The risks of American protectionism to EU industries

European industries are at risk. The energy crisis and the war in Ukraine are taking their toll on our struggling economy. The recent American protectionist measures will add another blow that will likely accelerate a widespread de-centralisation of Europe.

The American Inflation Reduction Act (IRA) introduces $300 billion in Deficit Reduction and $369 billion in Energy Security and Climate Change programs over the next ten years, which includes massive subsidies and tax credits for green products (electric cars, batteries and renewables) made in the US. Meanwhile American businesses are already paying about 5 times less for their energy bills. Not only does this put European businesses at a huge disadvantage, it is also likely to result in innovative and energy dependent tech businesses moving to the US, a brain drain.

This is damaging for an economy battling with a recession, record high inflation and an energy crisis. Tensions between the EU and US are tangible as a result. How can American protectionist measures have such a significant impact on Europe? The EU is not economically autonomous since its economy relies heavily on other countries. Many of the issues we are currently facing stem from this underlying problem. To tackle the root cause, we need a more powerful and economically autonomous Europe in the long term.

A trade war with the US, the EU’s most important global partner, is undesirable. The accelerated growth of (heavily subsidized) green industries in both the US and the EU is more than welcome, but it should not be accompanied by closing our economies. Free trade and (mutually) open green economies are what we should work towards. Macron is currently in the US trying to single-handedly prevent a trade war. His aim was to persuade the US to lower the energy prices it charges to European countries and soften its measures towards European businesses, but didn’t get a definitive answer. Given the high interests and clear European dimension, it should’ve been an EU delegation instead of Macron by himself, which would’ve increased the chances of a positive outcome.

Diplomatic action is likely to have limited effect or could even lead to problematic compromises. So the EU needs to take additional action: get ready to accelerate the energy transition, devise subsidies packages (enough to counter the IRA) and invest in developing its green and tech industries. The EU Chips Act is a good example.

These are long term solutions to combat the high energy prices and to allow green and tech businesses to flourish in the EU, creating jobs, innovation, progress and prosperity.

This article was authored by David Joon.