Will Ferrell’s 2021 Super Bowl ad for General Motors Co. makes bleak viewing today. The actor’s comic fury at being “out-EV’d” by Norway hit at a truth that was a point of pride for Europe: When it comes to electric-vehicle sales, the US has been a laggard, lacking the regulatory and investment push seen in China and Europe. “Don’t hate, imitate,” Volkswagen AG-owned rival Audi replied.
Imitate, the Americans have — and now it’s European Union politicians who are prone to Ferrell-style rants. The Biden administration’s tax credits of up to $7,500 on EVs assembled in North America are seen as an “aggressive” competitive threat by the EU and the likes of South Korea, as are other goodies promoting green investment in the $369 billion Inflation Reduction Act. Battery-makers like Sweden’s NorthVolt AB are pivoting to the US, with energy costs also in mind after a year that saw European natural-gas prices trade eight times higher than in the US.
This is not a textbook trade war: We’re a long way from the Trump-era threat of tariffs on European cars, and the Ukraine conflagration has pushed NATO allies closer. But we’re also a long way from a new era of multilateralism under Biden. A subsidy salvo designed to keep China in check and incentivize new factories in the US is bad for trade partners caught in the middle, even if it’s good for the climate. The protectionism tying together “Buy American” provisions with subsidies that manufacturers say equates to a cost reduction of about 30% feels like a grim new era.
“The risk for Europe is the kind of deindustrialization we haven’t seen for years,” says Antoine Huard, co-founder of French power-plant developer Verso Energy.
So far, Europe’s response has been halting. Appealing to Biden’s good nature has procured the promise of tweaks, but not much more. Complaining to the World Trade Organization feels like a fool’s errand: Dispute-resolution mechanisms have become gummed up and undermined by the US; they weren’t exactly fleet of foot in the first place. There’s been little appetite for the threat of retaliatory tariffs, which Canada used to its advantage.
The obvious move left is, in the words of Audi, imitate rather than hate. The EU has launched a 750 billion-euro ($812 billion) fund to heal its pandemic-scarred economy, and not all of it is spent yet. It’s eyeing 43 billion euros in public and private investments for semiconductors. Would another industrial boondoggle be so bad? European Commission industry chief Thierry Breton, the face of French-style dirigisme in Brussels, is whipping up support for a “Clean Tech Act” to support industry.
There are some good reasons to join the subsidy race, even if few expect an overall “win.” Demand wouldn’t be created from scratch. There’s already investor appetite and corporate demand for green investments like batteries or renewables, especially with the pressure to reduce supply-chain dependencies on China and re-shore critical components. Carmaker Stellantis NV wants to itself produce half its European factories’ energy supply, for example. Public support would help make the EU more competitive by subsidizing energy or relevant tech.
But there are also risks. One is more fanning of trade tensions. The EU’s latest plan to further ease restrictions on state aid in response to the US, as reported by Bloomberg News, will lead to plenty of internal fights over unfair competition between big countries like Germany and those with less financial firepower. And the more the EU tries to create carve-outs for specific products or industries, the likelier it is to damage its credibility with other trade partners, reckons Bruegel research fellow Niclas Poitiers.
Another is wasting money. In the current environment, there is plenty of demand for raw materials or components that are produced locally because they’re easier to transport and carry no geopolitical risk. But there is a point where shortages might turn into gluts, as seen in the chip industry in the past. Even in the gleaming world of Tesla Inc.-style gigafactories, which have attracted $300 billion in investment worldwide since 2019 with China in the lead, there are likely to be flops, such as the “Britishvolt” battery factory that came close to collapse last year.
So even as the EU races to fuel its own industrial-champion dreams, it should also be on guard. Bend state-aid or antitrust rules too much and they will break. Past efforts to build new Airbus-style ventures haven’t always worked out. And effective spending, not just more of it, should be a priority, according to economist Xavier Jaravel, who points out France still has 40 billion euros of recovery funds to put to work. The stakes are high, as are the risks. Sparks will fly.