The Inflation Reduction Act ranks among the most dishonest pieces of legislation ever passed in the U.S. How ironic, then, that the law is causing new rays of truth to burst forth—in Europe.
Europe’s complaint is that the act will work too well. The Continent has been barraged by reports of one company after another shifting investment to the U.S. from Europe in a mad dash to soak up the new law’s generous climate-related subsidies. This week it’s the prospect of a battery manufacturer ditching Scotland in favor of America. The long and growing list of companies diverting green investments to the U.S. includes German auto makers BMW and Volkswagen and Italian energy firm Enel.
This is prompting desperate calls from politicians and industry for European governments to do something. Their first choice is for Europe to expand its own green subsidies to keep up with Washington. The European Commission is making a game attempt with the €250 billion Green Deal Industrial Plan unveiled in February.
But Europe is running out of money for such flights of fancy. The EU plan mostly repurposes unspent pandemic aid, because that’s all the cash that’s available. When British Chancellor Jeremy Hunt says his government will focus on regulatory reforms rather than subsidies to entice green investment, he’s pleading poverty, not free-market virtue. The U.K. can’t afford the government spending it’s already doing, let alone a more aggressive climate-subsidy regime.
Barring that, Europe will start a trade war. The Inflation Reduction Act conditions many of its most generous handouts on local-content rules requiring that goods be manufactured in North America. These probably run afoul of U.S. commitments under global trading rules.
I remember when people were telling me that Trump was going to plunge us into destructive trade wars.