The dispute over discrimination against European car manufacturers in the $369 billion US support package for green technologies has apparently been resolved. Like their US competitors in Europe, European manufacturers thus have free access to the subsidies. Commission President Ursula von der Leyen wanted to announce the agreement on Friday evening after a meeting with US President Joe Biden. The EU and the US want to conclude a bilateral trade agreement for critical raw materials. This allows the US government to classify the EU as a trading partner and exempt it from the requirements of the "Inflation Reduction Act" (IRA) for electric cars, which the EU criticizes.

Hendrik Kafsack

Economic correspondent in Brussels.

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In essence, it is about a clause in the Inflation Reduction Act that only grants buyers full subsidies for electric cars if 40 percent (later 80 percent) of critical materials in the traction battery initially come from the United States – or a country with which they have a trade agreement. These are Canada and Mexico, but not the EU. The US Treasury Department had shown the way for a solution when it made it clear that the term free trade agreement is not defined in the law.

Technical details are still missing

The US government could fix such a commodity agreement by government decree (Executive Order), the EU member states would have to ratify it. The procedure would have the advantage of leaving out the US Congress, in which there are critical voices against a "watering down" of the IRA requirements. The negotiations between the Commission and the US administration on the exemption for the EU, which have been running since last year, have therefore taken place in the utmost discretion. The time pressure was great to find a solution. The US Treasury Department wants to make public this month how it intends to interpret the rules.

The solution announced on Friday is only a political agreement in principle. The technical details still need to be worked out. This and the subsequent ratification would take a few more months, it was said in Brussels.

At the end of last year, the EU and the US had already agreed on another exemption from the IRA requirements for the automotive industry. It stipulates that the rules on the share of local production for electric vehicles do not apply to leased vehicles. German car manufacturers in particular benefit from this. The share of leased vehicles in the total car market in the USA is traditionally just under a quarter. According to Commission estimates, however, it is between 50 and 60 percent for exports by German car manufacturers, and in individual cases even up to 80 percent.

Brussels' fear

However, the agreement is unlikely to help calm the discussion on the IRA and the appropriate response to it. On the one hand, aid to the auto industry accounts for only a fraction of the total funding amount at $7.5 billion. On the other hand, the debate has long shifted from the initial excitement about discrimination against EU producers to the question of whether the EU should counter US subsidies of a similar amount.

Analyses by the Brussels-based think tank Bruegel, for example, show that US aid is not as high as that paid in Europe – whether from EU funding or through national programmes. Nevertheless, the Commission has put forward or announced several proposals on how to avoid a potential threat of relocation of investment from Europe to America.

This includes effectively suspending EU aid rules until 2025. The new "crisis and transition rules" that came into force on Thursday even allows member states to assume up to 100 percent of the investment sum in extreme cases. The prerequisite for this is that companies in a third country receive the prospect of aid of the same amount – whereby the funding amount should be limited, at least in theory, to the absolute minimum necessary to prevent emigration.

Next week, the Commission will also present two legislative proposals to secure the EU's supply of strategically important raw materials and the production of green technology in the EU. A European Sovereignty Fund is to follow in the summer. The heads of state and government want to deal with the IRA again at the summit at the end of March.