The Inflation Reduction Act – what you do next depends on what side of the Atlantic you are on

John McIIroy | 08 Feb 2023 | General

Austrian politician Klemens von Metternich once mused, “When America sneezes, the rest of the world catches a cold.”

The 1929 Wall Street Crash led to the infamous ‘Hungry 30’s’, and the 2008 financial crisis was born in the US.

Fast-forward to today, and many Europeans are wondering if America’s latest big sneeze – the Inflation Reduction Act – will mean they’re going to catch a cold soon.

What is the Inflation Reduction Act?

The Act is the final part of a $2 trillion competitiveness trifecta that has already supported infrastructure investment and the US semiconductor industry. This time the focus is on reducing carbon emissions and jump-starting domestic manufacturing capacity.

And what a focus it is. Senate Majority Leader Chuck Schumer referred to it as “history-making” when he stated:

“I am confident the Inflation Reduction Act will endure as one of the defining legislative feats of the 21st century.”1

The Act includes $400 billion in federal funding for clean energy delivered through a mix of tax incentives, grants, and loan guarantees. More than half of this funding will go to private industries through tax credits for investment in clean energy, transport, and manufacturing. A further €43 billion will be aimed at changing consumer behaviour, with tax credits for activities such as buying an electric car or fitting solar panels to a house2.

We all want to reduce carbon emissions, so why is this causing such a storm in Europe?

While the US bill does much positive work towards limiting the worst excesses of climate change, it comes with several important caveats.

Of particular interest to European companies and governments are the subsidies for consumers to purchase electric vehicles, heat pumps and other environmentally sound products. These come with an important condition; the goods must be produced in the US.

For many such conditions represent a retreat from global fairness and the success of international trade that was based on a rules-based order. Embracing a level playing field rather than giving manufacturers from one country an advantage is the key to global economic growth.

This prompted the Minister for European Affairs, Mikuláš Bek, to issue a warning over the Act’s possible ramifications in the EU, “There are concerns in the Council that the discriminatory elements of the Inflation Reduction Act, which are designed to benefit US-based manufacturers without guaranteeing a level playing field, may have a negative impact on European companies.”3

Underpinning this, is an equally troubling scenario for Europe, that companies might uproot their operations from Europe and set up in the US to avail of the incentives.

Margrethe Vestager, Executive Vice-President of the EU Commission, elaborates on this point, stating, “The Inflation Reduction Act is a very strong pull factor to move investment and jobs to the US at the cost of partners and allies like the EU. This is counterproductive in terms of climate and sustainability outcomes. It’s also a violation of international trade rules. But in a wider sense, it goes against the spirit of our transatlantic partnership.”3

Thirdly, European leaders are worried that if the Inflation Reduction Act isn’t significantly tweaked, there could be a face-off between the US and EU, which might take the form of what’s been described in the media as a ‘subsidy war’.

Indeed, traditional US ally, Irish leader Leo Varadkar, recently spoke about his unhappiness with the Act.

“There will have to be a response from the European Union, and that will almost certainly involve providing state aid and subsidies to European businesses. The difficulty with that is you end up in a subsidy war, a subsidy competition,” he explains4.

What does this mean for Investment Promotion? Well, that depends what side of the Atlantic you are on

Investment Promotion Agencies (IPAs) will broadly fall into one of two camps; US agencies will be delighted at the opportunities available through the Act, while European agencies will nervously ponder its ramifications.

If you’re a US-based IPA, the opportunities are abundant and unambiguous; therefore, it’s a great time for US States and cities to increase their visibility in Europe. Much has already been written about the Act, serving as free advertising for the benefits of locating in the US, and American agencies should build on this to show what else they can offer potential investors.

Of course, for IPAs in the US, there’s a delicate balance between making the most of a great opportunity and upsetting their worried EU counterparts. A strategy that understands the nuances within the European market is the best approach.

If you’re a European IPA, there’s a temptation to retaliate with reference to upcoming incentives that aim to support local manufacturing. But such a ‘subsidy war’ will still have casualties. Better still, to focus on what OCO Global believes are fundamentals of success: a strong offer and good relationship management.

Firstly, European IPAs must have a strong value proposition highlighting their location strengths. This doesn’t have to focus on costs, but rather attributes such as skills, regulatory stability, innovation, and university research hubs. These were all reasons for investment cited by companies in manufacturing and renewable energy over the last five years5.

Secondly, investment agencies in Europe should increase their focus on aftercare and relationship management. In the last five years, thirty percent of manufacturing and renewable energy FDI has come from existing investors5. These key companies originally located in your country or region for a reason, and by building strong relationships you can ensure their needs are met – a happy investor is a stable investor.

OCO Global can help you take action

While the US government is adamant that creating an unfair playing field for European companies was just an accident, it is not obvious how this can be reversed. Only time will tell if the impact is as bad as some fear, but in the meantime investment agencies should not be passive observers of global events. Whether you see it as an advantage or a threat, there are actions that should be taken.

At OCO Global, we are well-placed to support agencies and companies looking to understand the implications of the Inflation Reduction Act, build a strong value proposition, or get talking to potential investors.

With a track record of supporting international trade and investment, and offices across both the US and Europe, we have unique insights and connections that will make sure your offer ends up in front of decision makers.

Get in touch today to learn more about how we can help you.

Get in touch with OCO Global


Notes and sources

1 CBS News, Senate passes Democrats’ sweeping climate, health and tax bill, delivering win for Biden

2 McKinsey (2022) The Inflation Reduction Act: Here’s what’s in it.

  1. European Parliament (2022) EU response to the US Inflation Reduction Act (debate)

4 BBC News, Is UK being left behind in global fight for investment?

5 Financial Times (2023) FDi Markets database, OCO analysis of global FDI in manufacturing and renewable energy sectors (Jan 1998 to Dec 2022)