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BERLIN — Threatened by a new US subsidy package that could hurt EU industry, Germany is rowing back on its long-standing objections to regulations such as France’s Buy European Act, which would include provisions on buying goods locally.
Berlin’s growing sympathy for the French approach is a strong sign that Germany fears the traditional trade order is melting down as Washington follows China’s lead in massive state support for the industry. As one of the EU’s more commercially liberal countries, Germany has generally opposed French proposals for an industrial strategy of intervention, believing such measures would break free trade taboos.
However, the calculus is now changing ahead of a meeting of EU trade ministers in Brussels on Friday and a meeting between German Chancellor Olaf Scholz and French Prime Minister Elisabeth Borne in Berlin.
The US Inflation Reduction Act, which awards $369 billion in subsidies and tax breaks to US green companies, will be high on the agenda of both meetings. EU countries fear the US law will suck investment out of Europe and rage over discriminatory provisions that encourage consumers to “buy American” when it comes to purchasing an electric vehicle.
As the time for peace talks with the US draws to a close and there is little hope of an agreement, German officials are now openly discussing not only funneling billions of state subsidies into key green technologies such as batteries, wind or hydrogen, but also creating controversial requirements that would, at least to some extent, favor European production.
German economy minister Robert Habeck said on Thursday that the EU needed a “strong response” to the US law, telling the German daily Handelsblatt that this would lead to faster approval of state aid decisions by the European Commission, more subsidies and also purchase of local products. “
This last point is crucial as it leans towards a “Buy European Act” called for by French President Emmanuel Macron, which would give preferences to the use of European components in critical industries, similar to those that the US law offers to US Products. . However, it is likely to antagonize other trading partners as they would be put at a disadvantage.
While such local content provisions could help the EU prevent an exodus of key industries and ensure the bloc stays in the race to produce next-generation green technologies, including electric vehicles, they are seen as a sacrilege in the international trading system.
“The issue of local content is very tricky because by definition it violates core World Trade Organization (WTO) rules, which is not discrimination against foreign companies,” said Elvire Fabry, senior research fellow at the Institut Jacques Delors.
Fabry warned that the EU “risks crossing the Rubicon” and losing its credibility as a guardian of global trade rules, on which the EU is much more dependent than the US due to its large share of foreign trade.
Speaking at an economic summit in Berlin on Wednesday, Habeck accepted that the EU’s actions must remain in line with multilateral trade rules “if possible”, but also warned that given the unfair trade practices of the US and China, it would not enough was to just “criticize and complain.”
Habeck said local content requirements had long been “unknown” to the EU, but stressed that Europe had already taken such a path in microchip manufacturing.
He suggested that such a measure could qualify for an exemption under global trade rules, as long as the EU can demonstrate that it is not about creating “national” benefits, but about “the strategic need for sovereignty, including in field of energy policy”.