European Commission President Ursula von der Leyen recently came to Washington, D.C., hoping to soften the impact of the Inflation Reduction Act (IRA), which has strained U.S.-European Union economic relations and looks ready to spark a green tax subsidy race to the bottom.
In a White House meeting, Presidents Biden and von der Leyen think they arrived at a solution, there’s just one catch: It would require undermining the authority of Congress and EU member states at once, casting the entire process into more public scrutiny.
Not only is that not a winning strategy, it also risks exporting the EU’s long-built democratic deficit across the Atlantic.
How the White House and the European Commission proceed from here will show China how united the West is about challenging its economy democratically.
In 2013, on the heels of the Great Recession, the European Union and the United States launched the Transatlantic Trade and Investment Partnership (T-TIP) negotiations. The goal was to boost economic growth and put trade enforcement power back in Western capitals rather than the World Trade Organization (WTO).
The deal was designed to harmonize standards and leverage the bloc’s joint market power to force non-market economies like China to conform. Negotiations hit a roadblock in 2016 due to the European public’s skepticism over corporate America’s food and environmental standards and the election of President Trump.
Despite not reaching a T-TIP deal, President Obama should be praised for pursuing a bipartisan approach. Congress, after all, is the branch with the constitutional authority to regulate commerce with foreign nations.
Unlike Obama, President Biden isn’t seeking congressional approval for what amounts to a T-TIP-by-another-name strategy. In fact, he is actively avoiding it.
In the summer of 2022, Congress passed Biden’s signature climate legislation, the Inflation Reduction Act, which aims to incentive domestic green tech investment by giving tax credits to companies that produce electric vehicles (EV) in the U.S., including regional sourcing of the critical raw materials (CRM) needed to produce EV batteries.
Not only is this a violation of WTO rules, it has caused headaches for President Biden, who does not want to disrupt transatlantic unity during the Russian war in Ukraine, and for EU leaders, who fear an exodus of European companies, especially German automakers, across the Atlantic.
In response, the EU is designing its own green subsidy scheme called the Green Deal Industrial Plan, creating the real risk of a transatlantic subsidy race to the bottom and undercutting the goal of presenting a united economic challenge against China.
To find a diplomatic workaround, European and American executive staff have been meeting since October with limited success. After meeting at the White House, however, Presidents von der Leyen and Biden think they found a loophole.
According to the U.S. Treasury Department, limited free trade agreements can be implemented through its rule-making process, bypassing congressional approval. Biden and von der Leyen think that if the U.S. and EU can strike a narrow trade deal on critical raw materials, European companies might be able to benefit from the IRA’s green tax credits without moving production to the U.S.
A limited critical raw materials deal would start to put Brussels and Washington back in the driver’s seat of international standard-setting. One might dare to call it the beginning of T-TIP 2.0.
There’s just one problem.
A critical raw materials deal crafted exclusively for tax breaks does not constitute a “free trade agreement.” Most definitions, including the WTO’s, consider free trade agreements comprehensive tools for liberalizing trade between countries, not instruments for micromanaging trade or isolating sensitive sectors.
Well, maybe there are two problems.
Even the author of the IRA’s domestic requirements, Sen. Joe Manchin (D-W.Va.), has raised concerns about Treasury guidelines undercutting congressional intent. Manchin says the purpose of the IRA is, first and foremost, to “grow domestic manufacturing and reduce our reliance on foreign supply chains for the critical minerals needed to produce EV batteries.″ The Biden-von-der-Leyen workaround would directly undermine that.
Once again, it appears that the Biden administration is ignoring Congress’ wishes for geopolitical reasons, just as it did in the OECD negotiations with Pillars One and Two.
The U.S. and the EU should be working together on goals like combatting unfair Chinese trade competition while reclaiming trade enforcement power back from the WTO. In fact, President Biden would likely find bipartisan allies in Congress on both fronts. If he truly wants to get something done, maybe the president should ask.
Sean Bray is director of European policy at the Tax Foundation, where he researches international tax issues with a focus on tax policy in Europe.