Brussels Is Ditching Its Free-Trade Gospel

As the U.S. government prepares to hand out hundreds of billions of dollars to American companies and consumers in a bid to speed up the transition to sustainable energies, Europe is realizing with dismay that its hopes of improved trade relations with the United States under President Joe Biden were a delusion, and it is preparing to respond in kind—potentially accelerating a general slide toward protectionism that risks undermining global trade. 

After four rocky years of Donald Trump’s presidency, Biden’s election was welcomed in many European Union capitals with a huge sigh of relief. But while overall trans-Atlantic ties have significantly improved since he took office, with the Russian invasion of Ukraine further cementing the Western alliance, on trade and industrial policy the current U.S. president is largely sticking to the same playbook as his predecessor. 

The U.S. Inflation Reduction Act includes more than $400 billion in green subsidies from which EU companies will be excluded, unless they relocate across the pond. U.S. consumers will enjoy a tax break of up to $7,500 when buying an electric car, but only for vehicles assembled in North America. 

“For some Europeans, this is a real wake-up call, a real warning sign,” said Marie-Pierre Vedrenne, a French member of the European Parliament’s International Trade Committee who belongs to the centrist Renew Europe group.

In fact, the writing has been on the wall for some time. Last year, Biden agreed to remove Trump’s tariffs on EU steel and aluminum, but only to replace them with a system of quotas that hardly looks like free trade. The new administration has also been in no rush to revive multilateral conflict resolution. Just like Trump, Biden has so far held up appointments to the World Trade Organization (WTO) body in charge of dispute settlement, keeping the trade court effectively paralyzed. 

Biden is temperamentally friendlier toward Europe than his predecessor, but “like with Trump, his instinct is protectionist,” said Uri Dadush, a U.S.-based fellow at the Bruegel think tank.

The EU has long been in denial of this reality. “Europe has been so naive, and so keen to preserve its friendship with the Americans, that it has realized a bit late that whether it’s Biden or Trump, they defend first and foremost the economic interests of the United States,” said Emmanuel Maurel, a left-wing French member of the European Parliament.

This reluctance to give up on hopes of commercial harmony with the United States has much to do with Brussels’ long-standing attachment to free, rules-based international trade, on which the bloc is particularly dependent due to its high share of foreign imports and exports compared to the United States and China.

That approach, however, appears increasingly out of step in a global economy that, according to Fabian Zuleeg of the European Policy Centre in Brussels, is veering toward a “my country first” system, with less and less room for cooperation and multilateralism. “What we are seeing is a breakdown of the international rules-based economic order, and that’s particularly serious for Europeans,” Zuleeg said.

Now the EU is toning down its free-trade rhetoric, too. Last week, European Commission President Ursula von der Leyen declared that “the new assertive industrial policy of our competitors requires a structural answer.” That could entail changing the current EU regulation on public aid, which would make it possible to beef up subsidies at the EU and national levels. But the exact nature of Brussels’ reaction will depend on the balance it can strike between member states’ wildly different views on market competition and public spending.

France has long been calling for looser rules on state subsidies, also lobbying for a “Buy European Act” that would incentivize consumers to purchase products made in the EU. “You have China that is protecting its industry, the U.S. that is protecting its industry, and Europe that is an open house,” French President Emmanuel Macron said in October.  

Expanded subsidies and “buy local” requirements are opposed by some of the liberal, pro-trade member states and European Commission officials. Crucially, though, Germany, the largest car manufacturer in Europe, appears to be warming up to the French proposals. Last week, German Economic Affairs Minister Robert Habeck suggested that some kind of incentives to buy European may be included in a plan currently being hammered out at the EU level, as long as they don’t blatantly breach WTO rules.

“The Germans are now starting to have a real debate on this,” Maurel said. This could bring about a “major shift” in Europe, he added.

But the scale of any EU response may be conditioned more by its coffers than its conscience. The EU’s already-stretched resources will be primarily needed to shield people and businesses from soaring energy prices following the shock caused by the war in Ukraine. With the Nordic countries categorically rejecting the possibility of a new program of joint borrowing to subsidize European industries, similar to the one approved by the EU after COVID-19 hit, “there aren’t a lot of governments with a lot of cash to spare,” said Fredrik Erixon, director of the European Centre for International Political Economy in Brussels.

“I’m not sure we would win a subsidies race [with the U.S.],” said Bernd Lange, the chair of the International Trade Committee in the European Parliament, who has called for the EU to file a formal complaint at the WTO instead. “We want a rules-based system,” he said.

Whatever balance will be found in Brussels between the bloc’s different souls, a full-blown economic conflict with the United States remains unlikely. Gone are the days when then-President Trump boasted that “trade wars are good, and easy to win.” Now, both sides seem keen to prevent tensions from boiling over. When Macron visited the White House last week, Biden struck a reassuring tone, suggesting that the Inflation Reduction Act could still be tweaked to “make it easier for European countries to participate.”  

To what extent that can actually be done remains to be seen, but trade talks are currently underway. “The issue is not going to go away entirely, but it will be much smaller than we had imagined,” Erixon said.

Other aspects of Biden’s industrial policy should reassure Europe, too. According to Simon Schropp, managing economist at Sidley Austin, a U.S. firm in the field of international trade and investment law, in many areas the Biden administration is actively encouraging so-called friendshoring, the diversification of manufacturing and supply chains to countries deemed reliable partners—a list that includes the EU. Dealing with China remains one of Biden’s top priorities, and “the U.S. knows that in any confrontation with China, it will need the EU,” Schropp said. “I don’t think we are at any breaking point [between the two allies],” he added. 

This week, the Biden administration proposed to the EU the creation of a new international consortium that would coordinate on the production of metals with lower carbon emissions and impose tariffs on China and other countries that do not respect those standards.

Moreover, EU-U.S. trade spats are hardly new. Trans-Atlantic relations have been characterized by constant bickering at least since the 1990s, with the two sides slapping tariffs on each other over everything from hormone-treated meat to civil aviation subsidies. Still, alliances and bilateral investment deepened. Since 2000, more than 50 percent of total U.S. foreign direct investment has gone to Europe, and Europe’s corresponding figure has consistently been above 50 percent as well. Trans-Atlantic direct investment grew even amid the shockwaves of the 2007-2008 financial crisis, more than doubling in absolute terms over the following decade.

“Husbands and wives live together for 30 years, and they still fight over the dishes,” Dadush said.