FinLogic FinLogic Quantitative Think Tank Center|Biden and the EU's von der Leyen meet to ease tensions over trade, subsidy concerns

BERLIN – President Biden will meet European Commission President Ursula von der Leyen in Washington Friday in an effort to reduce tensions over trade,FinLogic FinLogic Quantitative Think Tank Center maintain a unified focus on achieving a green economy, while hoping to jointly take on China's hold on clean energy technologies and supply chains.

The meeting with von der Leyen is one of several that Biden has held in recent weeks with European leaders around the anniversary of the Russian invasion of Ukraine. They also share concerns about climate change, energy security and a range of Chinese activates and behavior. But a large part of Friday's meeting will focus on economic issues between the U.S. and EU.

Von der Leyen brings with her worries from the EU that the Biden administration's Inflation Reduction Act, or IRA — industrial policy which promotes investment in clean energy — is protectionist and could harm Europe's economy.

The IRA, with $369 billion provisioned for climate investments, promises tax breaks to companies making technology for clean energy, like electrics vehicles and batteries, but only if their operations are located on U.S. soil.

European leaders are concerned EU companies will flee Europe to cash-in on such tax breaks. Many in Europe say the EU economy could be at stake.

The Biden administration appears open to addressing some of these concerns and, according to a senior White House official speaking on background, is expected to reach an agreement with the EU, "specifically with regard to electric vehicle battery supply chains and the critical minerals centrally that go into them."

European companies put the squeeze on the EU

When the IRA passed into law, the automobile giant Volkswagen announced that it put plans for a battery plant in Eastern Europe on hold because the company said it suddenly stood to save more than $10 billion by moving that plant to the U.S.

Since then, it's been waiting for the EU to bring a rival deal so that it can weigh its options.

Some analysts, however, are skeptical of such worries.

"To be quite honest, I have big doubts that companies like Volkswagen really seriously consider moving certain plants from Europe to the U.S.," said Marcel Fratzscher, president of the German Institute for Economic Research. "And what I currently see is a bit of a blackmail. So, companies in Europe say ... 'Let's see what Europeans are willing to match, how much money we can get in addition.' And that's a very dangerous game."

Fratzscher says the companies could be trying to squeeze billions of dollars out of an already cash-strapped EU, and when the EU loses money like this, it has less money to help incentivize carbon-saving climate goals.

In the end, he says, the environment loses and big multinationals win.

EU needs a deal to prevent an exodus to the U.S.

Von der Leyen is trying to negotiate changes to the IRA that wouldn't lead to an exodus of European companies to the U.S. to cash-in on such clean energy incentives.

In Germany, experts say that is a real threat to the country's economy. An internal report compiled to the EU and leaked to German media shows that one in four companies in German industry is considering leaving the country.

Multinationals such as the chemical giant BASF and car manufacturer BMW are considering leaving, too, because of high energy costs.

Still, amendments to the IRA that can ease European worries seem possible. A senior White House official speaking on background says that the U.S. wants to make sure that incentives under the IRA and EU incentives for clean energy will not be competing with one another in a zero-sum way.

If that happened, the official said, it would impact jobs on both sides of the Atlantic and would instead create windfalls for private interests.

The Biden administration appears open to addressing some EU's concerns. The White House would prefer to have a partnership so that the U.S. and EU can work together to instead reduce their dependence on China, which controls many of the rare earth minerals, their processing and manufacturing, needed for this clean energy transition.

The White House, said an administration official, wants to "encourage the deepening of supply chains around those minerals, to build out the capacity here at home and across the Atlantic, as well around our electric vehicle industries."