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America’s Inward Turn on Trade

America’s efforts to use renewables subsidies to protect domestic manufacturing interests will not only bring higher costs. Because they flout World Trade Organization rules, they could also have significant political repercussions.

ROME – Given that the Inflation Reduction Act promises the largest investment in the fight against climate change ever made by the United States, one might expect the European Union to welcome it. But, while EU leaders undoubtedly applaud America’s strengthening commitment to the green transition, they do have important – and legitimate – misgivings about the IRA.

The IRA commits $385 billion for green subsidies – over-financed by $750 billion of tax increases and revenue savings – over the next decade. While this is significant for the US, the annual total – less than $40 billion – is less than half the amount spent by EU countries on renewables alone (€80 billion, or $84.5 billion, in 2021), which amounts to about 0.5% of EU GDP, compared to a projected 0.2% for the US.

But the scale of spending is not the EU’s main concern about the IRA. The real issue is that the US is becoming the first major economy explicitly to link renewable-energy subsidies to local-content requirements that are clearly incompatible with World Trade Organization rules prohibiting discrimination against products based on their country of origin. EU leaders fear that the IRA’s provisions on domestic content will hamper European industry.