Biden Starts a Climate Trade War The Inflation Reduction Act’s subsidies are angering U.S. allies.
Wasn’t President Biden going to end Donald Trump’s destructive trade wars against allies? Apparently not. His “super aggressive” climate protectionism—to quote French President Emmanuel Macron—is infuriating U.S. friends and may set off a subsidy and tariff war.
U.S. allies are upset about the Inflation Reduction Act’s generous subsidies for domestically manufactured green technologies. In his trip to Washington last week, Mr. Macron said the U.S. subsidies may “perhaps fix your issue but you will increase my problem.” They’re really a problem for everybody.
The dispute involves tax credits for electric-vehicle and battery production. The IRA’s $7,500 consumer tax credit are restricted to EVs assembled in North America. Most foreign auto makers make EVs abroad and export them because the global and U.S. markets are still small. They can’t tap the consumer tax credit unless they invest in American production. But making EVs in the U.S.—or Canada or Mexico—may be more costly and could render their cars less competitive in other export markets.
Half of the U.S. $7,500 tax credit is also contingent on an increasing share of the vehicle’s battery minerals being extracted or processed in the U.S. or a country in which the U.S. has a free-trade agreement—starting at 40% in 2023 and increasing to 80% in 2027. The other half will be available only to EVs whose battery components are mostly made in North America, starting at 50% in 2023 and reaching 100% by 2029.
No auto maker is expected to qualify for the full $7,500 tax credit next year, but Tesla and GM may be eligible for half. Foreign auto makers will become less competitive in the U.S. and struggle to meet stringent fuel-economy mandates. The upshot? They will have to buy regulatory credits from Tesla and GM.
The law also offers generous tax credits for domestic EV battery production, including a $35 per kilowatt-hour credit for U.S.-made battery cells, plus $10 per kilowatt-hour for domestically produced modules. These credits are expected to shave the cost of producing an EV battery by 30% to 40% and reportedly prompted Tesla to reconsider plans to make battery cells in Germany.
The biggest winner of Mr. Biden’s climate protectionism may be GM, whose joint venture with LG Energy Solution this summer received a $2.5 billion federal loan guarantee to build three U.S. battery factories. RBC Capital Markets has estimated that GM could pocket $3 billion from the battery tax credit in 2025. GM recently projected the IRA tax credits will add $3,500 to $5,500 in profit to each EV.
The law also includes up to $40 billion in loans to build new EV and battery factories. Oh, and don’t forget the manufacturing tax credits for wind turbines, solar panels and other CO2-reducing technologies. “The U.S. has turned on a shop vac to suck up incentives and we’re standing here with a dust buster,” a Canadian Manufacturers & Exporters official said last month.
A Toyota spokesman in Canada spoke the truth: “While the IRA is being presented in many quarters as key legislation to fight climate change, in reality it is an act of trade protectionism.” The Canadian Steel Producers Association has warned that U.S. steel producers would also indirectly benefit from the climate subsidies without incurring carbon costs.
Ah, yes—carbon costs. Complaints by European and Canadian leaders would merit more sympathy if they hadn’t handicapped their own manufacturers with renewable subsidies that increase energy prices. Many European manufacturers are shifting investment from the Continent because of surging energy prices. Cap-and-trade systems in Europe and some Canadian provinces have also raised the cost of energy and manufacturing.
As for “climate protectionism,” Europeans also play the game. Europe is planning to implement a carbon border adjustment tariff on imports produced in countries with higher CO2 emissions, including possibly the U.S.
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European leaders are threatening to file a complaint with the World Trade Organization if the Biden Administration doesn’t rewrite the IRA to extend subsidies to foreign EVs and green technologies. But the latter would compound the policy felony by forcing U.S. taxpayers to subsidize foreign-made cars. Europe could also impose subsidies for domestic manufacturers or tariffs against U.S.-made EVs.
The West’s climate policies are already harming consumers and slowing economic growth by raising energy prices and distorting investment. Now they are threatening a trade war that will cause more harm. The new climate protectionism won’t end well.
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