The Biden administration hopes to assuage European economic fears over green energy subsidies in the Inflation Reduction Act. The European Union is concerned that the law gives tax credits on certain electric or hybrid vehicles built in North America, excluding those made in the EU. This has the potential to start a green energy subsidies war that affects taxpayers on both continents.
The protectionist language in the law will devastate the global economy if not remedied soon. On the one hand, the administration touts global cooperation. On the other, it is pursuing policy objectives that threaten access to global markets.
The American economy depends on imports. The European response to the Inflation Reduction Act’s implementation will have ramifications for businesses and families across the United States.
European Commission Vice President Valdis Dombrovskis is planning a Washington visit in March to discuss the law, following similar talks in February. Dombrovskis told reporters in February, “The U.S. has indicated openness to find ways how to treat us as a free trade agreement equivalent partner.”
Dombrovskis also praised a joint U.S.-EU task force discussing policy differences. He’s hopeful some deal will be reached to avoid an economic conflict while noting there’s more to be done. His hope is that the United States will add EU automakers to the tax credit.
EU Executive Vice President Margrethe Vestager wrote in The Wall Street Journal that America’s regulatory state might draw European companies away from the United States. “If people think that it’s easy to do business in the U.S. just because of the ease of getting a subsidy, they’re wrong. … I think there’s a lot of detail to add to the equation.”
The United Kingdom also has a bone to pick with America over the law. UK Business and Trade Secretary of State Kemi Badenoch told Politico in February that “I don’t think it’s a good idea, not just because it’s protectionist.”
“It also creates a single point of failure in a different place, when actually what we want is diversification and strengthening of supply chains across the board.”
Badenoch thinks America’s focus on onshoring jobs will cause further supply chain disruptions, particularly “when it’s looking at the economic challenge that China presents.” She vows that the UK is working with the EU, Switzerland, South Korea and Japan on potential responses. There’s fear that businesses may start competitions between governments to get the most taxpayer dollars possible.
Ultimately, these protectionist subsidies and extra taxes cause the most harm to taxpayers.
The United States plans to spend just under $400 billion on green energy through the Inflation Reduction Act, primarily through subsidies. This increase causes higher inflation because the government is putting more money into the hands of consumers. Prices rise with the increase in demand, meaning Americans spend more on necessities and have less to save.
The subsidies also mean that property values go up. Increased property values equal increased property taxes, depriving Americans of larger parts of their hard-earned paychecks. Housing prices rose during the pandemic as inflation and government spending went up. The Case-Schiller U.S. National Home Price Index noted that home values rose almost $100,000 as government spending increased.
Renters also face higher costs since property owners will pass down costs to make up for the taxes. The administration said in December 2021 that rental prices are higher than pre-pandemic prices. Zillow’s Observed Rent Index puts the average rent at $1,970 in January, compared to $1,580 in March 2020. This puts residents in a major bind.
When America is already experiencing near-record levels of inflation and a multitude of supply chain issues, the administration’s approach on this issue misses the mark. The spending figures on these subsidies will exacerbate inflation, keeping the squeeze on American families. The global effect of those subsidies and the response of America’s traditional trading partners will cause great uncertainty for businesses that rely on foreign goods and services.
This blunder is due to the administration’s insistence on picking winners and losers in the global economy. The result could be a protracted subsidy war with the EU — and whichever other countries decide to get involved. Protectionism typically fails to accomplish its intended objectives while leaving collateral damage in its wake.
The Inflation Reduction Act has been no exception.