The global issue of deforestation and its environmental consequences stand at the forefront of Brazil’s agenda as it directs a critical crossroads. In this context, the Brazilian Ecological Transition Plan, an initiative by the Ministry of Economy, emerges as a vital step towards positioning Brazil as a leader in sustainability and environmental responsibility. This plan, currently in progress, addresses urgent ecological challenges and sets the course for a more sustainable and resilient future.

However, Brazil’s path towards sustainability faces challenges, particularly concerning the EU-Mercosur Agreement. This agreement, designed at bolstering cooperation and economic growth, has been met with concerns. Increased trade in agricultural products between Mercosur countries and the EU could potentially aggravate deforestation, raising questions about the compatibility of the agreement with environmental goals.

Therefore, International Law serves as a guiding force in promoting responsible environmental practices. The interrelation of ecosystems transcends national boundaries, necessitating collaborative efforts among countries to mitigate environmental degradation. In this context, Brazil’s ambitious plan aligns with the principles outlined in international agreements such as the Paris Agreement. By adhering to these agreements, Brazil can signal its commitment to global efforts to combat climate change.

As negotiations proceed, finding common ground on environmental commitments is essential for successful ratification and the realization of mutual benefits. Brazil’s Ecological Transition Plan and the EU-Mercosur Agreement offer opportunities to demonstrate global responsibility and sustainability. By navigating these challenges, Brazil can emerge as a steward of the environment, contributing to a greener, more sustainable future.

Context

The Brazilian Ecological Transition Plan, announced by the Ministry of Economy, represents an initiative that seeks to position Brazil as a global leader in sustainability and environmental responsibility. This plan is still in progress and is set to tackle pressing ecological challenges and pave the way for a more sustainable and resilient future.

The Ecological Transition Plan, consisting of six major pillars, presents a comprehensive approach to address key environmental concerns in Brazil. These pillars include sustainable finance, technological densification, bioeconomy, energy transition, circular economy, and climate adaptation infrastructure. Each pillar aims to tackle critical challenges and foster a more sustainable and environmentally responsible future for the country.

The Plan also encompasses a wide range of measures to address key environmental concerns in Brazil. It includes initiatives such as establishing a regulated carbon market, implementing carbon taxes, and launching sustainable bonds to promote sustainable finance. In addition, the plan emphasizes a circular economy model that promotes resource efficiency, waste reduction, and innovation.

The implementation of the Ecological Transition Plan will be executed over the course of President Luiz Inácio Lula da Silva’s period, with some initiatives already starting this semester. Therefore, it is a testament to the government’s commitment to embracing sustainability and transitioning towards a greener and more ecologically responsible economy.

EU-Mercosur Agreement in the Context of Brazil

The EU-Mercosur Trade Agreement stands as a testament to the strengthening ties between the European Union and the Mercosur states, which include Argentina, Brazil, Paraguay, and Uruguay. This landmark agreement was politically finalized on 28 June 2019, marking a significant step towards fostering mutual growth, sustainable development, and increased trade and investment between the two regions.

Key components of the agreement include the reduction or elimination of tariffs on various goods and services, improved access to government procurement opportunities, protection of intellectual property rights, and facilitation of investment flows. By streamlining trade procedures and reducing barriers, the agreement aims to boost economic growth and create new opportunities for businesses in both the EU and Mercosur countries.

The agreement holds strategic importance for both parties. For the EU, it represents an opportunity to expand its market access in the dynamic economies of the Mercosur bloc and gain a competitive edge in sectors like machinery, chemicals, and automotive. On the other hand, Mercosur countries, especially Brazil, stand to benefit from increased export opportunities for their agricultural products, such as beef, soybeans, and poultry, which are vital components of their economies.

From Deforestation to Protection

The EU-Mercosur agreement, while aimed at fostering economic cooperation and trade between the two regions, has been marred by significant concerns surrounding logging in recent years in Brazil. Due to the intensified trade in agricultural commodities, from Brazil to the EU, there is a threat of deforestation being exacerbated. The expansion of agribusiness and the demand for these products could lead to further devastation, as agricultural land is cleared to meet the export demands.

In response to the growing concerns, the EU has sought to impose environmental requirements on Mercosur countries, including Brazil, to ensure adherence to sustainable practices and the Paris Agreement’s environmental goals. However, Brazil has been resistant to these proposals, raising concerns about the agreement’s compatibility with climate and environmental objectives.

Nonetheless, a striking contradiction reveals itself when inspecting the EU’s stance on deforestation. While the EU actively urges Mercosur nations to halt deforestation and embrace sustainable measures, it concurrently remains a potent catalyst for this very degradation due to its robust appetite for agricultural imports. Products like Brazilian soybeans and beef, in high demand in European markets, are frequently associated with the expansive clearing of forests for cultivation.

The EU’s consumption habits, marked by their significant imports, inadvertently fuel the deforestation they are keen to diminish. This juxtaposition not only muddies the agreement’s narrative but also casts a shadow on the EU’s true dedication to sustainability, given their prevailing consumption patterns.

As described by Knox in his exploration of “Imperialism, Hypocrisy and the Politics of International Law,” the contradictions and accusations of hypocrisy are not mere anomalies but rather intrinsic facets of international relations and policy-making. This framework can be aptly applied to the EU’s stance on deforestation. 

While on one hand, the EU guardian environmental sustainability and urges Mercosur nations to halt deforestation, its consumption patterns reveal a contrasting narrative. This duality in the EU’s actions mirrors the broader theme Knox emphasizes: the tension between proclaimed values and actual practices in the realm of international law and relations. 

Additionally, President Luiz Inácio Lula da Silva’s recent speech at the Power Our Planet event in Paris served as a poignant reminder of the complex interplay between environmental responsibility, global consumption, and historical accountability. With resounding applause, Lula stated, “It is not the African people who pollute the world, it is not the Latin American people who pollute the world… they must pay the historical debt they have with planet Earth.” These words resonate as an echo of the concerns arising from the EU’s demand on Brazil to address deforestation while European consumption drives it.

With the return of Luiz Inácio Lula da Silva to the presidency, there has been a significant shift in Brazil’s approach to the Amazon. Data from various sources indicate a substantial decline in deforestation rates since Lula assumed office. According to government satellite data, deforestation in the Amazon dropped by 33.6% during the first six months of Lula’s term. This decline is even more noteworthy when compared to the same period in the previous year.

Several factors contribute to this positive trend. The new administration has emphasized the importance of environmental conservation and has taken proactive measures to protect the Amazon. The government’s efforts, combined with international pressure and increased global awareness about Amazon’s significance, have played a critical role in this decline.

Challenges and Perspectives

The EU-Mercosur Agreement has faced several complications in the ratification process. Some EU member states have expressed objections regarding the environmental aspects of the deal. As of the current context, the agreement remains pending final approval and ratification from all the EU member states.

However, the European Commission President, Ursula von der Leyen, is determined to conclude the long-delayed trade deal between the European Union (EU) and Mercosur countries. With the geopolitical landscape evolving, the EU recognizes the importance of strengthening ties with Latin America and is eager to avoid neglecting the region any further.

During her tour of Latin American countries, von der Leyen, alongside Brazilian President Luiz Inacio Lula da Silva, emphasized the urgency of accelerating negotiations and finalizing the EU-Mercosur agreement. Both leaders expressed their ambition to reach a conclusion as soon as possible, aiming to achieve this milestone by the end of the year.

Nevertheless, even though both European and South American leaders are excited to sign the agreement and tout its potential benefits, authors such as Jason Hickel present a thought-provoking perspective that challenges the conventional notion of sustainable economic growth. 

His argument centers on the assertion that the pursuit of never-ending economic expansion is incompatible with the finite nature of Earth’s resources and the urgent need to mitigate environmental crises. According to this view, achieving genuine sustainability requires more than mere tweaks to existing systems—it demands a profound reevaluation of our societal values and consumption patterns.

At the heart of this perspective is the notion that true environmental resilience necessitates a departure from the relentless cycle of production and consumption that has characterized modern economies. Proponents of this viewpoint argue that focusing solely on increasing GDP and material accumulation exacerbates resource depletion, pollution, and ecological degradation. Instead, they suggest that by reining in production and consumption, we can reduce our collective ecological footprint, allowing ecosystems to regenerate and reducing the strain on vital resources.

The idea isn’t to strip away comforts or advancements, but rather to challenge the prevailing assumption that continual material accumulation equates to progress. By reimagining prosperity and embracing a more holistic perspective, societies can allocate resources more efficiently, reduce waste, and cultivate lifestyles that are both environmentally regenerative and personally fulfilling.

To address the pressing environmental crises, the reevaluation of growth becomes imperative. The view that sustainable economic growth is an oxymoron suggests that we must be willing to question the status quo and explore alternative pathways that prioritize harmony with the planet over unchecked expansion. This approach invites us to consider innovative economic models that prioritize well-being, foster resource equity, and champion ecological restoration.

Despite these issues, analysts remain optimistic about the agreement’s prospects. Trade between the EU and Mercosur countries has been steadily growing over the past two decades, even without a formal agreement. The conclusion of the EU-Mercosur agreement holds immense potential for enhancing trade, economic collaboration, and sustainability between the regions. As the negotiations progress, finding common ground on environmental commitments will be crucial in securing the deal’s successful ratification and realizing the mutual benefits for all parties involved.

Conclusion

The discourse surrounding Brazil’s Ecological Transition Plan, the EU-Mercosur Agreement, and global environmental concerns reveals a nexus of economic interests, sustainability goals, and geopolitical maneuvers. Brazil’s commendable efforts to position itself as an environmental steward are evident in its Ecological Transition Plan, aiming for a sustainable and resilient future. Also, the return of Luiz Inácio Lula da Silva to Brazil’s presidency signals a promising shift in environmental protection, supported by data indicating a reduction in deforestation.

Yet, challenges arise in aligning these intentions with the potential environmental implications of the EU-Mercosur Agreement, especially concerning deforestation. While the EU demands sustainable measures from Mercosur countries, notably Brazil, there exists a dichotomy in its actions, evident in the consumption habits that inadvertently spur deforestation. This discrepancy, exemplified through the EU’s simultaneous advocacy for environmental preservation and its consumption patterns, underscores the complex dynamics of international relations, as highlighted by Knox’s insights.

The arguments presented by thinkers like Jason Hickel provide an alternate perspective, suggesting that true sustainability might necessitate a departure from the traditional economic growth paradigm. Instead, a reconceptualization of prosperity, pivoting towards ecological harmony and well-being, might be the path forward.

The current global landscape, characterized by a heightened awareness of climate change and its ramifications, offers an unprecedented opportunity. Nevertheless, this shared vision for a prosperous and sustainable future requires not just agreements on paper but real-world actions, informed policymaking, and a steadfast commitment from all participants. 

Furthermore, as nations come together in this effort, they also have a single opportunity to lead by example. By successfully navigating these challenges, Brazil, the EU, and Mercosur nations could set a precedent for the world – illustrating how global collaborations can be rooted in both economic ambitions and an unwavering dedication to the environment. The path ahead may be complex, but with unity, innovation, and a shared ethos, they can illuminate the route for others, showcasing a harmonious blend of progress and preservation.

Pedro Serodio holds an LL.M in International and European Law at the Universität des Saarlandes and a Legal Assistant at MarketVector Indexes, in Frankfurt am Main, Germany

To read the article as it was published on the OpinioJuris webpage, click here.

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Critical raw materials (CRMs) are the bedrock of the world’s renewable energy systems. As economies around the world are committing to decarbonization, demand for critical minerals—the key components of clean technologies powering the green transition—is swiftly outpacing supply: the International Energy Agency (IEA) forecasts that the global energy sector’s requirements for energy transition minerals could quadruple by 2040. Confronted with growing competition for control over critical mineral supply chains, governments worldwide have implemented new policies, marshaled funding, and forged alliances to protect their access to these essential materials.

Although concerns over CRM supplies were raised as early as 2008, supply chain insecurities exposed during the Covid-19 pandemic and the challenges of reducing the EU’s energy dependencies in the aftermath of Russia’s invasion of Ukraine catapulted the issue of reliable access to energy transition minerals to the top of the EU’s political agenda.

The need to reduce dependencies on the EU’s access to CRMs figured prominently in Ursula von der Leyens political guidelines which were presented to the European Parliament on July 18th. She underscored the need to create a secondary market for CRMs, but also underlined that the EU need to diversify its supply and aggregate its demand as well as a need to boost European investment in the sector.

While we are still awaiting Mario Draghi’s report on the EU’s competitiveness, access to CRMs are also expected to be a central theme here. Speaking on April 16, 2024, Mario Draghi, the former president of the European Central Bank, thematized the urgency of securing Europe’s strategic autonomy in critical raw materials value chains. In a world where global superpowers such as the United States and China are turning to protectionist policies to shore up their CRM supply, the EU, Draghi underlined, needs “a comprehensive strategy covering all stages of the critical mineral supply chain.” 

The Critical Raw Materials Act (CRMA), which entered into force on May 23 of this year, is the EU’s initial attempt to build such a strategic approach. The regulation focuses on measures the EU can implement domestically to increase its raw materials resilience: ramping up extraction at home, increasing circularity and recycling efforts, and fostering innovation in alternative technologies. By 2030, 10% of all the EU’s annual consumption of strategic raw materials is to be extracted domestically and 40% is to be processed within the EU. At least 15% of the EU’s annual consumption is to come from recycled sources. According to observers, these targets set by the EU are widely ambitious and will most likely not be achieved by 2030.

The EU, however, will never be entirely self-sufficient in supplying the critical raw materials it requires and will always rely on CRM imports. Even in the best-case scenario where the CRMA’s goals are reached, 90% of the extraction and 60% of the processing of the EU’s yearly requirements will still occur overseas. Currently, geospatial concentration of supply chains leaves Europe’s critical raw material supply—and with it, Europe’s climate ambitions—vulnerable to supply disruptions, external shocks, and the tactics of trade wars.

For a handful of CRMs, the EU is almost solely dependent on a small number of third countries. For example, 98% of the EU’s supply of borate comes from Turkey and 63% of the world’s cobalt is extracted in the Democratic Republic of Congo (DRC). China’s stranglehold over global CRM extraction and, especially, refinement is a serious concern. For example, 100% of the rare earth elements used in permanent magnets are refined there. As the EU and US attempt to loosen China’s grip on CRM value chains, China is becoming more and more assertive in using its dominant position to defend its control of the market. In 2020, China ranked as the country with the most export restrictions on minerals, and, in 2023, introduced additional restrictions for graphite and for rare-earth mineral processing technology. Even the EU’s recently announced plans to impose tariffs on electric vehicles produced in China—an attempt to curb Chinese dominance at the downstream end of the critical mineral value chain—provoked Chinese authorities to open anti-dumping probes into European pork and French spirits in what was widely seen as a retaliatory response.

To secure a reliable CRM supply, the EU must reduce these dependencies. Thus, the CRMA establishes that, by 2030, not more than 65% of the EU’s annual consumption of each strategic raw material at any stage of the value chain is to be sourced from a single third country. This brief, which builds on Tænketanken EUROPA’s previous works, seeks to unpack the strategies deployed by the EU in pursuit of this diversification target. 

Why trade is not enough

There is an ongoing political discussion both within the Commission, but also among Member States, as to whether the EU can secure its critical mineral supply chains through mere import diversification or whether the EU also needs to build up industrial capacity in third countries. So far, the EU has been pursuing strategies along both these vectors, completing trade and investment agreements to increase its network of preferred trading partners and signing strategic partnerships to create investment opportunities overseas.

Industry forecaster, Benchmark Minerals, estimates that at least 384 new graphite, lithium, nickel, and cobalt mines will have to be opened by 2035 to meet global demand for electric vehicle battery materials alone. To secure true stability of supply, the EU thus cannot rely solely on increasing its number of trading partners but must be proactive in ensuring European engagement in supply chains on competitive terms.

Since mining and processing are capital intensive processes, accompanied by a slew of associated environmental and business risks, attracting investment in mineral projects poses a challenge the EU must overcome. The EU must think beyond its current strategies, which though feasible are not sufficiently innovative, to develop tools that will both incentivize and protect European stakeholder involvement.

Reducing dependencies through development: The EU’s Strategic Partnerships

The EU’s raw materials strategy has emphasized the creation of Strategic Partnerships on Raw Materials Value Chains, which are formalized in memoranda of understanding (MoUs) and pledge to facilitate investment in CRM value chains abroad. The EU has forged 13 such agreements with mineral-rich countries outside of the Union since 2017, with more agreements in the pipeline.

The partnerships aim to promote economic development in cooperating countries in mineral extraction, processing, and related infrastructure, scaling up global CRM output. Being non-legally binding, the MoUs are practical: they are easy to set up, quick to push through the internal machinery of the EU, and they satisfy a political appetite for official statements of cooperation. They are followed by more concrete, though still not legally binding, roadmaps identifying projects and laying out a step-by-step approach to achieving the goals of the partnership, which the EU and its partners agree to design within six months of the Strategic Partnership’s signing.

By opening up opportunities for EU investors to establish a foothold in third countries, the strategic partnerships constitute a means of establishing a European presence in global CRM supply chains. In the MoUs, the EU promises prioritized funding for projects through the EU Global Gateway, the EU’s foreign investment policy initiated in 2021. Global Gateway has earmarked a total of €300 billion to clean energy and infrastructure projects worldwide. Deploying Global Gateway funds and a Team Europe approach, under which the EU pools resources from the EU, Member States, and other actors such as development finance institutions and the European Investment Bank, the EU hopes to stimulate private sector investment in partnering countries. However, investors will need more concrete incentives than the Partnerships alone, not least because the Strategic Partnerships, as non-binding compacts, do not create the clear and enforceable legal guarantees necessary to support investments.

Reducing dependencies through trade policy: Understanding the EU’s exclusive competence FTAs

In addition to forming Strategic Partnerships, the EU has doubled down on efforts to bring pending trade agreements with resource-rich countries across the finish line, in a move to diversify its critical mineral supply by increasing trade privileges in CRM markets worldwide. While FTAs are broad arrangements that cover relations across a range of economic sectors, critical raw materials can be a driving force behind these agreements. All new EU trade agreements since 2015 have contained a dedicated chapter on Energy and Raw Materials.

Trade agreements have limited power to stimulate imports of critical raw materials into the EU because there is little scope for country-specific tariff reductions on CRMs. 92% of EU CRM imports do not pay import duties, whether because of tariffs set at zero or trade agreements already in force. The remaining CRM imports are covered by a tariff ranging from 2-7% for unprocessed and 3-9% for processed goods. As such, there is little scope for significant further reduction. However, the EU’s FTAs can be understood as reflecting a shift away from traditional trade liberalization methods and towards increasing opportunities for EU companies in sourcing SRMs overseas, much like the Strategic Partnerships, although FTAs are legally binding accords.

However, trade agreements might help restrict protectionist CRM policies implemented by mineral exporting countries. Such measures pose a worrying barrier to trade in critical minerals. In newly developed FTA provisions, the EU has included additional rules which aim to address defensive CRM trade strategies adopted by resource-rich countries and to close gaps in existing WTO regulations. Recent FTAs have also sought to open foreign markets to EU investors in the extractive industries of FTA partners, for example by securing preferential access for EU investors to trading opportunities and ensuring non-discriminatory procedures in the authorization of exploration and production licenses. 

Since 2017, the EU has crafted more agile FTAs—slimmed down agreements designed to fall under exclusive EU competence which can enter into force with only the consent of the EU Council and European Parliament. In this way, the EU has managed to accelerate the exhaustive ratification procedure associated with traditional trade agreements. However, the EU’s newest trade agreements, including the deals with mineral-rich Chile, New Zealand, and Vietnam, are unable to secure full protection and security for EU investors once they are operating in foreign markets: because investment protection counts as an area of shared competence, these FTAs must leave out provisions protecting EU investors against the expropriation of their investments.

Though offering a promising way of expediting FTA ratification, the inability of exclusive competence FTAs to secure investment protection makes these agreements weak supports for the Strategic Partnerships’ investment push. The EU’s current Strategic Partners are predominantly countries where no trade agreement with investor protection articles is in force, whether because negotiations have been on hold, as is the case in the DRC and Zambia, or because ratification is embattled, as is the case with the MERCOSUR country, Argentina.

Investment protection: The missing piece in the EU’s strategy

Neither exclusive EU competence FTAs nor Strategic Partnerships include robust, legal-binding, investment safeguarding measures, which, though controversial, can be crucial prerequisites for investor engagement. It is only with fully-fledged, shared competence trade and investment agreements that the EU has the ability to ensure legally binding investment protection mechanisms, including the shielding of EU investments against discriminatory judicial and administrative procedures and the safeguarding of investors against expropriation or nationalization of their investments. These rules have bite: Investor State Dispute Settlement (ISDS) provisions grant EU investors standing to sue the EU’s trading partners directly. Remedies include financial compensation or restitution of expropriated property. Due to investment risks in many of the EU’s partnering countries, investment protection provides the stability essential for the kind of investment in raw materials value chains that the EU hopes to foster. ISDS procedures, however, are increasingly coming under fire for enabling private companies to sue governments when climate policies or local opposition affects their profits. Should the EU’s trading partners grant EU investors the right to ISDS procedures, they would expose themselves to substantial risk of lawsuits and weaken their leverage to take further measures to protect the environment, as well as protected and indigenous land. As EU-level investor protection measures will not materialize soon, mechanisms for de-risking investment will have to be installed on a project level basis, including guarantees from the Multilateral Investment Guarantee Agency (MIGA) of the World Bank, from national export credit agencies, or the private political risk insurance market. 

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In addition to the three EV manufacturers mentioned, other EV producers in China that cooperated with the EU investigators received a weighted average duty of 21 percent. All other producers that did not cooperate were hit with the top 38.1 percent. These anti-subsidy duties come on top of the European Union’s regular 10 percent tariff on EV imports from China.

These new EU anti-subsidy tariffs are on par with those imposed following previous EU anti-subsidy investigations concerning imported goods from China. Rhodium Group estimates that collaborating Chinese firms in earlier investigations have faced new duties of an average of 19.7 percent. Meanwhile, in earlier EU anti-subsidy investigations, the exports of non-cooperating firms, such as coated organic steel products, received new duties of 44.7 percent, while Chinese exported truck and bus tires to the European Union in some cases were subjected to new duties of over 50 percent.

Imposing the lowest tariff on BYD, a leading firm that is opening a production facility inside the European Union, gives the company an advantage in the EU market. Its stock price has predictably benefitted. Similar circumstances pertain to Geely, which also has EU production facilities and enjoyed a relatively low additional tariff. By contrast, SAIC, which is the largest Chinese owned EV exporter to the European Union via its MG brand, has no current or planned EU production location. Its tariff will probably encourage it to locate EV production inside the European Union. As discussed in a previous blog, these circumstances add up to something functionally akin to Japan setting up auto production in the United States to avoid tariffs threatened in the 1980s.

Assuming that all EU-owned EV producers in China, as well as Tesla, cooperated with the EU investigation, they too face relatively low additional tariffs of 21 percent for EV exports to the European Union. And as researched by Rhodium, some China-based EV producers will suffer commercially from tariffs at this level. Rhodium estimated approximate differentials in profit rates for sales of EVs produced in China in both the Chinese and German EV markets, relying on available EV model manufacturer suggested retail prices. China-based EV producers like BMW, Tesla, and probably other foreign EV producers operating in China, as well as the Chinese company that makes the Nio, will face significant challenges for their future export profitability relative to their sales in China. The 21 percent tariff exceeds these firms’ estimated profit margin for sales in the German market, making exports from China unprofitable. However, these producers, of which most have EU-located production facilities, now instead have a commercial incentive to relocate EV production to Europe. It should here be noted, though, that the Commission in its announcement made clear that Tesla “may receive an individually calculated duty rate” later, and hence possibly face lower future commercial headwinds from these tariffs.

All told, the Commission has acted carefully after mounting a substantial anti-subsidy investigation, involving over 100 location visits and dozens of Commission staff, as discussed in an earlier blog post. New tariffs signal the political willingness—within World Trade Organization (WTO) rules—to confront Chinese EV trade practices while providing incentives for Chinese EV producers to locate production inside the European Union. And applying the lowest tariffs on BYD, the EV market leader in China and clearly the biggest commercial threat to EU car companies, points to the Commission following the facts of the case rather than being guided by crude protectionist instincts. This approach could set the stage for further cooperation in the future.

The Commission’s tariff announcement was for “provisional tariffs” on EV exports from China to the European Union, while “definitive tariffs” must now be set within four months. Definitive anti-subsidy tariffs, however, must be approved by a majority of the EU member states in the EU Council. Some member states may try to get the Commission to revoke or alter the proposed tariff levels to promote smoother trade relations with China in the auto sector. The final political review of the tariffs will also provide individual EV producers in China with the opportunity to seek their own (like Tesla) individually calculated (lower) definitive duty rate.

But the Commission’s cautious and fact-driven approach fostering more investment in Europe will make it harder for EU member states to challenge its decision. Perhaps the scope of the application of the top 38.1 percent tariff to non-cooperative firms can be negotiated at the margin, but it seems unlikely that the lower tariffs around the 20 percent level will be altered.

Will China respond to the European Union’s careful approach? Some retaliatory action against specifically targeted EU exports to China may be inevitable. These actions could affect EU agricultural imports as well as internal combustion engine (ICE) vehicles with large engines, or even aircraft, although given the global duopoly of Airbus and Boeing, the European Union is unlikely to punish the former to the benefit of the latter. China will also not want to antagonize German and other European car manufacturers that are among its allies in the fight against these new EV tariffs. Targeting the EU car industry for retaliation might be self-destructive. Various politically sensitive agricultural products hence seem a more likely trade outcome. China has now initiated an investigation into EU exports of pork and pork by-products to China.

Obviously, China has various other political and financial tools to retaliate. It could delay or redirect planned investments selectively to European countries backing the tariffs. Beijing is likely to take its time before responding to measure various countries’ reactions.

For China, the commercial bottom line is that the European market is important, especially because the US market has been closed off by the Biden administration’s tariffs, while Turkey (40 percent) and Brazil (35 percent by 2026) have recently introduced new EV tariffs that are even higher than EU levels. Beijing has every incentive to avoid an escalatory trade war with the European Union in the EV sector.

Finally, because the European Union followed WTO rules in its investigation of Chinese subsidies, it is signaling that it is not following the “rogue” path of the Biden administration justifying its EV tariff action on national security grounds. So perhaps Beijing will hold its fire also for political reasons.

The Chinese government might take this dispute in the EV sector to the WTO, perhaps as part of its Multi-Party Interim Appeal Arbitration Arrangement, to which both China and the European Union are parties. Such a move would help China to be seen as playing by the rules, unlike the United States, and it could even signal a potential settlement of the EU-China dispute on EVs.

To read the full blog piece as published by the Peterson Institute for International Economics, click here.

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Most of these products are already subject to high duties or extensive trade-remedy measures, so the amount of imports from China covered by the new tariffs, including EVs, is small at $18 billion. In fact, the US imports essentially no EVs from China. However, it is a sector of great concern to the European Union, which in October 2023 opened an anti-subsidy investigation into Chinese EVs, which may trigger countervailing duties. The US move may therefore have implications for the pending EU decision on countervailing duties on China.

An extraordinary decision, driven by domestic politics

The US decision on Chinese EVs is extraordinary in four respects:

• First, the 100 percent tariff is prohibitive. Ostensibly justified by China’s own subsidies, it would imply that half of the cost of Chinese EVs is paid for by government funds, far beyond the range of other estimates.
• Second, unlike previous protection episodes, such as when the US was responding to the threat of Japanese car manufacturers, there are virtually no Chinese car imports today, and US manufacturers, especially General Motors, already have large footprints in China, whereas they were marginal in Japan. Though GM sales in China have declined recently, for more than a decade until 2023, China was a profit engine and the company’s top sales market.
• Third, the EV tariffs depart from the US emphasis on national security to adopt anti-China measures (unless one believes that EVs are meandering Chinese spies), suggesting that all sectors are now in play.
• Fourth, the measure runs counter to the Biden Administration’s green transition goals, which include large tax breaks for EVs, intended to lower the cost for consumers of green alternatives.

The decision on EVs and its timing are strictly political and reflect the extraordinary power of the United Auto Workers union in swing states in the run-up to the US presidential election. The decision is nevertheless a surprise in the light of recent efforts at China-US rapprochement, including exchanges at senior military level, and talks on AI and climate change. China will be affronted and many China-dependent US firms, which had hoped for tariff reductions, will be disappointed. The decision is, however, consistent with US Trade Representative Katherine Tai’s “Worker Centric” trade policy which claims to place workers’ interests ahead of those of firms.

Global impact

The immediate economic impact of the tariffs will be minimal at the macro level, whether on quantities, prices, or exchange rates; $18 billion is tiny relative to the size of the two economies, and even the $500 billion that China exported to the US in 2023. Even so, they will hurt some Chinese companies and US importers. The effect on US consumers and prices will be minimal and take the form of lost future opportunities rather than immediate cost, especially in relation to EVs.

China’s retaliation (it always retaliates) will be proportionate and limited. If the past is a guide, retaliation will affect mainly some US agricultural exports, which can be sourced easily elsewhere, and US exporters will be compensated for their losses in China. But even if the Chinese government does not retaliate against US car exports and investments in China (which it continues to court), the Chinese consumer is unlikely to respond well to America’s extreme measure on EVs when he or she chooses the next car to buy.

Perhaps more worrying is the further escalation of tensions with China that the tariffs represent – a dangerous trend with many repercussions. It may undermine any Chinese willingness to play a moderating influence on the war in Ukraine. The tariffs also quash any notion that the US intends to abide by World Trade Organisation rules. These two considerations, by themselves, increase policy uncertainty globally and are bound to have a dampening effect on international trade and investment.

The US approach diverges from that of the EU, which is building a case for countervailing duties under WTO rules. Although the outcome may also be new tariffs, in the EU there will have been due process based on evidence. But politically, prohibitive US tariffs place enormous pressure on the EU to apply its own. Even though there is no immediate threat of trade diversion, EU firms such as Stellantis, and unions that lobby for tariffs, will argue that Chinese EV exporters, cut off from the US market, will focus on the huge EU market instead. Though EU firms are still the largest exporters of EVs from China to the EU by a wide margin, the share of Chinese indigenous manufacturers is rising rapidly.

The adverse effect on trade relations of the new tariffs will extend beyond trade under the WTO to encompass trade under regional agreements. This is because US politicians are determined to avoid China-sourced products coming in through the back door – strict rules of origin are already there to prevent that – and to prevent the products of Chinese-invested companies from entering. In their view, even if batteries, EVs and semiconductors are manufactured by a Chinese-invested company in a US trading partner, and are entitled to tariff-free treatment under a regional agreement, they should be discouraged. This also applies to Chinese companies producing in the US. Mexico and Morocco are two examples of US regional trade agreement (RTA) partners that host Chinese manufacturers of batteries and soon of EVs, where frictions are bound to rise.

Even though the EU remains more open to Chinese producers on its territory than the US (eg BYD in Hungary, CATL in Germany and Hungary), it will face a similar challenge with its RTA partners if, as expected, it applies its own tariffs on Chinese EVs. These tensions among parties to RTAs, together with China’s retaliation against EU and US EV tariffs, is likely to mark this episode as a classic example of protectionist contagion.

A separation of Chinese and US value chains?

The EV value chain is destined to increase greatly in importance to mitigate climate change. From the standpoint of US industrial policy, a big question raised by the prohibitive tariffs on Chinese EVs and by the accompanying resistance against hosting Chinese producers is whether a US EV/battery value chain entirely separate from China is sustainable and realistic. The US is undoubtedly capable of developing such a chain, but can it do so at reasonable cost and without falling behind in quality and efficiency? On the answer to this question rests the calculation of long-term consumer losses from the tariffs against the counterfactual, the speed of the US green transition, the burden on government finance from the possibility of more subsidies, and even the solvency of US car companies.

Even a cursory examination of China’s current competitive advantage in EVs suggests that the answer to the question is no. China produces almost twice as many EVs as the EU and US combined, the share of EVs in new car registrations is rising rapidly, and it has reportedly moved ahead at the combined quality/price/technology frontier. The latest BYD Model, the Seagull, sells in China at slightly less than $10,000, and has been highlighted as an illustration of China’s competitiveness. Tesla founder Elon Musk has been openly pessimistic about the West’s ability to compete with Chinese cars.

China’s cost advantage arises from a combination of scale, advanced and lower-cost battery technology, availability of IT and AI expertise, lower labour costs, and intense competition in the Chinese market, with dozens of domestic and foreign producers active. Central and provincial government subsidies still play a role, and their extent is what the EU investigation will evaluate. The only available and presumably reliable numbers on subsidies received are those declared by Chinese publicly traded companies such as BYD, and are small relative to turnover or value added.

China’s EV exports increased by over 60 percent in 2023 to reach 1.2 million units, directed mainly at Europe, Mexico and several emerging markets in Asia. Since the biggest Chinese EV manufacturers and their battery suppliers have developed distinctive assets (brand, technology and design), they are new able to set up manufacturing and distribution channels overseas, in markets including Thailand, Indonesia, Australia, Morocco, Mexico and Hungary. Chinese EV manufacturers are also rapidly gaining market share in China, where competitors are increasingly struggling.

As EVs become even more established worldwide, the scale advantage of the most successful Chinese producers over US-based producers will only increase, as will their capacity to target individual markets with customized products on a common platform. Finally, it is important to note that the largest US car companies, Ford and General Motors, are not in the best shape to compete in the intensifying EV market. Standard and Poor’s rates Ford’s and GM’s long-term debt at BB+ and BBB respectively, just below and just above investment-grade. The market capitalisations of BYD and Xiaomi, the two largest Chinese EV producers, are $86 billion and $62 billion respectively, while those of GM and Ford are both around $50 billion.

The EU’s strategy

Should the EU adjust its policies in the light of the new Biden tariffs, and if so, how? Note that since there will be no surge of Chinese EVs diverted from the US market, it is not a given that the EU needs to alter its course.

The EU’s trade strategy on EVs must pursue six main objectives: 1) a fair deal for EU manufacturers insofar as they are affected by China’s subsidies in excess of subsidies they receive at home, and one that is in line with WTO rules; 2) stand up for the interests of EU car exporters and manufacturers in China, which are also recipients of various subsidies; 3) the long-run health and competitiveness of the EU car industry; 4) protect the interests of consumers, especially those with low incomes, who would benefit greatly from cheaper cars; 5) ensure the speed of the green transition; 6) maintain a cooperative and constructive relationship with China for both economic and geopolitical reasons. To progress towards all six objectives simultaneously is a challenge, but can be done:

• The EU’s stated objective should be to arrive at competitive neutrality in the EV sector, enhancing and not preventing fair competition that will promote productivity growth and innovation. Accordingly, the countervailing duty margin on Chinese EVs should be computed objectively and realistically; it should be defined and documented in a way that is entirely robust to legal challenge at the WTO. It should also take account of subsidies at home to reduce the EU’s vulnerability to a Chinese counter: if the net subsidy is found to be zero, the countervailing duty margin should be zero, and the countervailing duty, if any, should be set at the minimum level consistent with the findings. The duty should be accompanied by a proposal to set up a China-EU working party with a mission to identify and monitor EV subsidies, and to reduce them with a view to eliminating the duty margin over a defined period.
• To ensure the long-term vibrancy and competitiveness of its car industry, to safeguard the interests of its consumers, to sustain the green transition, and to maintain good relations with China, the EU should adopt an open-door policy on Chinese inward investment in its EV and battery sectors, while insisting on continued fair treatment of its firms that have already established footholds in the Chinese market. The EU may need to prepare, ultimately, to confront US restrictions on China-invested cars produced in Europe, such as Geely-owned Volvos.
• It is possible that, once embarked on this course, the EU may nevertheless face an excessively rapid penetration of imported Chinese EVs sometime in the future. Should that happen, the EU may resort to a WTO-compatible safeguard measure. The advantage of the safeguard course is that the increase in tariffs would be time bound (three years). Safeguard tariffs must, however, apply to all imports, not only those from China.

Uri Dadush is a Non-resident fellow at Bruegel, based in Washington DC, and a Research Professor at the School of Public Policy at the University of Maryland where he teaches courses on trade policy and on macroeconomic analysis and policy.

To read the full analysis as published by the Bruegel, click here.

The post Rippling Out: Biden’s Tariffs on Chinese Electric Vehicles and Their Impact on Europe appeared first on WITA.

The horse is already out of the barn when it comes to China overtaking Europe and America economically and technologically. The key difference is that when America overtook Europe the two were not adversaries. Today China is, with Xi Jinping referring to the need for China to “win the battle” for core technologies. In contrast, too many U.S. and EU officials still cling to the fiction that it’s possible to negotiate with China to achieve fair competition and even cooperation.

While neither the U.S. nor the EU can hope to change China nor outpace its advanced industry growth, they can and should not lose the battle for either advanced industries (e.g., aerospace, high-speed rail, biopharmaceuticals, semiconductors, machinery, software, etc.), and or emerging ones (e.g., AI, quantum computing, synthetic biology). Collectively these are a principal source of geo-economic power and Chinese victory in these sectors would turn the transatlantic partners (the U.S., UK, and European nations) into techno-economic vassal states, dependent on China for key inputs. China has already won steel, shipbuilding, solar panels, and it is gaining high-speed rail, telecom equipment, EV’s, and machine tools.

Not losing this battle is not about figuring out what policies and programs to adopt. There are many reports from think tanks and others laying out such an agenda. Policymakers could easily craft an actionable agenda by inviting experts to a two or three-day brainstorming retreat. The real problem is that policy makers on both sides of the Atlantic do not take the China challenge seriously enough to do so.

As such, the most important task for the transatlantic policy community is to recognize the true nature of the threat and adopt a new conceptual framework. Albert Einstein once stated that “We shall require a substantially new manner of thinking if mankind is to survive.” Today, if the transatlantic community is to survive, elites will need a new manner of thinking. The two most important components are to:

1. Recognize that the EU and U.S. have far more in common than they don’t and that they are collectively in a great-power techno-economic competition with China that is more akin to war than a game of football guided by rules and norms; and

2. Understand that not losing this techno-economic war is the most important non-military task. It is about not losing, rather than winning, because it’s not likely the transatlantic community can gain significant global market share in these industries over China. But it can and should avoid seeing its key sectors slowly decimated by Chinese predatory practices like intellectual property theft, massive subsidies, and closed Chinese markets.

The United States, especially Congress, is further in understanding point 1, in part because since WWII the U.S. has shouldered the global defense of freedom. As such, it’s easier for American policymakers to understand the true nature of adversaries. Many EU policy makers naively cling to the belief that China is a “normal” nation competing for economic competitiveness just like democratic nations do, and that existing rules and institutions (like the World Trade Organization) can effectively address economic conflicts.

Thankfully, as the reality of Chinese innovation mercantilism become clearer, it appears that EU officials are shedding some of their blinders and utopian globalist beliefs. But when EU President Ursula von der Leyen states that: “Global integration and open economies have been a force for good for our businesses, our competitiveness, and our European economy. And that will not change in the future,” it’s clear that the EU has still not caught up to reality. Is it too much to ask for EU policymakers to not lag five years behind the United States in understanding the true nature of the China challenge?

On issue 2, the United States is also ahead, but not by as much. While “Trump” Republicans and many centrist Democrats understand the importance of not losing the techno-economic war to China, many traditional Republicans are worried more about military superiority over China and about maintaining “freedom” and a small government at home. Industrial policy remains anathema to them. For most Democrats, including the Biden administration, competing with China takes a backseat to what they see as the two most important challenges: climate change and racial equity, with the latter requiring significant income redistribution and limits on corporations. Indeed, when President Biden was running for President, he made it very clear that he rejected the notion that China was an economic threat to the United States. In 2019 he stated, “China is going to eat our lunch? Come on, man…. I mean, you know, they’re not bad folks, folks. But guess what? They’re not competition for us.” The administration seems to still believe this as it has done little to confront China’s innovation mercantilism other than its export controls on semiconductors, which it justifies in military terms. If the view is that China does not present a competitive challenge to America, the door is open for hundreds of billions of dollars for domestic spending: building mass transit, insulating houses of low-income Americans, subsidizing costly clean energy, eliminating college debt, and expanding health care. Acknowledging the true nature of the China threat would require way more techno-economic “guns” and way less domestic policy “butter”.

Unfortunately, the dominant views in the EU are even worse, with an almost exclusive focus on clean energy. Winning the solar panel race will not cut it. And when it comes to winning in advanced industries, the EU seems to think winning means designing the most restrictive technology regulations, while at the same time punishing U.S. technology companies.

Sadly, it does not appear that this will change any time soon. Both EU and U.S. officials tell themselves that they can have their green cake and eat it to; that by leading the clean energy transition they can outcompete China. But that is not the case. There are far too many sectors critical to national power that will not be supported by a green industrial policy, including aerospace, semiconductors and advanced computing, machine tools, and biopharmaceuticals. And in the United States the libertarian right and the “equalitarian” left shows no signs of retreat, with the former wanting more military spending and less spending on everything else (including competing with China), and the latter wanting to use regulation and competition policy to tear down large corporations, while ensuring that tax and spending advances social policy goals not competitiveness.

Nonetheless, let’s suppose the ideal happens and conceptual frameworks change that in turn enable real policy innovation. In the United States this would mean that virtually all federal government programs and regulations that affect the economy are restructured and reinvigorated around the goal of not losing to China. To be sure, this is easier said than done. The old “DNA” of federal agencies is deeply entrenched. And powerful special interests resist real change.

Still, one can hope. Let me provide two examples of how change might happen. First, the U.S. science system. The current system dates to after WWII when the academic science community convinced Washington that personal investigator-directed scientific research focused on basic science was the key. Policy makers are told that any changes to this will have dire consequences, not just on the conduct of science but on U.S. technological leadership.

But that system, like so many other U.S. systems, is no longer purpose fit for a world where China is the pacing competitor. In the old model, researchers pick the areas of research. In the new model, the state prioritizes key areas where China is a threat. In the old model, the federal government provided the lion’s share of funding. In the new world, industry funding, incentivized by the federal government, needs to play a key role. In the old world, publications were the key goal. In the new world, transferring knowledge to the domestic private sector is the key goal. In the old world, science was seen as global, so cooperation with Chinese scientists and university students is an unalloyed good. In the new world, science cooperation with China is seen as fraught with risks.

To be sure, Congress is aware of some of these challenges, but unwillingness to see China as an existential threat means that efforts at change have been incremental at best. A case in point is the 2022 CHIPS and Science Act. The Science part created an initiative to fund research in 10 key areas, but because of political pressures and limitations the program was placed in the National Science Foundation (NSF), rather than in an agency more focused on commercial development. And the original industry areas were broadened to include domestic social challenges, like clean water. When it came to funding, the original legislative funding proposals were cut in half, while funding for the traditional NSF science programs doubled. Finally, as NSF implements this program it’s likely that the “working with industry” component will be paid lip service at best.

If Congress took the China challenge truly seriously, it would have done something quite different and far bolder. Congress would have created a National Advanced Industry and Technology Agency dedicated to working closely with industry. It would have appropriated far more money and required that most of the money be spent in university-industry research partnerships to support industries and technologies threatened by China.

We see that same incrementalism regarding the U.S. Export Import Bank (EXIM), an agency established in the 1930s to provide exporters with patient capital. Congress realized that through its massively funded export finance and development banks China was bribing the way for its industries to capture contracts and influence around the world. In response, Congress created within EXIM the China and Transformational Export program, which requires EXIM to invest 25 percent of its lending authority in deals that compete with China in ten designated technologies. Certainly, a useful step.

But if Congress took the China challenge truly seriously it would have picked technologies critical to America’s future (water treatment is not one), provided significantly more lending authority to the Bank, and allowed a loss rate of at least 10 percent (instead of mandating that the Bank earn at least a 2 percent rate of return). It also would have changed the core mission of the Bank from job creation to winning the global battle for advanced industries with China. This would include lowering the domestic content requirements to enable the Bank to fund a greater number of projects that contain less American labor, but that still challenge Chinese expansion.

In other words, U.S. efforts have been incremental. If China is truly seen as the existential threat to the West, we’d see a new approach to not just science and export financing, but to many areas of economic policy. We would see a trade policy that prioritizes market opening for advanced industries (rather than supporting all industries, including agriculture and financial services, equally) and revised and improved trade protection tools to limit market access of unfairly supported Chinese companies. We would see a much more generous R&D tax credit and a new investment tax credit. We would see a regulatory system with two tracks, one for domestic-serving industries and a more-flexible one for sectors competing globally, especially with China. Congress would transform the Small Business Administration into the New (high-growth) Business Administration. We would see a workforce development system focused more on generating skills needed for advanced industries, and less on subsidizing English literature degrees.

The EU is no different. There is no broad-based commitment to outcompete China, even if EU officials naively believe that its green strategy will do the trick. And there is an unwillingness to invest. For example, the new German China strategy states: “we will strive to implement this Strategy at no additional cost to the overall federal budget.” Good luck with that because without significantly increased financial support for German innovation and advanced industry companies, Germany will lose.

But even if the EU and the U.S. develop a broad-based consensus on the real nature of the China challenge, domestic action alone will not be enough. We need to join forces. And that has to start with real transatlantic cooperation. Unfortunately, Europe thinks it is competing against both the United States and China, and that it needs strategic independence from both. This is music to Beijing’s ears. During the Obama administration I co-chaired its U.S.-China Innovation Experts Group. At a lunch in Beijing with a high-level Chinese government official I asked how the Chinese government would handle increased resistance to Chinese unfair economic and trade policies. The official said they were not worried about individual countries or even the G20. What really worried them is the G2: a strong alliance between the EU and U.S. It was the threat of the G2 “ganging up” on China that kept him awake at night.

Today, he must be sleeping very soundly, for the trade tensions between the EU and the United States are quite high and the EU refuses to name United States a key ally and China a key adversary. To listen to many EU officials, one could easily get the message that the United States is the EU’s key technology adversary.

The reality is that the United States cannot adequately prevent Chinese global technological dominance without full and unstinting cooperation with the EU. Because if China wins in Europe, its companies will be too powerful for American companies to compete with. But this cooperation will not happen until policy makers accept the two key realities discussed above.

While some in the EU seem to be moving in the direction of recognizing that China is not a “normal” country when it comes to trade and globalization, overall, the EU has a long way to go, especially as Germany keeps resisting EU efforts to get tougher with China and as EU officials still maintain the fiction that it is possible to reform the WTO in ways that can stop China’s mercantilism. They even believe that, “China should play a part commensurate with its economic weight to help achieve this objective.” It boggles the mind to believe that China will allow changes to the WTO that would constrain its widespread manipulation of the global trading system.

Likewise, when the Commission states:

to achieve a maximum benefit from the trade and investment relationship between the EU and China, solutions to long-lasting concerns will have to be found. Ensuring reciprocity, achieving a level-playing field, and addressing asymmetries in the relationship is a matter of priority.

That ship has sailed. The only reciprocity, level-playing field, and addressed asymmetries possible is from the transatlantic side; China will not roll their mercantilism back. EU officials appear to be living in a fantasy world where if only they can have enough meetings and “constructive dialogue” China will start playing fair. Germany continues this delusion in its “Strategy on China” which states: “At the same time, China is an essential partner as regards global challenges. No it is not. The CCP’s coverup made the pandemic worse. And there is no need to “partner” with China on climate change. China will cut emissions when CCP officials see it as in their interests to do so and bribing them to do so lets China win.

At the end of the day, the EU needs to decide whose side it’s on. The EU wants it both ways: to be friendly with China and the United States, and to avoid getting involved with the “U.S. trade war” which most in Europe wrongly see as U.S. protectionism. The reality is that America did not start the “trade war” (China did in the 2000s) and it is not being fought solely for the United States; it’s being fought on behalf of all allied nations. It’s time the EU stopped free-riding on U.S. efforts (though doing so appears to be one of Europe’s few comparative advantages.).

Relatedly, the EU needs to significantly dial down trade tensions with the United States. This is not the place to litigate who is more at fault for deteriorating trade relations, although I would argue that most of the blame lies on the eastern side of the Atlantic. When German Chanceller Olaf Scholz states that European sovereignty “means in essence that we grow more autonomous in all fields; that we assume greater responsibility for our own security,” he is playing directly into the hand of Beijing. When EU Commissioner Theirry Bretton talks about the need for the EU to have digital sovereignty from the United States he is playing into the hands of Beijing. The fact that some EU officials appear to believe that the United States would cut off exports to the EU and therefore it needs strategic “derisking” from America boggles the mind.

While efforts like the EU-US Trade and Technology Council try to address some of the trade irritants, it is best a side show. Until the EU decides which path it wants to take, no bilateral efforts like the TTC will bear real fruit. As such, the EU has three choices. It can seek to continue to engage economically with China and hope to maintain acceptable relations with the United States. The problem with this is, as the German think tank MERICS has shown, the negative impacts of the Made in China 2025 plan are likely to be more damaging to the EU than to the United States. As each year goes by, the ability of EU companies to sell in China will deteriorate and the ability of China to sell in Europe will grow; as Europe is now seeing with electric vehicles. Why the EV export surge should have come as a surprise to EU policy makers is truly amazing.

Second, the EU can continue to go down its path of strategic derisking and digital sovereignty, where it sees both China and the United States as equal risks. That path will make joint efforts to limit China’s techno-economic aggression hard if not impossible, and it will result in tens of billions of Euros wasted to prop up industries for which the EU is better off relying on from the United States and other allies (and vice versa).

Third, deeply aligning with the United States (creating a “G2”), is the only course that will be effective in countering China. This means the United States and the EU dialing back recent protectionist actions, including U.S. steel tariffs (for which both the Trump and Biden administrations have been completely in the wrong on) and EU “digital sovereignty” actions that discriminate against U.S. firms. The two regions should however go much further and resurrect and pass a Transatlantic Trade and Investment Partnership that would eliminate all tariffs on products traded between nations and eliminate most if not all regulatory barriers to trade and investment. On top of this, both regions should establish much closer cooperation in areas of science and technology, foreign development assistance, and commercial counterintelligence against China. And most importantly the two regions should create a “demand alliance” focused on advanced technologies or inputs which would insulate markets from unfairly produced Chinese goods. This approach is based on reciprocity: the PRC constantly manipulates its market as a tool of statecraft. Joint policies to support this agenda would include tariffs to impose a price floor on Chinese product dumping—in sectors such as critical minerals—to enable market-based firms to compete, as well as long-term import restrictions on companies that systematically benefit from unfair trade practices, including closed Chinese markets and excessive subsidization.

As much as that is the optimal outcome, its prospects are not good. Too many EU activists are willing to fall on their swords on trivial issues like chlorinated chicken and GMO crops. Will EU leaders have the courage to ignore these radical voices, whose mission is to overthrow market capitalism? Probably not, at least until the threat from Chinese quantum computers becomes clearer than the threat from U.S. chickens.

Even without activists gluing themselves to paintings, close EU-US economic relations have always been stymied by Europe’s chip on its shoulder. Ever since Jean Jacques Servan-Schrieber wrote in his 1968 book The American Challenge, that “The American challenge [U.S. firms like IBM gaining market share and entering Europe] is not ruthless like so many Europe has known in her history, but it may be more dramatic, for it embraces everything” the EU has been in a defensive mode towards America. We see this in Europe’s decade-long campaign to achieve “digital sovereignty” as a remedy to “digital imperialism”. President von der Leyen claimed that “it is not too late to achieve technological sovereignty” in areas including AI, blockchain, and quantum computing. Commissioner for Internal Market and Services Thierry Breton claimed that EU efforts to do this, including limiting access by U.S. firms “is not a protectionist concept, it is simply about having European technological alternatives in vital areas where we are currently dependent.” The EU wants sovereignty, and strangely it sees its democratic ally, the United States, as more of a threat to that sovereignty than the Chinese Communist Party. It is willing to decouple from the United States, but not China.

Maybe there’s a middle way. At one level, who cares if the American farmers can sell chickens to Europe; poultry is not strategic. The real question is can the two regions develop a much more integrated economy in advanced technology industries, like semiconductors, drugs, automobiles, machine tools, digital and others, where they work together to support each other’s advanced industry development while limiting China’s market access and overall techno-economic advance. Only time will tell… But time is running short.

To read the full article as it was published by the Information Technology & Innovation Foundation, click here.

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The European Commission accuses the Chinese government of distorting competition with subsidies for electric cars and has launched an investigation into public support for electric cars in China. The President of the European Commission Ursula von der Leyen said in her “State of the Union Address” that global markets were being “flooded with cheaper Chinese electric cars,” posing a possible threat to the European Union’s fledgling and promising electric car industry. The anti-subsidy investigation is therefore intended to determine whether manufacturers of battery electric vehicles (BEV) in China benefit from countervailable—i.e., specific and advantageous to the receiving companies—subsidies and whether these are causing or threatening to cause economic damage to BEV manufacturers in the European Union (EU).

Similar discussions have been held regarding subsidies to Chinese producers of railway rolling stock and of wind turbines. In February 2024, the European Commission had launched an investigation into China Railway Rolling Stock Corporation (CRRC) for allegedly using subsidies to undercut European competitors in a public procurement procedure. With respect to wind turbines, no official anti-subsidy investigation has been launched so far. However, leading EU officials have argued that massive subsidies to Chinese manufacturers are encouraging cheap imports from China into the EU, driving European wind turbine manufacturers to the brink of ruin.

Even though these allegations are to be taken seriously, the data situation is currently highly unsatisfactory and the requirements for legally secure interventions by the European Commission, i.e., the imposition of countervailing duties on Chinese imports, are high. And even if the requirements for legally secure interventions were met, the question still arises as to whether import restrictions would actually be in the long-term interests of the European (and especially the German) industry and consumers.

The central prerequisite for an adequate analysis and adequate policy measures is reliable data on the scale and structure of Chinese subsidies in the areas mentioned. The available data is currently scarce, partly misleading and even contradictory. Tracking Chinese subsidies is a tough and challenging task for researchers because the Chinese subsidy system is highly complex and intransparent.

The current paper assembles data on overall industrial subsidies in China from different sources and provides some new data based on the analysis of the Chinese government’s most recent final reviews of purchase subsidies for new energy vehicles and the annual reports of the most important Chinese companies in the electric car and wind energy sectors.

The data shows that overall industrial subsidies in China are significantly higher than those in large EU/OECD countries. Depending on the type of subsidies covered and the data sources and methods used, the estimates vary greatly between the different studies, however. For 2019, even according to a very conservative estimate, Chinese industrial subsidies amount to about Euro 221 bn or 1.73% of Chinese GDP. Relative to GDP, industrial subsidies in China would thus be at least three to four times higher than in large EU/OECD countries. According to a more encompassing study, the ratio could be as high as nine (relative to company sales). And this does still not include several forms of particularly hard to quantify government support measures which are arguably also of importance particularly in China. The Chinese government heavily subsidizes companies in the fields of electromobility, rolling stock and wind power, and makes the payment of subsidies conditional on production in China. With BYD (electric cars), CRRC (rolling stock) and Mingyang (offshore wind turbines), Chinese companies have got to dominate the Chinese home market for their products and are increasingly penetrating export markets as well. And even as the Chinese central government has recently abolished some of the large demand-side subsidies in these sectors— such as purchase subsidies for BEV or preferential feed-in tariffs in wind power—central and regional governments continue to support these industries through various other forms of direct and indirect subsidies. Direct subsidies to some of the dominant Chinese companies in these sectors, such as BYD for BEV or Mingyang for offshore wind turbines, have even been increased recently, helping these companies in their attempts to expand beyond China and gain a presence in EU markets.

We attempt to quantify Chinese industrial subsidies in Section 2 and discuss the challenges and potential policy response of Chinese industrial subsidies for the EU in Section 3.

DISCUSSION AND POLICY RECOMMENDATIONS

The empirical evidence presented in this paper confirms concerns and allegations raised by many trading partners against China: China strongly subsidizes those manufacturing industries which rank highly on its economic policy agenda, including many green tech industries. Here industrial policies are targeted to win and defend superiority in green technology, to convert superiority into a leading position as global supplier of key manufactured products, and to become independent of foreign technology. This policy has allowed Chinese green manufacturing industries to scale up rapidly and to start dominating the Chinese home market and increasingly also foreign markets. This is true, e.g., for solar panels or batteries for EVs, where Chinese companies have dominated the EU markets for several years now. And it is increasingly true also for BEV and wind turbines where Chinese companies are only just starting to penetrate EU markets.

The very comprehensive and opaque Chinese subsidy system blurs the difference between domestic subsidies which do not distort trade and subsidies intended to help domestic companies to conquer export markets and thus are trade distortive. Two trading partners stand out, here, as the most important export markets for China, the US and the EU. Each of the two has its own agenda when it comes to dealing with China. The US has set the agenda with a plethora of legislative acts to enforce the “produce in America” strategy. The Inflation Reduction Act is the quantitatively largest one and supports the rise of local content in US non-fossil manufacturing through producer and consumer tax credits. In addition, BEV imported from China face a hefty import tariff of 27.5%. Hence, a trade and tech war with China trying to decouple the country from state-of-the-art IT technology is envisaged by the US through, e.g. restricting high tech exports to China and screening US foreign direct investment in China on risks of losing technology superiority.

So far, the EU has no trade or tech war on its agenda. The European Commission has made clear, however, that is prepared to take stronger actions against subsidized imports from China. In line with this, it has officially launched an anti-subsidy investigation into the import of BEV from China in October 2023. And in February 2024, it had launched an investigation into Chinese rolling stock manufacturer CRRC for allegedly using subsidies to undercut European competitors in a public procurement procedure in Bulgaria, applying for the first time the EU’s newly enacted “Foreign Subsidies Regulation”. In the BEV case, the European Commission argues to have found sufficient evidence demonstrating that imports of BEV from China benefit from subsidies that allow them to rapidly increase their market share in the EU thus posing an imminent threat of injury to the EU domestic industry and de-motivating domestic investment into badly needed full electrification. If these allegations are confirmed in the investigation, the EU could impose retroactive countervailing tariffs against BEV from China. 

Pros and cons of an EU intervention

Seen from the textbook lens, there is a strong case against the introduction of such tariffs (restrictions) on subsidized imports. This is substantiated by the view that subsidies are ‘gifts of the donor’ which raise the real income of recipients of gifts (the European consumers) while strengthening their comparative advantages in other non-subsidized sectors. An increase of tariffs/import restrictions on BEV or other imports of green technology products from China would likely lead at least in the short term to higher costs for green technology products in the EU and could make the green transition of the EU economy more expensive and also slow it down. This applies even more to import restrictions on those green technology products for which the EU industry currently has too little capacity to meet the increasing domestic demand such as EV batteries or wind turbines.

Yet, the textbook lens may neglect a dynamic perspective including geopolitical externalities, path dependencies, and the issue of technology control in key industries. Battery cell technology, for example, is not only one of the key technologies in the energy transition, but also qualifies as a general purpose technology (GPT). Early mover advantages and spillovers into related sectors (aviation, underwater shipbuilding, medicine) could make it beneficial to push such technologies and to avoid one-sided dependencies on systemic competitors like China. From a geoeconomic perspective, import restrictions reducing the (increase in) imports from China of products vital for the green transition may, in addition, be considered a welcome contribution to reducing the EU’s reliance on China (‘de-risking’). Or it may even be considered necessary for strengthening national security given the espionage or sabotage risks which are currently being put up against the imports of wind turbines or connected cars (BEV) from China especially in the US.

On the other hand, we also need to consider that the EU has much higher stakes in the Chinese economy than the US as witnessed by the much higher share of EU investment in China and the far greater reliance on imports from China of the EU as compared to the US. Due to China’s strong position as a production base for European firms and as a source of many critical products for the EU market, its retaliatory power against the EU is higher than against the US.33 Hence, the costs for EU industries and consumers of import restrictions on subsidized Chinese goods could increase considerably if the Chinese government were to respond to with countermeasures such as export restrictions on inputs on which the (green tech) industries in the EU are heavily reliant, such as refined rare earths. Such export restrictions would harm the EU industry not just on the internal EU market but also with respect to its exports to China or third-country markets. And export restrictions on necessary inputs are just one of a myriad of possible countermeasures through which China could harm EU companies in the industry directly affected by EU measures or indeed any other EU companies trading with or producing in China. This is likely one reason for why German automobile manufacturers which are heavily engaged in trading, production and R&D in China are rather skeptical about the EU’s investigation into BEV imports from China. 

But even without considering possible Chinese retaliatory measures it is far from clear, whether and to what extent EU industry would actually benefit from restrictions on Chinese imports. Take again the case of EU import duties on BEV from China, for example. First, these tariffs would also affect imports of BEV manufactured by European (German) companies in China.

Second, the (direct) effect of EU import tariffs on BEV from China would be restricted to the EU market, only. On third country markets (and in China itself) BEV produced in the EU would still have to compete against subsidized BEV from China without countervailing duties. Third, the effects of import restrictions and thus less intense competition on EU industries’ incentives to invest in R&D and in cost efficient production facilities are ambiguous (from a theoretical point of view).

From a purely industrial economics point of view tariff protection or subsidies for the EU industry could be justified if subsidized imports from China would hinder the EU industry to scale up and achieve the economies of scale necessary to compete internationally. In our view, it seems likely, however, that the industry will be able to substantially increase production in the EU despite increasing Chinese imports. Given the strong increase in demand and the comparatively high transport costs for BEV (or for other heavy and large green energy products such as wind turbines) we would expect that manufacturers will expand production near consumers to reduce shipping costs, as technologies mature. At least in the medium term we would thus expect companies producing in Europe to have a substantial advantage in serving EU customers (the more so as import tariffs for BEV into the EU now stand at 10% even without additional countervailing duties). We would thus also expect Chinese BEV manufacturers to build up production capacities in Europe to serve the EU market (as we have already observed for Chinese producers of EV batteries).

What should the EU do?

In our view, there is a case in favor of driving forward the current EU proceeding against BEV imports from China, and to use the information obtained in this proceeding and the pending decision to enter into negotiations with the Chinese government and to try to persuade it to abolish some the Chinese support measures that are particularly harmful to the EU industry. Given the current weak macroeconomic situation in China, the focus of China’s government on its political conflicts with the US and, at the same time, the relative strength of China’s green product industries, we believe that there is currently a realistic chance for such negotiation to be successful.

To read the abstract published by the Kiel Institute for the World Economy, click here.

To read the full policy brief, click here.

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It is taking steps to rebalance its position in the global economy. While seeking to preserve the benefits of interdependence with the rest of the world, the European Union is contemplating policies that would induce change. One change seeks to alter the footprint of global production for certain goods, affecting whom it sources imports from and whom it sells exports to. It wants to decrease certain trade dependencies (which could be weaponized) and increase others (to encourage diversification). A second change is the enactment of new contingent policy instruments intended to allow the European Union to respond more quickly when policymakers in other countries act badly (or to establish a credible threat sufficient to deter them from doing so in the first place).

This paper describes how the European Union is seeking to use trade and industrial policy to achieve its economic security objectives. It identifies some of the economic costs and tradeoffs of using such policies. Because the issues it examines—many of which are noneconomic, for which reasonable estimates of costs and benefits are lacking—are evolving, the paper shies away from normative recommendations. Instead, it explores the political economy of what is emerging and why. The paper focuses on EU efforts to “de-risk” vis-à-vis China especially, given the emphasis EU policymakers now place on doing so.

The paper is organized as follows. Section 2 defines the concept of economic security and the events that led it to play such a sudden and prominent role in modern policy. It provides some early evidence to motivate the new policy interventions but emphasizes that much remains unknown, especially concerning their design.

Section 3 explores a case study that highlights the difficult choices the European Union faces in responding to threats to its economic security. The case study involves the electric vehicle (EV) industry, the European Union’s potential use of trade defense instruments (TDIs) to address unfairly subsidized imports from China, and China’s potential retaliatory response of placing export restrictions on graphite, a critical material needed to manufacture EV batteries. It also identifies unknowns facing policymakers seeking “a clear-eyed picture on what the risks are,” in the words of European Commission President Ursula von der Leyen. The section also explores empirically whether the European Union’s trade interdependence with China may be deepening—despite stated goals to de-risk—in part because of the third-country effects arising from the US– China trade war.

Section 4 introduces the policy instruments the European Union, its member states, and other governments are pursuing to address concerns about their economic security. They include stockpiling and inventory management, investment or production subsidies, various forms of tariffs, export controls, and regulations on foreign investment. This section also highlights proposals for new policy instruments, analyzes the associated tradeoffs, and briefly describes basic World Trade Organization (WTO) rules that might discipline such instruments.

Section 5 turns to the potential for selective international cooperation over the use of such policy instruments. It explores how countries facing common concerns over economic security have been acting in coordinated fashion— implicitly or explicitly—and the difficulties of doing so.

Section 6 concludes with some caveats and lessons from history.

Chad P. Bown is the Reginald Jones Senior Fellow at the Peterson Institute for International Economics.

To read the abstract published by the Peterson Institute for International Economics, click here.

To read the full working paper, click here.

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Today’s proposals are part of a broader three-pillar approach to EU economic security by promoting the EU’s competitiveness, protecting against risks and partnering with the broadest possible range of countries to advance shared economic security interests.

The initiatives adopted today aim at:

• further strengthening the protection of EU security and public order by proposing improved screening of foreign investment into the EU;
• stimulating discussions and action for more European coordination in the area of export controls, in full respect of existing multilateral regimes and Member States’ prerogatives;
• consulting Member States and stakeholders to identify potential risks stemming from outbound investments in a narrow set of technologies;
• promoting further discussions on how to better support research and development involving technologies with dual-use potential;
• proposing that the Council recommends measures aimed at enhancing research security at national and sector level.

Future EU actions will continue to be informed by the on-going risk assessments and by strategic coordination with Member States to reach a shared understanding of the risks that Europe faces and of the appropriate actions.

Legislative proposal to strengthen foreign investment screening

Foreign investments into the EU benefit the European economy. However, certain foreign investments may present risks to the EU’s security and public order. The Commission has reviewed over 1,200 foreign direct investment (FDI) transactions notified by Member States over the past 3 years under the existing FDI Screening Regulation. Building on this experience and extensive evaluation of the functioning of the current regulation, today’s proposal addresses existing shortcomings and improves the efficiency of the system by:

1. ensuring that all Member States have a screening mechanism in place, with better harmonised national rules;
2. identifying minimum sectoral scope where all Member States must screen foreign investments;
3. extending EU screening to investments by EU investors that are ultimately controlled by individuals or businesses from a non-EU country.

Monitoring and assessment of outbound investment risks

The EU is one of the biggest foreign investors in the world and recognises the importance of open global markets. It also acknowledges the growing concerns regarding outbound investments in a narrow set of advanced technologies that could enhance military and intelligence capacities of actors who may use these capabilities against the EU or to undermine international peace and security.

This is currently neither monitored nor controlled at EU or Member State level. The Commission’s White Paper on Outbound Investments is therefore proposing a step-by-step analysis of outbound investments to understand potential risks linked to them. This analysis will include a three-month stakeholder consultation and a 12-month monitoring and assessment of outbound investments at national level, which will contribute to a joint risk assessment report. Based on the outcome of the risk assessment, the Commission will determine, together with Member States, if and which policy response is warranted.

More effective EU control of dual-use goods exports

Today’s increasingly challenging geopolitical context requires action at EU level to improve the coordination of export controls on items with both civil and defence uses – such as advanced electronics, toxins, nuclear or missile technology – so that they are not used to undermine security and human rights. Today’s White Paper on Export Controls proposes both short and medium-term actions, in full respect of the existing rules at EU and multilateral level. The Commission proposes to introduce uniform EU controls on those items that were not adopted by the multilateral export control regimes due to the blockage by certain members. This would avoid a patchwork of national approaches.

The White Paper also provides for a senior level forum for political coordination and announces a Commission Recommendation in Summer 2024 for an improved coordination of National Control lists prior to the planned adoption of national controls. The evaluation of the EU Dual-Use Regulation is advanced to 2025.

Options to support research and development in technologies with dual-use potential

With a White Paper on options for enhancing support of research and development (R&D) of technologies with dual-use potential, the Commission launches a public consultation. Announced by President von der Leyen in November 2023, the White Paper contributes to the ‘promote’ dimension of the European Economic Security Strategy, aiming at maintaining a competitive edge in critical and emerging technologies with the potential to be used for both civil and defence purposes.

The White Paper reviews current relevant EU funding programmes in the face of existing and emerging geopolitical challenges and assesses whether this support is adequate for technologies with dual-use potential. It then outlines three options for the way forward: (1) going further based on the current set-up, (2) removing the exclusive focus on civil applications in selected parts of the successor programme to Horizon Europe, and (3) creating a dedicated instrument with a specific focus on R&D with dual-use potential. Public authorities, civil society, industry, and academia can have their say in an open public consultation and inform the Commission’s next steps until 30 April 2024.

Enhance research security across the EU

In today’s complex geopolitical context, the openness and borderless cooperation in the research and innovation sector may be exploited and turned into vulnerabilities. Results of international research and innovation cooperation can be used for military purposes in third countries, or in violation of fundamental values. Higher education and research institutions can fall victim to malign influence by authoritarian states.

Against this background, the Commission presents a proposal for a Council Recommendation to provide more clarity, guidance and support to Member States and the research and innovation sector at large. EU action is required to ensure consistency across Europe and to avoid a patchwork of measures. By joining forces at all levels and across the Union we can mitigate the risks to research security and ensure that international research and innovation cooperation is both open and safe. The overall approach follows the principle ‘as open as possible, as closed as necessary’ as regards international research cooperation.

Background

On 20 June 2023, the European Commission and the High Representative published a Joint Communication on a European Economic Security Strategy, to minimise the risks in the context of increased geopolitical tensions and accelerated technological shifts, while preserving maximum levels of economic openness and dynamism. It provides a framework for assessing and addressing – in a proportionate, precise and targeted way – risks to EU economic security, while ensuring that the EU remains one of the most open and attractive destinations for business and investment.

The strategy identified four risk categories to be addressed as a matter of priority: supply chains; physical and cyber-security of critical infrastructure; technology security and technology leakage; weaponisation of economic dependencies or economic coercion.

To address these risks, the Strategy is structured around three pillars:

• Promoting the EU’s competitiveness and growth, strengthening the Single Market, supporting a strong and resilient economy, and strengthening the EU’s scientific, technological and industrial bases.
• Protecting the EU’s economic security through a range of policies and tools, including targeted new instruments where needed.
• Partnering and further strengthening cooperation with countries worldwide who share our concerns and those with which we have common economic security interests.

To read the press release as it appears on the European Commission’s press corner, click here.

For more information

Communication: advancing European economic security: an introduction to five new initiatives

Proposal for a Council Recommendation on enhancing research security

White Paper on options for enhancing support for research and development involving technologies with dual-use potential

White Paper on export controls

White Paper on outbound investment

Proposal for a new regulation on the screening of foreign investments

Memo on European Economic Security

Factsheet – Proposal for a Council Recommendation on enhancing research security

Factsheet – White Paper on options for enhancing support for research and development involving technologies with dual-use potential

Factsheet – White Paper on export controls

Factsheet – White Paper on outbound investments

Factsheet – Proposal for a new regulation on the screening of foreign investments

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EU CBAM
The EU CBAM is designed to work hand in glove with the EU Emissions Trading System (ETS), a carbon pricing workhorse policy for the decarbonization of EU industry and of the European Union in general. In addition, the EU CBAM incentivizes other trading nations to adopt carbon pricing as a foundational decarbonization policy tool.

CCA
The CCA is also a BAM designed to work seamlessly with a domestic regulatory program intended to reduce greenhouse gas (GHG) emissions from the industrial sector. The CCA introduces a performance standard to achieve the reductions desired within the industrial sector. The performance standard within the CAA is defined as tons of GHGs per ton of product. Producers with a GHG intensity above the benchmark pay a fee while producers below the benchmark pay no fee. To ensure a rapid decline in GHG intensity over time, the benchmark declines year over year and the fee increases year over year. Revenues from fees are used to further incentivize investments in low-carbon technologies and other activities designed to reduce industrial emissions.

FPFA
A key distinction of the FPFA from the other two approaches is that the FPFA does not include a regulatory program to reduce industrial emissions. This is in line with the FPFA’s objective to reduce the importation of embodied GHGs within US trade flows rather than focus on further reductions in emissions from domestic sources.

Takeaways

The EU CBAM entering into force in October 2023 is clear evidence that the use of international trade as a component of climate policy has left the realm of academia and is now an accepted policy tool. While the European Union argues that the EU CBAM is a straightforward extension of the EU ETS and should not be considered an international trade policy, the introduction of the EU CBAM has provided a rationale that supports the consideration of BAMs in other countries that have the potential to significantly impact global trade.

It is hard to overstate the extensive impact BAMs can have on international trade. While the EU CBAM identifies six categories of internationally traded products, the number of actual products that would be subject to the CBAM can be quite large. In the case of iron and steel alone, the number of products is over 100. Some estimates of the number of products covered by the CCA run into the multiples of hundreds, and the provisions within the FPFA that allow domestic producers and others to add covered products to the existing list leaves the total number of covered products open-ended. The indirect impacts may yet be greater still through the consumption of covered goods in other products.

The cornerstone of any BAM is a measure of the GHG intensity of a covered product. Since BAMs will impact vast numbers of covered products and therefore the producers of those products, it will be in the best interest of those producers to provide measures of GHG intensity for their products. While such producers will have the information and ability necessary to construct those measures, the fact that BAMs do not share a common frame of reference for intensity calculations imposes an additional burden on those producers. At present there is no forum the business community can utilize to reconcile differences across BAMs or develop interoperable definitions and protocols that would allow companies to provide information compliant with individual countries’ BAMs.

The vast number of products subject to BAMs clearly poses complex implementation issues. It also leads to the scope of BAMs affecting large numbers of countries that rely on developed country markets for their exports and economic well-being. Many countries argue that BAMs are inconsistent with World Trade Organization (WTO) multilateral trade rules. While the WTO does have a dispute settlement system (the Appellate Body), that system is in a state of crisis because countries, including the United States, have blocked the appointment of Appellate Body members such that the Body’s current configuration is incapable of hearing appeals and processing disputes. Without a functioning WTO, there is no multilateral institution capable of resolving conflicts that will naturally arise due to the deployment of additional BAMs in the future.

Problems of emissions leakage, lost international competitiveness due ambitious decarbonization policies, and suggestions regarding the use of BAMs are not new. However, until the enactment of the EU CBAM they have been merely suggestions. Now BAMs are a reality, and we are confronted with important questions. Will this policy tool be effective in addressing leakage and competitiveness and spread beyond the European Union to the US and other large industrial nations? What will be the impact of widespread BAM adoption on the global system of international trade, industrial emissions, green investments, and the economic welfare of exporters in countries that enacted BAMs? Will long standing international trade rules embodied in the WTO successfully challenge the spread of BAMs or will trade rules—whether multilateral or plurilateral—adapt to this new reality? Time will tell.

To read the report as it was published by Resources For The Future, click here.

To read the full report, click here.

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Policymakers should take heed that their efforts on both sides of the Atlantic do not pose challenges for transatlantic cooperation. The US Inflation Reduction Act (IRA), as the most potent case, fueled a sense that the United States and the EU might become competitors rather than partners in the green transition. More recently, the EU’s anti-subsidy investigation into Chinese electric vehicles could bring collateral damage to US companies, like Tesla, that manufacture in China.

With the EU and United States still searching for solutions to improve their economic security and resilience, this raises a number of critical questions: What does a values-based industrial and trade policy look like? How should the United States and EU develop mechanisms to address policy differences, avoid or at least manage disputes, and craft real forms of cooperation? How can the United States and EU extend cooperation to other likeminded partners such as the Group of Seven (G7)?

Action will not doom cooperation. The French subsidy scheme on electric vehicles designed squarely with China in mind serves as a basis for a flexible subsidy design, that remains outwardly compatible with the World Trade Organization (WTO), but actually closely aligns with the US approach while not violating the EU’s own trade red lines.

Ahead of the upcoming summit between the United States and the EU in October, the Atlantic Council’s Europe Center launched a working group to examine these questions and propose potential solutions to strengthen and grow the transatlantic economy. The working group conducted interviews with current and former EU and US officials from various offices, agencies, and cabinets to understand attitudes in Washington and Brussels.

Background

The view from Washington

The IRA was a key first step as the United States finds its footing on economic strategy in the Biden administration. The Biden team, as outlined by US National Security Advisor Jake Sullivan, wants to find a way “to build capacity, to build resilience, to build inclusiveness, at home and with partners abroad” that shapes US strategy on everything from green energy subsidies to critical raw materials.

So far, the US strategy has a number of competing aims: constraining the rise of China and its ability to compete with the United States, reindustrializing the United States to bring back jobs, and delivering the green transition. These competing goals influence how the United States views industrial policy and trade vis-à-vis Europe—and mean that transatlantic cooperation is not always the highest priority, and Europe’s interests are not always appreciated and understood by law- and policymakers.

The United States was surprised by how strongly US partners—not just Europe, but Japan, South Korea, and others—have reacted to the IRA. While some partners clearly signaled their concerns early and secured substantial concessions, the EU was initially slower to engage with the United States, especially with Congress before the IRA passed, and has not been able to obtain all of the same concessions offered to others, such as free trade agreement (FTA) partner countries.

The EU’s unilateral environment, social, and governance (ESG) and digital policymaking rules will adversely impact its trading partners including the United States. The United States is concerned that these initiatives could require significant changes to global supply chains. Many of these instruments would force American firms to change how they do business, even outside Europe, due to their extraterritorial effect. The initiatives equally pose concerns for third countries, introducing the risk that these countries will ultimately see China as easier to do business with than the West—as illustrated in the EU’s difficulties finalizing its proposed FTA with the Mercosur countries.

The United States and EU are not doomed to have disputes on every aspect of industrial policy. On issues such as semiconductors, the United States and EU have a transatlantic consensus fueled by a determination to diversify chip manufacturing away from Asia, and they have coordinated closely on their respective approaches to semiconductor subsidies. A key reason for this consensus is that the initiatives did not come as a surprise to either side. Furthermore, the EU and United States are in similar positions, with a declining share of global production and fears about the security of future chip supplies.

More broadly, the United States and EU are working through the question of who makes the rules in response to emerging international challenges. While the United States may be the more natural rule-maker of the two as the bigger economy, it has largely ceded its position to the EU, demonstrated by the EU’s leadership on topics such as digital policy and sustainability. Through the IRA, a broader conversation is playing out on how the transatlantic partners should create trade and industrial policy. The United States seems more prepared to leave behind current international norms and bypass WTO rules, while the EU is more protective of the existing legal frameworks for international trade.

The view from Brussels

Industrial policy as such is not the problem for Brussels. The EU was more comfortable with the CHIPS and Science Act (CHIPS Act) than the IRA, for example, because the CHIPS Act does not directly harm Europe’s economic strengths or actively constrain its ambitions. However, the EU views the IRA’s local content requirements as discriminatory and as directly targeting the EU’s ambitions for global leadership in green industries—having developed regulations and policies designed to foster green industries in Europe early.

US local content requirements do not distinguish between damage to China and collateral damage to partners without an FTA with the United States, such as the EU. The United States has shown a degree of flexibility and willingness to course correct to ease the EU’s concerns, including on commercial leasing and critical minerals content, but there is still frustration in the EU that the United States appears unwilling to offer Europe the same flexibility it has given to other countries. For example, the Biden administration agreed to a mini FTA with Japan without congressional approval, but as a result of domestic political concerns, is now unwilling to offer a similar type of deal with the EU, instead requiring a more substantial deal that will take longer for both sides to agree on and ratify.

The EU feels forced to respond to the IRA, but the form of response has split Europe, namely through loosening a restriction on member states’ state aid for green energy projects and reusing EU funds from other places to drive investment in sectors that could be impacted by the IRA. The EU cannot replicate the nature of the IRA’s generous subsidies (such as unlimited and automatic tax rebates for production activities) because the EU lacks the same fiscal muscle and the EU treaties generally prohibit the use of state subsidies, except in defined circumstances. These rules are essential to limiting competitive distortions and promoting a level playing field among EU member states. Loosening these requirements allows some member states with a large fiscal capacity (such as France and Germany) to grant subsidies, which other member states could not afford to do. But the alternative EU-level subsidies would effectively require richer member states to contribute to supporting industry in poorer member states, whether directly or through joint borrowing. Given countries’ existing stretched budgets, there is little enthusiasm for this approach. Other members have not had the visceral reaction to the IRA that larger EU economies have had, further limiting the appetite for action. Moreover, the EU’s views of the IRA have gradually become more relaxed as there is growing understanding that the bulk of the bill has to do with subsidies which are far less discriminatory than the EV tax credits.

More generally, however, and despite the positive noises being made in public, stakeholders in the EU are getting frustrated by the lack of progress on transatlantic industrial and trade initiatives such as the “green steel club,” the Critical Minerals Agreement, and the Trade and Technology Council. In private, many European leaders see the Biden administration as having adopted a similarly protectionist trade policy as the Trump administration, albeit with a less heavy focus on imposing unilateral tariffs and with far more cordial diplomatic relations.

A lack of progress in transatlantic discussions has not prevented unilateral EU policymaking from continuing. The EU has pressed ahead with its own instruments to incentivize trade and investment partners to better protect human rights and the environment and to ensure that the EU’s own high domestic standards do not undermine its international competitiveness. These instruments include the carbon border adjustment mechanism (CBAM); the Corporate Sustainability Due Diligence Directive; the deforestation initiative; and the EU’s efforts to secure more enforceable ESG rules in its trade deals with Mercosur countries. The European Commission has also just launched an investigation into Chinese subsidies for electric vehicles. Many of these instruments pose challenges for the United States, even if most will have a much larger potential impact on China.

The case for cooperation

There are three drivers that make cooperation and compromise necessary: the geopolitical imperative to enhance US and European resilience and counteract the growing threat from China; the need for transatlantic cooperation on climate change; and the desire to secure manufacturing jobs in Europe and the United States.

First, China remains the greatest long-term strategic threat to both sides of the Atlantic. China’s well-practiced model of copious and opaque state aid, its regulatory support for national champions, its global dominance in markets for critical raw materials, its willingness to weaponize trade dependencies, and its production capacity mean that it poses far more of an industrial threat to the EU and the United States than they do to each other. Both Europe and the United States also remain concerned by China’s growing technological capabilities, including in artificial intelligence. A trade or subsidy war between Europe and the United States would only serve Chinese interests by fragmenting Western markets and supply chains, making it harder for Western companies to counter the advantages enjoyed by certain Chinese firms such as their ability to achieve economies of scale.

Second, the persistent and growing threat of climate change serves as another simultaneous, perhaps conflicting, pressure that requires action now from all of the world’s largest economies. Industrial policy is climate policy and vice versa. A tit-for-tat US-EU trade dispute will not help deliver the green transition as quickly as a coordinated approach would. Conversely, a coordinated joint transatlantic approach to industrial policy, green tech, and carbon emissions could serve as an important catalyst to convince other major players around the world to follow suit.

Third, the IRA seems to be part of a broader trend in both the United States and the EU toward more proactive and dirigiste industrial policies to secure manufacturing jobs. In the near to medium term, the transatlantic partnership will be increasingly similar to the economic partnership model of the 1960s to 1980s where both sides were engaged in assertive industrial policies, including supporting national champions, and the United States was anxious about losing its technological leadership to Japan. However, there are new elements in the story. Policymakers must take into account sustainability targets, along with digital and technology policy and the green transition, and not just satisfy manufacturing goals. And China represents a far more profound geopolitical, economic, and technological threat than Japan did in the 1970s and 1980s.

Going forward, US industrial policymaking will also be as much if not more constrained by domestic politics, which will limit Washington’s ability to regulate industries or implement internationally agreed approaches in areas like climate change. Just as the passage of the IRA required money to support and assuage industry, labor unions, China hawks, and climate activists, the politically easiest way to shape industrial policy will be through the checkbook.

In Europe, industrial policy, subsidies, and state aid are similarly becoming more the norm than the exception, although the EU’s regulatory agenda also remains relentless. Continued extensions of the (originally temporary) loosening of state aid, first in response to the pandemic, then to Russia’s war in Ukraine, and now to the IRA, may prove to have strong staying power. The framework may be difficult politically to phase out again.

Different approaches to industrial and trade policy will continue to hamper the transatlantic partnership. The United States, while officially maintaining its commitment to the WTO and its reform, will likely continue to violate the WTO’s rules in pursuit of its industrial policy goals. The EU will try to at least plausibly comply with international trade rules and is reluctant to set rules that explicitly single out China (though it is prepared to use its traditional trade defense instruments against China, as it did recently in commencing its anti-subsidy investigation for Chinese-made electric vehicles). European officials expressed their frustration that the technical guidance from the US government for US firms on how to benefit from subsidies in the IRA, for example, continues to emphasize local content requirements and does little to quell lingering European frustrations. Several stakeholders told us that the US-EU Trade and Technology Council (TTC), which could function as a forum to resolve or mitigate these issues, remains mostly a talk shop and that many key EU-US discussions on trade and industrial still occur outside of this platform.

The clock on resolving a number of important EU-US disputes and charting a better course forward is ticking. US and EU policymakers must imminently resolve the steel and aluminum tariffs that have haunted US and EU trade negotiators since the Biden administration put the Donald Trump–era transatlantic trade war on ice. US and EU leaders have publicly committed to resolving the dispute by this fall’s summit which corresponds with the deadline for reaching an agreement before the suspended tariffs kick back in, but time is of the essence to make progress on this tricky issue. This will require creativity and compromise from both sides on CBAM given that the United States is unlikely to have a national emissions trading system in place anytime soon.

Finally, the 2024 elections impose a tight timeline on both the EU and United States to find a potential path toward stronger industrial and trade relations. The US presidential election remains top of mind for policymakers on both sides of the Atlantic. Europeans have a reasonable concern that if an isolationist mood returns to the White House, the United States will be even less willing to take Europe’s concerns and interests into account, which in turn will make the EU even more determined to pursue unilateral strategies to protect its interests in the name of “strategic autonomy.” As campaigning makes politics more partisan, even limited results are better than none, and they are needed sooner rather than later.

Europe will choose a new European Parliament and Commission college in 2024. While Ursula von der Leyen’s reappointment currently remains probable and would help maintain good US-EU relations, it is not guaranteed. Internal EU horseracing could incentivize lavish spending promises to support domestic industry. Political trends in European member states will also come into account. The upcoming Polish and Hungarian presidencies of the Council of the EU are likely to prove polarizing and controversial, adding an additional layer of difficulty to EU policymaking. A potential further shift to the populist right in Europe, following recent wins in Finland, Slovakia, and elsewhere, may also impact the EU agenda and challenge support for trade and climate action. Together, these trends mean the EU may soon find it more difficult to build consensus around policies that would strengthen the transatlantic relationship.

Areas of convergence

While differences remain on each side of the Atlantic in both motivations that inform actions and the actions themselves, there are still strong areas of convergence. The United States and the EU are increasingly aligned on their respective determination to combat deindustrialization and build local green industries.

For Europe, much of the focus is about maintaining its competitiveness and trying to get third countries to adopt the EU’s ESG standards, so that the EU’s high standards do not lead to firms moving their businesses offshore where standards are lower. The EU’s goal is to become a leader in green technologies of the future. In that vein, it is a good thing, many Europeans stressed to this working group, that the Americans are taking climate financing seriously, and this can offer opportunities for European firms such as new subsidies for scaling up production.

For the United States, the focus is on a foreign policy for a middle class: an idea that foreign policy must fit into a domestic lens—in this instance, job creation. Jake Sullivan made the most articulate case for this approach: The United States will prioritize its own industry, “unapologetically” even, as well as partnerships with like-minded partners. His reference to Europe in this effort is a recognition of the importance Europe plays to this fundamentally domestic strategy.

Merely agreeing on the need for industrial policy will not be enough. Uncoordinated industrial policy can undermine the effectiveness of said policies if two economies compete for global leadership of the same industries. But there is space for convergence when the aim of industrial policy is to de-risk from problematic third countries or to diversify supply chains, for example. Where both the United States and Europe start with a low base and neither is likely to quickly achieve global dominance, industrial policy can be treated as a positive-sum game.

Some EU member states are developing subsidy programs that, while smaller in scale, achieve a similar effect as US efforts while being more justifiable under international trade law. French President Emmanuel Macron, for example, recently announced changes to French subsidies for vehicles that qualify as “green.” The assessment of whether a vehicles is green would take into account factors like the emissions involved in transporting it from its place of manufacture and whether the production facilities were powered by coal or more climate-friendly sources of electricity. These changes are expected to exclude most electric vehicles made in China while still rewarding countries for greening their means of production. Such subsidy schemes illustrate that there is space for European and US subsidy programs to be better aligned without requiring the EU or United States to breach their red lines.

Europe and the United States are also increasingly speaking the same language on China. While country agnostic, the Commission’s Economic Security Strategy provides little doubt that the Commission wants to see the EU reduce its dependencies on China. Important to note, however, is that the Commission’s approach, led by the transatlanticist von den Leyen, is not necessarily adopted by all of its member states. German Chancellor Olaf Scholz has stressed that de-risking is the responsibility of companies, not governments. Macron has also signaled the importance of Paris’s continued commercial relationship with Beijing. Even if the Commission’s latest proposals on Foreign Direct Investment screening and export controls on sensitive technologies require member state buy-in, a process that can be cumbersome with Berlin and other capitals being hesitant, it is clear that current EU and US approaches toward economic security are converging far more than they are diverging.

US policymakers should recognize the limits of Europe’s hawkishness on China, and see a partner that is, if not entirely in sync, moving closer to the US approach. At the same time, the United States has also aligned with Europe by emphasizing that its strategy is aimed at a few narrow strategic sectors, rather than trying to achieve a broader decoupling. Joint statements from the TTC, US-EU Dialogue on China, and the US-EU High-Level Consultations on the Indo-Pacific, for example, provide an example of communiqués written with China in mind and illustrating a degree of convergence.

Industrial policy is not a monolith, and certain areas will be harder to get agreement on. The attempt to resolve the oversupply of steel and aluminum, for example, will prove difficult without negative repercussions for US or European manufacturers. But cooperation in certain areas remains feasible. The clean energy investment dialogue, now folded into the TTC and created in response to the IRA, is proof that cooperation is possible. Other related issues like the CBAM or a proposed critical raw material club provide the opportunity for discussions to avoid competition or establish greater cooperation. The EU’s ESG initiatives, such as its forced labor law, which along with its stated focus on upholding human rights was also designed to keep certain Chinese products out of the EU market, was a welcome sign in Washington which has taken similar steps itself in recent years.

Recommendations

There are short- and long-term policies that decision-makers in Brussels and Washington can agree on. And there are both modest successes and moonshot opportunities possible for each side of the Atlantic.

With an upcoming EU-US summit, immediate action is needed, and policymakers should consider the following for October:

• Find a creative solution to steel and aluminum tariffs: A return of transatlantic tariffs would be a political disaster for both the Biden administration and the von der Leyen Commission. Failure to resolve the issue, or develop a stopgap, would put further transatlantic trade and industrial policy on a much weaker footing politically. The EU has been hard pressed to accept Washington’s proposal to resolve the dispute by creating a global green steel club (with membership premised on countries agreeing to reduce their industries’ carbon intensities, to avoid overproduction and limit the role of state-owned enterprises). Brussels believed the proposal could breach WTO rules by imposing discriminatory tariffs against imports from countries that are not members of the club. The EU has already enacted a CBAM, which would levy tariffs on imports based on the carbon intensity of their production without overtly discriminating among countries, and which has pushed as the model for a transatlantic deal. But the EU does not believe it can give the United States its requested blanket exemption from CBAM without breaching WTO rules, and the parties have not found a way to comprehensively tackle problems like perceived overproduction. Despite these problems, news reports suggest there is convergence at least on the threat posed by Chinese steel and aluminum exports. The EU is poised to launch anti-subsidy investigations which could result in the EU imposing higher tariffs on China’s exports of these products to the EU – mirroring Washington’s approach. While this would not solve all the problems the EU and US had hoped, it would at least give the US a rationale for extending the suspension of tariffs on EU products, buying time for both sides to work on a more comprehensive approach.
• Identify areas of industrial policy where US and EU subsidies will not be perceived as a zero-sum game and prioritize work in these areas: In line with their cooperative approach on semiconductor subsidies, the EU and United States could focus their industrial policies on other sectors where the biggest threat to their local industries is China rather than each other. This is true in electric vehicles: The EU is now starting to realize its industry is more threatened by Chinese vehicle exports to Europe than by constraints on Europe’s ability to export vehicles to the United States. But it is also true in other sectors, such as extraction of critical minerals, as noted in the communiqué from the last TTC. The EU and United States should focus on identifying and prioritizing other sectors where they both have a low share of global production and their ambitions are to reduce their reliance on China rather than dominate the global market at the expense of the other.
• Establish a WTO-compliant club: Without a US-EU FTA and while WTO compliance is a first-order priority of the EU, the United States and EU should concentrate instead on a club model with a focus on coordinating subsidies and the use of trade defense instruments. Any club must stay within WTO rules, while still remaining beneficial for Washington and Brussels, avoiding active discrimination of third countries. For example, building on the clean energy incentives dialogue, the club could work on designing subsidies that are WTO-compliant while bringing EU and US policies into closer alignment on China. The club could take inspiration from recently announced changes to French electric vehicle subsidies, which take into account factors like China’s heavy reliance on coal for powering its manufacturing industry. The club could also coordinate on the use of trade defense instruments to ensure that the other jurisdiction’s businesses will not become unexpected collateral damage in any trade dispute with China. For instance, there are concerns that the EU’s current anti-subsidy investigation into Chinese electric vehicles could also result in tariffs against US carmakers that manufacture in China.
• Take US concerns about the EU’s ESG agenda into account: The EU seems likely to slow down its barrage of ESG initiatives. French President Macron has called for a “regulatory break,” with a period focused on implementing existing rules rather than making new ones. The conservative European People’s Party has similarly proposed a pause on new initiatives. And the European commissioner responsible for many of these initiatives, Frans Timmermans, recently stepped down to return to national politics, with his successor, Maroš Šefčovič, promising more consultation with industry. The EU should take the opportunity to consult with the United States and third countries about how the EU’s recent ESG laws will be implemented, and the shape of potential future initiatives. This dialogue would have three benefits. First, it would help assuage American concerns that the EU’s agenda is inflexible and does not adequately take Washington’s concerns into account. Second, it could help ensure that EU initiatives do not create unnecessary barriers to a single transatlantic marketplace. Third, it could help the EU ensure that its initiatives better reflect the EU and United States’ joint ambition to foster closer economic ties with countries that China is trying to attract—rather than making the EU look like a difficult and demanding trading partner.
• Commit to implementing the IRA without causing further harm to EU industries: EU policymakers should be clear-eyed that the EU will not receive a Japan-style mini FTA as it has become politically unfeasible. Instead, the Biden administration could commit to a “do-no-further-harm” policy in the implementation of the IRA, specifically through its technical requirements where some EU policymakers are concerned that the administration is taking an unnecessarily protectionist and “America first” approach when allocating IRA funding. The executive branch has significant discretion over how the IRA is interpreted and applied, so it is somewhat unconstrained by Congress. The United States must be clearer on things such as permitting and what “local content” means—does that translate to the whole supply chain needing to be included in the United States or just the final assembly? Another relevant issue is the role of hydrogen subsidies under the IRA. The US and the EU should coordinate closely on how to define clean hydrogen as this is a promising area of transatlantic cooperation as the US is considering doubling down on subsidies for hydrogen while the EU is already leading on the technology and know-how that is essential for deploying hydrogen.

Policymakers should also start working now on the longer-term issues that industrial policy will ultimately require:

• Make the case for US-EU third-party engagement: Both the United States and EU need third countries. But for many countries, engagement with China is not just politically necessary, it is more attractive. Yet China’s largely condition-free investments—compared with ESG requirements, for example—still come with strings attached, catching countries in a debt spiral. China also frequently fails to deliver on its infrastructure investments, or those investments fail to deliver long-term economic benefits. The US-EU relationship has an opportunity to gain the advantage. US and EU policymakers should map out a joint initiative to promote an engagement strategy with other likeminded democracies, especially within the context of initiatives such as the G7 or Organisation for Economic Co-operation and Development, and build on the success of projects including those in the TTC to sell the benefits of sustainable investments.
• Double down on the TTC: Many of the irritants in the transatlantic relationship have come from the lack of a unified, collaborative approach, driven by the fact that the United States did not have a position on key issues that mattered to the EU (like tackling anti-competitive activity in tech), and so the EU therefore adopted its own unilateral approaches. The TTC is still important to help address this dynamic. It can help tease out where the United States has a position. Although it cannot solve US domestic political gridlock, it can therefore help the EU design its initiatives so that, if the United States is later able to move (like it has on climate), EU-US cooperation does not face unnecessary hurdles. Similarly, it can give the United States more predictability about the direction of travel for the EU. Dismissal of the TTC as a “talking shop” consequently seems unnecessarily negative: Many of the TTC’s successes will be from avoiding disputes before they arise. In particular, discussions on standards of emerging technologies such as AI and quantum, supply chain issues, and economic security are all promising areas where the TTC can make a distinctive contribution. Before the elections, Presidents Biden and von der Leyen should commit to continuing the TTC as central for transatlantic coordination on trade and tech issues while tasking a group of advisors to review the effectiveness of the format and put forward a set of ideas for how to enhance its effectiveness over the next four years such as streamlining the ten different working groups.

Erik Brattberg is a nonresident senior fellow at the Atlantic Council’s Europe Center.

Frances G. Burwell is a distinguished fellow at the Atlantic Council and a senior director at McLarty Associates.

Jörn Fleck serves as senior director with the Europe Center at the Atlantic Council with primary responsibility for the Center’s EU efforts, programming related to Western Europe, Brexit, and US-EU relations.

Charles Lichfield is the deputy director and C. Boyden Gray senior fellow of the Atlantic Council’s GeoEconomics Center.

Zach Meyers is a research fellow at the Centre for European Reform (CER) where he works on EU competition policy, particularly in the digital sector.

James Batchik is an assistant director at the Atlantic Council’s Europe Center, where he supports programming on the European Union, the United Kingdom, Germany, the Three Seas Initiative, and the center’s transatlantic digital and tech portfolio.

Emma Nix is a program assistant with the Atlantic Council’s Europe Center where she supports the Europe Center’s programming on the Three Seas Initiative and Central and Eastern Europe.

To read the full issue brief, click here.

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