“The US incentives for manufacturers have sparked a war of words among American allies,” stated Robert Habeck, Germany’s vice-chancellor and economics minister, last month. Habeck’s frustration stems from the subsidies and tax breaks offered by the US to its manufacturers, which Germany views as protectionist measures that could lead to the shifting of industries to America. With the implementation of the Inflation Reduction Act and the Chips and Science Act, the Biden administration aims to reverse the trend of deindustrialization in economically deprived areas. However, this move has caused concern among European and Asian allies, who see it as a threat to their own industrial bases. While some have contemplated retaliating through the World Trade Organization (WTO), others are seeking ways to catch up and attract investment in their clean energy and tech sectors. The EU, Japan, and South Korea have all introduced subsidies to compete with the US and prevent further industry migration. Europe, in particular, has adopted a “if you can’t beat them, join them” approach. Germany’s visit to Washington in February highlighted the consequences of the US’s industrial policy for allies. The key industries of the future, such as hydrogen, batteries, and semiconductors, are being decided right now, and Europe has no choice but to respond. However, the risk for the US is not retaliation from the EU, but the potential reluctance of European governments to participate in the broader alliance against China. Despite initial anger, many Europeans now understand the new American industrial policy’s focus on countering China. The policy has raised concerns among allied governments who fear that their companies will be incentivized to move production to the US. This has already been observed in Germany, with Meyer Burger warning that it will build its new solar cell factory in the US unless Berlin provides more financial support. The IRA has also prompted investment from Japanese and South Korean manufacturers in the US. The EU has responded by developing its own green manufacturing plan to compete with the US on the global stage. European countries already have significant subsidies for the green transition, and the EU has relaxed its state-aid rules to provide further assistance to companies affected by the Russia-Ukraine conflict. Additionally, the EU introduced the temporary crisis and transition framework to allow subsidies for clean tech industries. This has already led to successful outcomes, such as the Swedish battery maker Northvolt choosing to build its next factory in Germany after receiving substantial government support. The EU aims to ensure it remains a player in the green tech industry and does not fall behind the US.
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