Could new talks signal progress towards freer EU-US trade?

Industry News | | MIC Customs Solutions |

How could talks between the US and EU help resolve a dispute on EV subsidies and help counter the threats posed by China?

Efforts to ease the trade tensions between the US and the EU have progressed this month, with US president Joe Biden welcoming his EU counterpart Ursula von der Leyen to the White House to agree upon an outline for a limited trade agreement. This aims to head off a growing dispute over subsidies for electric cars and present a united front to counter the influence of China.

While the proposed deal is far short of a comprehensive free trade agreement (FTA), it would give the EU preferential treatment that could help ease some of the tensions and reduce the risk of a tit-for-tat subsidies war. So what areas are the two sides looking to find agreement on and what could it mean for the future of transatlantic trade?

What has caused recent tensions between the EU and US?

One of the biggest disagreements between the two sides has arisen out of US president Joe Biden's flagship Inflation Reduction Art (IRA), which includes significant subsidies for consumers in the country who purchase US-manufactured electric vehicles (EVs). 

However, such discounts are not available for imported vehicles, which Brussels claims breaks World Trade Organization rules and puts its own manufacturers at a significant competitive disadvantage. 

What's more, in addition to stating that cars must be assembled in North America in order to be eligible for the subsidies, the IRA also requires that the material for their batteries must also originate from North America, or from nations with which the United States has an FTA. 

This would mean EU carmakers seeking benefit from the IRA would have to move investment out of Europe and into the US, with both final manufacturing facilities and supply chains impacted. 

As a result, lawmakers in several EU countries have raised the idea of introducing their own subsidies. Last month, the European Commission unveiled its Green Deal Industrial Plan in response to the IRA, which includes more state aid to help Europe compete as a manufacturing hub for clean tech.

New talks on minerals signal progress

The face-to-face talks between president Biden and Ms Von der Leyen have been aiming to overcome some of these issues, and were described by some commentators as focusing on a 'free trade-like' agreement that addresses the specific concerns raised by the IRA. 

One of the biggest goals of the discussions was to allow the EU to benefit from some of the preferential treatment afforded to the US' FTA partners on critical minerals needed for EV batteries, without the need to sign a more comprehensive deal. 

In a joint statement after the meeting, the two sides said they had agreed to "immediately begin negotiations on a targeted critical minerals agreement" that should allow EU-produced raw materials to qualify for US tax credits.

The US Treasury, which is the department responsible for overseeing the EV tax credits, has previously noted that the text of the IRA itself does not explicitly define the term 'free trade agreement', which opens up the possibility for a more limited deal to be completed that focuses solely on areas such as minerals.

Such a deal would be narrow in scope in order to allow EU products to qualify for US subsidies and would not include other key elements of a traditional FTA, like lowering tariffs on imports. As such, it could be finalized in weeks or even days, rather than the many months a more comprehensive agreement would take.

How could an 'FTA-lite' agreement help reshape global trade?

Another aim for the talks is to shore up a solid supply of critical components such as minerals and reduce reliance on China, which is currently by far the world's largest producer of these items.

Indeed, a spokesperson for the US Treasury, said that this move should help tackle the "extremely high concentration of Chinese control over critical mineral extraction globally" as well as help to push towards a clean energy-centric economy.

The negotiations could therefore pave the way for a new approach to global trade from the US that focuses more closely on trade between geopolitical allies, with the aim being to develop a common front that can counter threats from China.

Mr Biden and Ms Von der Leyen's statement continued: "Cooperation is also necessary to reduce unwanted strategic dependencies in these supply chains, and to ensure that they are diversified and developed with trusted partners."

This follows on from comments made by US treasury secretary Janet Yellen last month that supported this trade strategy, sometimes known as 'friend-shoring'. She said: "I think the word 'free trade' was meant to mean reliable friends and partners with whom we can feel we have secure supply chains."