The Good Old Days?

It is rare to feel nostalgic about acrimonious trade disputes, especially ones among allies. But two weeks into the second Donald Trump administration, as Europe seeks answers to its own competitiveness challenges, the EU may find itself longing for the good old days of the Biden-era Inflation Reduction Act (IRA). What once seemed like an existential challenge may only have been a taste of what is to come. Europe needs to be ready for it.

The foundations of the Biden administration’s industrial policy—the Bipartisan Infrastructure Law, the Inflation Reduction Act, and the CHIPS and Science Act—had multiple objectives: combat climate change with investments to drive down the cost curve for green technologies globally; boost American manufacturing to create jobs and lure back Trump voters; and reinforce national security vis-à-vis China, particularly for key technologies such as semiconductors. The postwar United States has always practiced some form of industrial policy that has been often but not exclusively defense-related. But the once-anathema term experienced a renaissance with Biden’s “post-neoliberal” approach. 

By fall 2022, Europe, at first relieved by a return to more traditional transatlantic relations, was nevertheless incensed over the IRA’s buy-American provisions. French President Emmanuel Macron criticized the act as “super aggressive”, and European leaders fretted that it would undermine European competitiveness by enticing firms to quit the continent for greener US pastures. A transatlantic task force was set up to manage tensions. Some adjustments, such as allowing leased European electric vehicles (EVs) to qualify for tax credits, helped quell frustrations. But other efforts, such as an agreement on critical minerals, stalled. 

The EU, in turn, used existing instruments including the Recovery and Resilience Facility, introduced the Green Industrial Deal, and loosened state aid rules to allow increased national industrial support—all to the concern and disadvantage of smaller member states with less fiscal firepower. 

Brussels may have been irritated by its transatlantic partner, but it was admittedly still nice to see the United States doing something to address climate change.

A focus on American manufacturing also featured prominently among Republicans and conservative thinkers during the Biden years and in the lead-up to Trump’s reelection. Then-Senator Marco Rubio criticized the IRA and CHIPS Act but made the case for a GOP-led industrial policy. Campaign adviser and current Treasury Secretary Scott Bessent argued for tariffs rather than subsidies, a position mirrored by Trump’s criticism of the CHIPS Act. The candidate argued that tariffs would force firms to invest in the United States and claimed that Taiwanese semiconductor manufacturer TSMC “stole” US manufacturing. 

Heading into the election, reporting highlighted the IRA’s disproportional benefits for red districts. Eighteen Republican members of the House of Representatives wrote Speaker Mike Johnson in August 2024 in support of the IRA’s clean energy tax credits. Many analyses, therefore, floated the possibility that Republicans might resist a full repeal. 

But industrial policy in the early days of the Trump administration does not bode well for the IRA or for Europe.

Fulfilling Trump’s campaign promise to reject the so-called Green New Deal, the administration’s industrial policy is primarily focused on fossil fuel energy. The executive order entitled “Declaring a National Energy Emergency” focuses on boosting fossil fuel projects and production. It excludes wind and solar from the definition of “energy”. The “Unleashing American Energy” executive order overturned Biden’s Executive Order 14082, which coordinated IRA implementation through bodies such as the now-abolished White House Office on Clean Energy Innovation and Implementation.

In the first week, 70 climate and clean energy focused initiatives were cut. Although almost the entirety of the IRA’s $369 billion support schemes had been disbursed by the time Trump took office, and although many of the IRA’s provisions require Congressional approval to overturn, the Trump administration is pursuing a range of approaches to stall implementation. Silicon Valley in 2017 criticized the withdrawal from the Paris Climate Accords, but the industry’s growing need for energy to power data centers and AI perhaps explains the now-muted response. 

Across the Atlantic, Europe looks on as a potential raft of tariffs looms and the United States threatens to push back against legislation such as the AI Act, the Digital Services Act, and the Digital Markets Act, which impact the Silicon Valley firms that have now positioned themselves squarely behind Trump.

Still, some opportunities for industrial policy coordination remain. 

Europe should stay attuned to the contradictions within the administration, such as that between the China-hawk Rubio and Elon Musk, whose business interests in China are significant. The EU, especially the German auto industry, remains relatively more exposed to the Chinese market. But the bloc’s increasing focus on economic security, through tools such as export controls or foreign investment screening, could remain an area of possible coordination.

Overall, though, Europe may find itself longing ironically for the good old days of post-IRA disputes. Many EU firms indeed benefited from US subsidies and may suffer if these investments stall or are pulled back. Trump’s wind moratorium caused shares in EU wind and EV companies to drop. Other European firms have already cancelled planned investments in green tech or adjacent industries. 

As Europe attempts to boost competitiveness amid a looming China shock and the stagnation of export-driven economies such as Germany’s, the continent’s firms may find international opportunities curtailed. Strengthening “Buy Europe” provisions, such as the local content requirements in the Net-Zero Industry Act, or raising thresholds for public procurement to favor European firms, requires ever-elusive political will. 

In the meantime, the EU is facing an undesirable trifecta: the complex challenge of boosting competitiveness, adhering to the rules-based system of the single market or the World Trade Organization in a world where rule-abiding seems increasingly quaint, and fending off potential threats and retaliation from across the Atlantic. 

Maybe the IRA was not so bad after all.