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BERLIN — With only six weeks to avoid a transatlantic trade battle over green industries, Germans are frustrated that Washington is not offering a peace deal and are increasingly considering the taboo-breaking answer: European subsidies.

Europe’s concerns are based on a US $369 billion package of subsidies and tax credits to support US green businesses, which will come into effect on January 1. The problem for Europeans is that Washington’s plan will encourage companies to relocate investments from Europe and encourage customers to “buy”. American” when it comes to buying an electric vehicle – something that is infuriating large EU car-producing countries such as France and Germany.

The timing of this protectionist measure couldn’t have been worse, as Germany was in open panic that several top companies – spurred in part by spikes in energy prices following Russia’s invasion of Ukraine – were shutting down domestic operations to invest elsewhere. The last thing Berlin needs is even more incentive for companies to leave Europe, and the EU wants the US to strike a deal where its companies can enjoy US privileges.

A truce, however, seems unlikely. If this squabble gets out of hand now, it will lead to a trade war, something that terrifies beleaguered Europeans. While the first step would be a largely symbolic protest at the World Trade Organization (WTO), the clash could easily shift back to the tit-for-tat tariff battles of former US President Donald Trump.

This means that momentum is growing in Berlin for a radical Plan B. Instead of an all-out tariff war with America, the increasingly discussed option is to tear up the classic set of free trade rules and play Washington at his own game by funneling state funds to Europe. industry to nurture national green champions in sectors such as solar panels, batteries and hydrogen.

France has long been a leading advocate of bolstering European industry with state largesse, but so far the more economically liberal Germany has been reluctant to enter a subsidy race with America. But now the sands are shifting. High officials in Berlin say they are leaning more and more towards French ways of thinking if talks with the US don’t lead to an unexpected last-minute solution.

Berlin is the economic powerhouse of the bloc of 27, so this will be a defining moment if Berlin finally decides to throw its powerhouse into a state subsidized industrial race with the US

Time is running out

The clock is ticking for a truce with Biden that seems increasingly unlikely.

Recent attempts by a special EU-US task force to address EU concerns have met with little enthusiasm from the US to amend the controversial rules, the European Commission told EU countries this week.

“There are only a few weeks left,” warned Bernd Lange, chairman of the European Parliament’s trade committee, adding that “once the law comes into force, it will be too late to make any changes.”

Lange said no deal would likely lead to a WTO lawsuit against the US, and Brussels could also att*ck what it sees as discriminatory US subsidies by imposing punitive tariffs. Warnings of a trade war are already overshadowing preparations for a high-level EU-US meeting in Washington on December 5.

MEP Bernd Lange Lange says no deal will likely lead to EU WTO lawsuit against US | Philippe Buissin/European Union

This is exactly the kind of dispute the German government wants to avoid as Chancellor Olaf Scholz hopes to forge unity between like-minded democracies in the face of the Russian war and the growing challenges posed by China. Earlier this month, the Scholz government approached Washington suggesting a new EU-US trade deal could be negotiated to resolve the disputes, but that proposal was quickly rejected.

There are supporters of the subsidy approach in Brussels, with EU executives saying the powerful Internal Market Commissioner, Thierry Breton, is a leading proponent. Breton is already in favor “European Solidarity Fund” to help “mobilize the necessary funds” to strengthen European autonomy in key sectors such as batteries, semiconductors and hydrogen. Germany’s support could help Breton gain an advantage in internal EU policy discussions over the more cautious trade commissioner Valdis Dombrovskis.

Breton will travel to Berlin on November 29 to discuss the implications of the Inflation Reduction Act as well as industrial policy and energy measures with the Scholz government.

The German deliberations even echo calls from top Biden administration officials, including U.S. Trade Representative Katherine Tai, who call on the EU not to get involved in the transatlantic trade dispute and introduce its own industrial subsidies instead; a strategy that Washington also sees as a way to reduce dependence on China.

Plan B

Scholz first suggested late last month that the EU might have to respond to the US law with its own tax cuts and state support if negotiations with Washington fail to produce a solution, backing similar plans formulated by French President Emmanuel Macron that will meet with Biden on December 1 in Washington.

While Scholz does not support Macron’s wording of the initiative as “Buy a European Bill” (which sounds too protectionist to Germans), the chancellor agrees the EU cannot stand by if it faces unfair competition or lost investment, people familiar with his thinking said at the end of last month.

Negative economic news, such as carmaker Tesla halting its plans to build a new battery plant in Germany and instead investing in the US, or the partial closure of German operations by steelmaker ArcelorMittal, have increased calls in Berlin to consider more state support to counter the negative due to both the US program and high energy prices.

While the government’s official position remains that Berlin still hopes to negotiate a solution with Washington, officials in Berlin say it could be possible to increase incentives for industry to locate green technology production in Europe.

A spokesperson for the German Ministry of Economic Affairs said that facing the challenges of the Inflation Control Act, “we will have to find our own European response that prioritizes our strengths… The aim is to competitively shift green value creation to Europe and strengthen our own production capacity.”

However, the Ombudsman warned that both the US and the EU “need to be careful that there is no subsidy race that would prevent the best ideas from dominating the market” and added: “Green technologies in particular thrive best in fair competition; protectionism paralyzes innovation.”

An important condition that could help Germany and the EU to ensure fair competition and avoid the global free trade system from falling into protectionist tendencies would be to ensure that EU state subsidies are WTO compatible. This means that, unlike US law, these subsidies would not discriminate between local and foreign producers.

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German Chancellor Olaf Scholz first hinted late last month that the EU might have to respond to US law with its own tax cuts and state support | Sean Gallup/Getty Images

Most importantly, support also comes from German industry.

“In the area of ​​industrial policy and subsidies, we could look at WTO-compatible measures – as the EU is already doing in the chip sector,” said Volker Treier, head of foreign trade at the German Chamber of Commerce.

Treier also stressed that “there must be no discrimination” against foreign investors, but added: “This clearly does not preclude the possibility of clearing bonuses, which in turn should be available to investors from all countries who would be interested in such investment commitments in Europe.”

In Brussels, the Commission’s competition department also made it clear that it was looking at the upcoming proposals with an open mind.

“There are no excluded instruments a priori“Regarding the EU’s response to US subsidies, Ben Smulders, deputy director general of the state aid department, said on Thursday.

Barbara Moens, Suzanne Lynch and Pietro Lombardi in Brussels and Laura Kayali and Clea Caulcutt in Paris contributed.

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