The US is now taking major steps towards achieving its commitments under the Paris Agreement. It is therefore unfortunate that the law includes discriminatory elements. Free trade – not closed borders – is what is needed for the green transition to become a reality, means The Confederation of Swedish Enterprise.
The Confederation of Swedish Enterprise welcomes the ambition underpinning the United States’ Inflation Reduction Act (IRA). It highlights how the US is now taking major steps towards achieving its commitments under the Paris Agreement.
A subsidy race in which the US and the EU heavily provide targeted support for their own production has no positive outcomes.
However, Swedish Enterprise would like to emphasise that incentives like the IRA should only be based on climate-related criteria that create the best conditions for all businesses to meet climate commitments. It is therefore unfortunate that the law includes discriminatory elements. Free trade – not closed borders – is what is needed for the green transition to become a reality.
The IRA aims to help US consumers and businesses to become more climate smart through massive subsidies in a range of sectors. Demand for electric cars, wind turbines, solar panels, heat pumps, and more is set to increase dramatically as a result.
Swedish businesses, which are often at the forefront of the development of environmentally friendly technologies, have a key role in the transition to a greener economy. Therefore, incentives such as the IRA should be based solely on climate-related criteria that give all manufacturers and subcontractors the best opportunities to fulfil climate commitments.
This requires open trade, not closed borders. Hence, the local content requirements set out in the IRA are of particular concern. These are likely to violate common WTO rules that have served Sweden and Swedish companies well. Businesses that have or plan to establish production sites in the US will likely be able to take advantage of subsidies under the IRA. However, some of the rules will limit manufacturers’ choice of subcontractors and may mean they choose domestic suppliers over foreign ones, which could disadvantage European and Swedish businesses. Furthermore, companies with manufacturing in the EU will find it more difficult to export to the US.
State aid tends to be problematic and risks resulting in competition between countries to introduce targeted subsidies. These risks distorting markets. The distortion becomes even more severe due to the requirement that subsidies be paid exclusively to companies with production in the US.
The EU pursues a climate policy that differs significantly from that of the US in that it primarily aims to make businesses pay for their emissions, i.e. a stick approach. The EU is also set to further tighten its policy in this area. US policy, on the other hand, is almost exclusively focused on a carrot approach. The playing field is thus uneven. Extensive subsidies already exist in the US and within the EU. The IRA adds further subsidies. In short, it is too early to see exactly how uneven the playing field will be.
EU trade and investment thus risk being undermined. This does not mean, however, that the EU should panic. Rather, careful analysis of how the situation will develop is needed.
Swedish Enterprise believes it would be unfortunate if the EU were to develop a similar approach to the US. Instead, the Union should launch a strategy for strengthened European competitiveness, based on market principles and clear goals for increased growth. Protectionism or a subsidy race will neither benefit American nor European companies in the long term.
The EU should never be tempted by a state-sponsored arms race or a trade war across the Atlantic.
– It would be extremely unfortunate if we find ourselves in a trade war across the Atlantic. We need to maintain a constructive tone in the dialogue between the EU and the US, says Anna Stellinger, deputy Director General and Head of International and EU Affairs at Swedish Enterprise.
She argues that neither should the EU follow the same path as the US.
– A subsidy race in which the US and the EU heavily provide targeted support for their own production has no positive outcomes. We all lose if every continent enters a global competition with borrowed money.
Anna Stellinger believes that the next steps will be vital, and that we need to keep calm.
– Continued dialogue with the US is now needed on the implementation and guidelines of the IRA. Hopefully, the US can be persuaded to adjust some of the discriminatory elements of the legislation when it is introduced. At the same time, the EU must do its homework within the bloc. Obstacles to the green transition within the Union need to be removed and measures taken to strengthen the EU’s competitiveness. The EU should never be tempted by a state-sponsored arms race or a trade war across the Atlantic.