It's US vs EU over electric vehicle subsidies as trade spat hots up

The United States and European Union may be key allies but the recent Washington decision to offer new subsidies on electric vehicles (EVs) and tax cuts to car makers has been frowned upon across the Atlantic. Most - if not all -of these incentives are meant for EVs that are manufactured in North America.

While the Joe Biden administration is looking at promoting EVs made in the US, the move to offer a new set of subsidies on such vehicles has not gone down well with either arch rival China or even key allies like South Korea and those in Europe. EU leaders in Brussels have come out strongly against the ‘Buy American’ condition, and have termed it as discriminatory against car manufacturers in Europe. There is a growing concern that it would also lead away investments from Europe and into the US.

It has been noted by many EU leaders that while Europe and the US remain key partners in a host of geo-political and climate-based issues, the US is also looking to carve out a trade advantage at a time when Europe is going through an energy crunch.

What is US Inflation Reduction Act (IRA)?

Signed into law on August 16, the US Inflation Reduction Act (IRA) aims to bolster investements into domestic manufacturing capacity, encourage procurement of critical supplies domestically or from free-trade partners, and jump-start R&D and commercialization of leading-edge technologies such as carbon capture and storage and clean hydrogen, according to a McKinsey report.

Around $43 billion in IRA tax credits to consumer have been earmarked. It provides for tax credit of up to $7,500 for new and up to $4,000 on purchase of a used EV by individuals but the condition is that these units would have had to be manufactured in North America. Additionally, a large part of a whopping $394 billion in energy and climate funding is in the form of tax credits for private investments.

Why is US IRA facing resistance globally?

Biden may be looking at promoting local production but what about big brands that do not currently have manufacturing facilities in North America? Hyundai, for instance, fears its EVs will lose out in race vs rivals owing to the fact that these are not eligible for tax credit upon purchase. The Korean company, however, has now confirmed plans of investments into an EV manufacturing facility in the US. The South Korean government too has taken up the entire matter with the White House.

Much like the EU, there also is a concern that private enterprises will be compelled to take investements out from elsewhere and pour it in the US. The country, after all, is a major auto market and one of the largest.

(With inputs from agencies)