The US energy transition subsidies have sparked concerns about trade and have caused a shift in global manufacturing. The Inflation Reduction Act (IRA), which was signed into law on August 16 last year, has directed approximately $370 billion in subsidies towards America’s energy transition. These subsidies include tax breaks for US-made electric vehicles (EVs) and batteries.
While the incentives aim to boost American manufacturing after years of offshoring, they have raised fears that businesses could be drawn away from other countries. European nations, China, and others had been subsidizing clean technology development even before the enactment of the IRA. However, with Washington’s entry into the game, other countries had to continue or increase their subsidies to remain competitive.
The legislation has unintentionally constrained trade with key US allies, inadvertently causing trade tensions. One of the issues is a consumer tax credit of up to $7,500 for the purchase of electric vehicles assembled in North America. To qualify for the full credit, the vehicle batteries must have a percentage of critical minerals sourced from America or countries with free-trade agreements. This requirement initially excluded the European Union and Japan.
This exclusion led to dissatisfaction from these countries, prompting US officials to expand access to clean vehicle subsidies. In March, they clarified that the free trade agreement requirement could include newly negotiated critical minerals deals. This change opened doors for countries like Japan to benefit from the subsidies. Despite the initial friction, the US made efforts to negotiate bilateral deals with various countries to address the concerns raised.
Canada, for instance, warned about the risks of a subsidy war but responded by matching certain IRA incentives with its own. In April, the country announced subsidies of up to 13.2 billion Canadian dollars ($9.8 billion) over ten years for Volkswagen’s first overseas battery plant in Ontario. Hyundai, South Korea’s largest automaker, is also planning to produce US-assembled electric cars eligible for subsidies at a site under construction in Georgia. Other South Korean companies have formed partnerships with US counterparts to meet IRA requirements by building assembly lines, such as the joint venture between battery maker Samsung SDI and General Motors to construct an EV battery plant in the US.
According to an analysis by three European Central Bank economists, the IRA would benefit the US by increasing production in electrical and optical equipment by 6% to 30%. However, this gain would come at China’s expense, and to a smaller extent, the European Union’s. The relocation of manufacturing to the US may result in losses in some specific sectors, although the overall impact is relatively small.
Since the IRA was signed into law, at least $75 billion in new manufacturing investments have been announced. The availability of similar-sized green subsidies in the European Union, coupled with rising energy costs due to Russia’s invasion of Ukraine, has made the US a more attractive option for businesses, particularly those in energy-intensive sectors.
Overall, the US energy transition subsidies have triggered trade concerns and shifted global manufacturing. While they have unintended consequences and caused some trade tensions with US allies, the government has made efforts to address these issues through bilateral agreements. The subsidies have attracted significant manufacturing investments, which may have some impact on China and the European Union. However, other factors, such as rising energy costs, also contribute to Europe’s competitive challenges.
