More economic cooperation, not a trade fight, is the way ahead in Transatlantic relations

Politics - February 15, 2023

The recent trip to Washington by the ministerial duo Bruno Le Maire, French Finance Minister, and Robert Habeck, German Economic Affairs Minister, has highlighted looming tensions in the current Transatlantic relationship. As with adults, tensions may be conducive to significant improvements in a relationship if appropriately managed, but also to further deterioration, if left unchecked.

Let’s consider the facts, first. The prompt has been offered by the Inflation Reduction Act through which the US Administration intends to allocate almost $400 billion on energy security and climate change programs over the next 10 years. A point of contention is the consumer tax credit of up to $7,500 for electric vehicles that are assembled in North America. There are some escape clauses for parts originating from, or being assembled abroad, but those apply to countries that have a trade agreement with the US. As it turns out, the EU boasts very close commercial ties with the US, yet the two blocs fall short of a formal trade agreement.

In sum, the provisions requiring local assembly and minerals contents to qualify for electric vehicle tax credits discriminate European companies vis-à-vis those based in the US. European officials further believe that those measures would end up diverting investments away from Europe to the US. Needless to say, this comes at the worst possible moment with Europe being especially hit by the economic consequences of the Russian aggression to Ukraine: the energy crisis as well as sanctions and counter-sanctions are all impacting its economies at the worst possible moment. As if all that were not enough, the resulting inflationary pressures have prompted the ECB to restrict its monetary stance by raising interest rates by 3 percentage points so far.

We shall learn in due course whether the Franco-German mission to Washington has been successful and to what extent. For now, it highlights a sparkling tension in the Transatlantic relationship. On the one hand, free nations across both sides of the Atlantic support Ukraine by cooperating militarily and diplomatically within NATO. The benefits of these efforts will be equally shared but the costs are hitting some countries more heavily than others. On the other, the EU and the US are on the verge of a trade dispute with the EU now working on a retaliatory package. Most likely, both sides will end up worse off, as it is typically the case in any trade fight.

Countries whose recent history and values could not have been any closer have fallen short of pursuing a broad economic cooperation framework. It is high time that the EU and the US bridge this unforgivable gap.