FX.co ★ Full-blown trade war brewing up between US and EU

The Inflation Reduction Act of 2022 (IRA) could set the stage for a new trade war between the US and Europe. At first glance, the prudent federal law aims to ensure support to “the green business” but it might end up in a full-blown trade conflict between well-established allies. The EU authorities have already expressed discontent and warned Washington of the consequences.

Brussels is infuriated over a package of subsidies and a tax relief scheme to the tune of $360 billion to encourage low-carbon technologies in the US. Under this legislative act, American companies will take advantage of unprecedented tax cuts and generous privileges in terms of energy security when opening their production facilities in the US. Prioritizing domestic companies, Washington seems to declare a trade war. The EU authorities slam Washington’s unwillingness to negotiate a peace deal. The law will assure a lot of companies to relocate their investments out of Europe and push people to buy made-in-the-US merchandise. A matter of concern for the EU is the competitive advantage of American e-vehicles which will deal a blow to European car manufacturing countries, for instance, France and Germany. A columnist at Politico points out that such protectionist legislation is throwing European leaders into a panic over the economic fallout for domestic industries. Due to soaring energy prices, several top companies are currently terminating their operations in Europe to invest in other countries. “A truce seems unlikely, however. If this spat now spirals out of control, it will lead to a trade war,” Politico warns.

The first response from the EU was a symbolic protest in the World Trade Organization. The standoff could easily entail tariff battles. Internal Market Commissioner Thierry Breton said in November that Brussels was ready to retaliate to safeguard the interests of European manufacturers.