Rarely has a piece of trade legislation stirred as much excitement in Europe as did the US Inflation Reduction Act (IRA). With a volume of nearly $500bn, the IRA is the biggest US piece of climate legislation ever passed. The reason why Europe was immediately up in arms against the IRA is that the subsidies for the purchase of electric vehicles, as well as the lavish grants and tax credits for investments in production facilities, were linked to local content requirements. Which was said to exclude European firms from supplying the US market, and implicitly forcing them to invest in the US.  

There’s just no doubt about it: local-content requirements are a distorting protectionist interference into the free play of the market. They violate WTO rules, and potentially are the straw that breaks the WTO’s back, because everyone will start to use them. 

That being said, European outrage about the IRA was overshooting the mark. 

The tax breaks subsidising the purchase of e-vehicles amount to less than 5% of the overall IRA package. Relocating a manufacturing site isn’t done just because you get generous subsidies, it is usually the result of a convergence of many different location parameters, such as energy prices and regulatory context. 

Besides, FDI decisions are primarily driven by market considerations. Manufacturers produce building materials, wind turbines and cars, where they want to sell them, not where the subsidies are. In that the function of the IRA is probably more to change the order of sequence of the investments in battery plants and chip factories, rather than determining where they are being built. In other words, it may encourage companies to set up manufacturing in the US first, and then look at Europe, but not scrap Europe altogether. 

If anything, the whole episode is probably more of a hint to the EU to make it more attractive to do business in Europe. And to structure regulation such that it supports companies, rather than focussing on maximising control over them. After all, the €510bn Green Deal Industrial Plan, presented by the European Commission a few months after the passing of the IRA, rarely got a mention in the media, so it is probably not the money that matters. 

Finally, Katherine Tai and Gina Raimondo have been lobbying for European solidarity vis-à-vis China. From that perspective, treading on European toes all too enthusiastically might badly misfire.