedish EU presidency make a difference? Stellinger believes it can.
“We need to maintain a good dialogue with the US in the near future and not fan the flames of a transatlantic conflict.”
– “Sweden’s presidency could play a key role, especially in finding a well-balanced response with a sense of proportion. We need to maintain a good dialogue with the US in the near future and not fan the flames of a transatlantic conflict.
– “Sweden also needs to continue to focus on the EU’s long-term competitiveness and stimulate it through a reliable energy supply, more efficient permit processes, a deepened single market and open trade with the rest of the world, for example.”
And of course the EU will act, says Stellinger:
– “Doing nothing is not an option.”