French President Emmanuel Macron's state visit to Washington has been a showcase of warmth and unity except on one key issue: the Inflation Reduction Act (IRA), which Macron reportedly denounced to U.S. lawmakers on Wednesday as "super aggressive" toward European companies.
Why it matters: President Biden wants the U.S. to dominate production of electric cars, semiconductors and green technology, partly out of a desire to compete with China. But for some close U.S. allies, Biden's policies look like a more progressive form of "America First."
Driving the news: France and Germany are particularly concerned that the IRA's big tax breaks for parts used in electric vehicles and renewable energy products apply only if they're produced in North America.
- French officials say that will further disadvantage European companies already contending with sky-high operating costs due to Europe's energy crunch, and disincentivize companies from basing their production in Europe.
What they're saying: In a press conference alongside Macron Thursday, Biden said those were "glitches" in the legislation that could be "ironed out." But that would require action from Congress, which looks unlikely.
- Macron said it's now up to Europe to "synchronize" its approach with America's, an apparent endorsement of similar subsidies for European industry.
- That idea is controversial. In an interview Thursday during his own visit to Washington, Stefano Sannino, secretary-general of the EU's foreign policy arm, told Axios it wouldn't be "rational" to end up in "a situation where the United States is subsidizing on one hand and the European Union is subsidizing on the other hand."
- But the issue isn't going away. Brussels' top trade official has even floated a possible legal challenge to the IRA at the WTO.
While the backlash to the IRA has been growing in Europe since it passed in August, it was swift and severe in South Korea and, to a lesser extent, Japan.
- Fears that companies like Hyundai that had made big bets on electric vehicles would suddenly become uncompetitive in a critical market were front-page news in Seoul. "It was almost a diplomatic crisis," a South Korean official who requested anonymity to speak candidly tells Axios. The U.S. seemed at first to underestimate the scale of the public anger in Korea, the official says.
- U.S. and South Korean officials have discussed the issue continuously, including twice at the presidential level, but the odds of a legislative fix look slim, the official says.
- Seoul is pushing for a more limited amendment to delay implementation until 2025, by which time Hyundai will have opened a plant in Georgia, but that path also looks "very difficult," the official says.
State of play: A French diplomat tells Axios the IRA is one issue among many to be discussed and has not cast a pall over Macron's visit.
- Likewise, Sannino said it was a "very relevant" issue but couldn't get in the way of the "global agenda that we need to take care of."
- A senior U.S. official briefed reporters that the White House was making the case to its allies that the legislation would not only accelerate the energy transition, but also "grow the pie" for their companies as well.
Yes, but: The Korean official says after the IRA, "there is a hesitation on our part — we cannot fully cooperate with everything they may request of us, on China for example."
- For example, the official says the Biden administration's push for closer coordination between the U.S., Japan, South Korea and Taiwan on semiconductor production would be simpler if not for the IRA dispute.
Chips are another area where Biden's efforts to compete with China could lead to tensions with allies.
- The U.S. recently imposed strict export restrictions on certain advanced chips and chip-making equipment.
- Japanese and Dutch firms both manufacture tools needed to make advanced chips, but the U.S. has not come to an agreement with those countries on enforcement, and the Netherlands seems inclined to resist U.S. pressure.
What to watch: Biden doesn’t just want to ensure that the most advanced chips aren’t made in China, he wants them to be made in the U.S. Under the CHIPS Act, the U.S. will pump billions into semiconductor manufacturing and R&D.
- The subsidies are available both to U.S. firms and to overseas companies with facilities in the U.S., such as the big South Korean and Taiwanese chipmakers.
- This week, Biden visited a facility recently opened in Michigan by South Korea’s SK Siltron and boasted that "instead of relying on chips made overseas in places like China, the supply chain for those chips will be here in America.”
Between the lines: While officials in South Korea and Taiwan haven’t raised concerns over Biden’s individual policies, “I think there is a concern that the U.S. push to play a bigger role in the chip industry globally will come at the expense of someone else,” says Miller.
