The threat of a transatlantic trade war is dominating Davos

DAVOS, Switzerland – It’s the talk of the town. Transatlantic trade tensions dominated the conversation at the World Economic Forum this week.

On the one hand, European officials say they will provide more financial support to European companies.

On the other hand, the business community is excited about green subsidies in the states and argue that the EU should match what the US administration is doing.

Finally, the pressure is on the European institutions – but the question is how can it be done?

“It’s the big elephant in the room… it has shaken the European Union, discussions between politicians, civil society and even industry,” Ilham Kadri, CEO of Solvay, a chemical company headquartered in Belgium, said during an event in Davos on Tuesday evening.

“The fact is that the Biden administration is giving incentives, while Europe is organizing – so that black becomes white,” he added.

The EU has been lobbying hard to ensure that European companies will be able to benefit from some of the tax incentives without the need to move, for example.

The US Treasury Department issued guidance in late December that allows EU companies to benefit from certain credits without having to change their business models.

However, further guidance on how the law will be implemented is still outstanding, so conversations continue between European and American officials.

“We must avoid a trade war or a subsidy war. At the same time, we must support competitiveness,” European Economic Commissioner Paolo Gentiloni told CNBC in Davos.

Biden’s IRA has created an internal debate in Europe where there is only real consensus: the EU must have its own plan to support the competitiveness of the region.

Spanish Prime Minister Pedro Sanchez told CNBC earlier this week that the EU should learn from the IRA and reform industrial policy. Aditya Mittal, CEO of ArcelorMittal, the steel company, said at an event on Tuesday in Davos: “We need to recover the mindset of this industry.”

“IRA matching is almost non-negotiable. If we don’t match IRA in Europe, it will be very difficult for industrialists, businessmen, investors to continue to build industrial infrastructure… be the response,” Mittal said.

Thus, the president of the European Commission, Ursula von der Leyen, announced the Green Deal Industrial Plan. Speaking on the main stage of the World Economic Forum on Tuesday, von der Leyen said the plan was to “make Europe the home of clean industrial technology and innovation on the road to net zero.”

However, one of the biggest uncertainties is where the funding will come from to get this project.

One idea is to relax state aid rules so the government can spend more on industrial revitalization. The longstanding problem here is that Germany and France, Europe’s two largest economies, have the fiscal power to do so, but the rest of the EU does not.

This could lead to fragmentation into the EU’s single market – a common area where there is free movement of goods and people.

Speaking to CNBC on Wednesday, Gentiloni said he was happy use of state aid, but only “if this is targeted and limited” support, but cannot interfere with the European model.

“We need a public response,” he said.

Without state aid, which is a national response, the EU as a whole will have to decide whether to reorganize existing European funds to support European industry – or tap the common market together and borrow new money to do so.

Germany seems strongly against the idea.

“We don’t need more public sector money,” Christian Lindner, Germany’s finance minister, told CNBC in Davos. “There is a lot of public sector money, which has not been used,” he said.

However, not everyone agrees with him. Speaking to CNBC on Wednesday, Belgian Prime Minister Alexander de Croo said raising money from the public market “may be a good idea.”

“The funding should be centralized and, in fact, tapping back into the capital market could be a good idea and we could give a role, for example, to the European Investment Bank to manage the funds,” he said.

European heads of state gathered in Brussels in early February to discuss supporting the industry.

De Croo suggested he could convince Germany and other partners to find funding as a solution.

“I’ve heard a lot of no’s about public funding in the past and we’re finally doing it, so often it’s been impossible until now. Let’s see how we balance it out.”

The EU decided to jointly tap the market after the coronavirus pandemic at a historic moment for the bloc because of long-standing opposition from more fiscally conservative member states.