The EU and Japan lashed out at the incentive introduced by the US government over the Inflation Reduction Act, which sets aside $369bn for the country’s green transition, as both parties feel their companies are being discriminated against. 

“Given their size and design, the financial incentives deployed to meet the US’s climate objectives unfairly tilt the playing field to the advantage of production and investment in the US, at the expense of the EU and other trading partners of the US, potentially resulting in a significant diversion of future investment and production, threatening jobs and economic growth in Europe and elsewhere,” the EU wrote in an official response to the Act on November 7. 

The EU response also criticised the US for triggering a harmful global subsidy to “race to the bottom”. This is a “market-distorting boost turning a common global objective — fighting climate change — into a zero-sum game,” it added.

The Inflation Reduction Act is the flagship legislation committing $369bn to boost clean energy and green investments. Its measures include tax rebates for buyers of American-made electric mobilities and substantial financial incentives for clean energy projects.   

However, the Act has been controversial because of the domestic content requirements. To get full credit for electric vehicle (EVs) in the US, carmakers will have to use critical minerals and battery components from the country or its trade partners from next year. 

Neither the EU nor Japan have a free trade agreement in place with the US. 

“The requirements of the EV tax credit — conditioning that the extraction, processing, manufacture or assembly of critical minerals or battery components should be done in North America or countries with which the US has a free trade agreement in effect — are not consistent with the US and Japanese governments’ shared policy to work with allies and like-minded partners to build resilient supply chains,” the Japanese government wrote in its official response to the Act on November 7. 

Both the EU and Japan deemed the Act’s incentives as “discriminatory”. 

Even countries that have free trade agreements with the US have expressed their concerns, particularly with regards to its domestic content rules. 

“The Republic of Korea is concerned that limiting eligibility for the clean vehicle tax credits ... to those vehicles finally assembled in North America will have an adverse impact on many clean vehicle exporters, including Korean automakers, and could be inconsistent with the US’s commitments under the Korea–US Free Trade Agreement and World Trade Organization (WTO) agreements,” the government of South Korea wrote in a statement on November 4. 

Under WTO rules, a subsidy granted by a WTO member government is prohibited if it is contingent, in law or in fact, on export performance or the use of domestic over imported goods. 

The director-general of WTO, Ngozi Okonjo-Iweala, told CNBC on November 7 that they understand “some countries may feel [the] subsidies are … discriminatory”.

She noted that the WTO “encourages trade policy leading to low-carbon emissions”; however, WTO members should be careful that “policies should not be discriminatory”. 

According to fDi Markets, the US has been the third-largest market for green technology investments, worth around $9bn between January and September 2022, after Egypt ($75.7bn) and Morocco ($10bn). 

The Act expresses “the desire to reduce emissions and deepen American economic nationalism”, Joseph Majkut, director of the energy security and climate change programme at Center of Strategic and International Studies, tells fDi. Mr Majkut notes that the subsidies in the Inflation Reduction Act would anger the US trading partners and allies more. “I worry about retribution in clean technology and other sectors.”