Europeans furious about Joe Biden’s Inflation Reduction Act are threatening a trade spat: ‘Nobody wants to get into a tit-for-tat’

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The European Union and the United States are treading precariously close to a major trans-Atlantic trade dispute at a time when the two Western giants want to show unity in the face of challenges from Russia and China.

EU trade ministers on Friday insisted they would be forced to respond if Washington stuck to all the terms of its Inflation Reduction Act, which is favorable to local companies through subsidies and, according to the EU, will unfairly discriminate against its firms that want to compete for contracts.

“Nobody wants to get into a tit-for-tat or subsidy race. But what the U.S. has done really isn’t consistent with the principles of free trade and fair competition,” Irish Trade Minister Leo Varadkar said.

Even though the allies have stood shoulder to shoulder by imposing strict sanctions against Russia since the Feb. 24 invasion of Ukraine, they cannot gloss over the trade differences.

“What we are asking for is fairness. We want and expect European companies and exports to be treated in the same way in the U.S. as American companies and exports are treated in Europe,” EU Commission Vice President Valdis Dombrovskis said.

And beyond the European Commission, which negotiates on behalf of the 27 member nations on trade issues, the concerns are largely shared in EU national capitals, too.

“All the member states are concerned,” said Czech Trade Minister Jozef Sikela, who chaired the emergency meeting.

The Czech minister said the EU still hopes divergences can be solved during a Dec. 5 meeting of the task force that the U.S. and EU have set up, with the possibility that the bloc would be treated like Canada and Mexico and be exempted from the subsidy conditions.

Trade disputes have been a red line for decades in trans-Atlantic relations, highlighted by fights over aircraft subsidies and steel exports and affecting everything from hormone-treated beef to liquor exports.

Planned subsidies under the Inflation Reduction Act passed by the U.S. Congress in August, are especially grating for the EU. For example, electric car buyers are eligible for a tax credit of up to $7,500 as long as the vehicle runs on a battery built in North America with minerals mined or recycled on the continent.

The EU believes that the measure is a potential trans-Atlantic trade barrier discriminating against foreign producers. Potential actions the EU can take are complaints before the World Trade Organization, trade sanctions or upping subsidies for their own companies.

Those considerations have to weighed against the need to cooperate on the geopolitical stage and the essence of showing a united front.

“We see that the parts from the East actually are trying to divide us,” Estonian Trade Minister Kristjan Jarvan said. “And of course economy plays a huge role in that.”

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