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The Transatlantic Subsidies Race We Need

Following the passage of the US Inflation Reduction Act, calls for a European green industrial policy have been growing louder. But trying to out-compete the US by introducing subsidies based on the IRA model would be a grave mistake.

BRUSSELS – The US Inflation Reduction Act (IRA) has America’s trading partners in a tizzy. The legislation is not only gargantuan, dedicating some $369 billion to climate and clean-energy programs; it also has a “buy American” component, delivering cash benefits only to buyers of North American automakers and subsidies to renewable-energy producers that satisfy domestic-content rules. Many countries, particularly in Europe, are now weighing the possibility of implementing their own green industrial policies. This is the wrong response.

The IRA’s subsidies for American-made products are undoubtedly contentious, particularly among leading US trading partners such as Japan, South Korea, and the European Union. US President Joe Biden is now in damage-control mode, as he attempts both to reassure partners and to find ways to soften the impact on allies by bending the IRA’s buy-American provisions.

European policymakers are unconvinced. They fear that, unless they introduce subsidies of their own, the IRA will effectively guarantee US leadership in green industries. But the logic underpinning this conclusion is dubious, at best.