EU announces green proposals to counter US inflation reduction act

Brussels suggests investigating "hidden", "massive" subsidies in China's leading green sectors

Editor's Note: With the Chinese New Year just around the corner, the CCCEU kindly wishes you a happy and successful year of the rabbit ahead! This edition of the CCCEU Weekly Update keeps you in the know of China-EU dynamics. Enjoy your reading and have a lovely break!

The US Inflation Reduction Act (IRA) came into force on January 1, 2023, after being passed by the US Congress in August 2022. The main logic of the IRA's reduction of inflation can be summarised as "two increases and one decrease": "Two increases" refer to the reduction of currency excess caused by fiscal deficits through increased taxes, and the suppression of inflation caused by rising energy prices through increased subsidies for the clean energy industry; "one reduction" refers to the reduction of inflation caused by medical costs through drug and health insurance reform. Among them, the subsidy plan for the clean energy industry amounted to 369 billion US dollars.

"Localization" is the key point of the IRA's clean energy subsidy program, and up to nine tax benefits are based on production and sales in the US or North America. The EU has been worried that these discriminatory subsidy measures will distort the market and greatly weaken its industrial competitiveness in the fields of automobiles, batteries, clean energy, etc. On the second day after the IRA came into effect, EU foreign affairs chief Borrell criticised the IRA for violating WTO rules.

Despite the opposition to the IRA becoming the mainstream voice of the EU, the EU and its members are still at odds on the specific approach. In contrast to France's desire to re-establish EU unified subsidy plans through the Buy European Act, Germany was more inclined to accept national incentives and simplify fund allocation in existing EU plans. However, France and Spain were concerned that Germany's incentives alone would result in unfair competition within the EU.

On January 17, ministers of economy and finance from EU member states gathered and discussed the IRA in Brussels. On the same day, the Executive Vice-President of the European Commission, Mr. Dombrovskis, met with the US trade representative, Katherine Tai, saying that the EU and the US should be building an open, thriving transatlantic marketplace for innovators and investors, and the two "need to have the same rules of the game."

Although the competitive pressure of industrial subsidies comes from Washington, Brussels seems to be seeking to take a more combative stance on China. President von der Leyen warned again in Davos about China's dominance in mining and processing key raw materials.

"China has made boosting clean-tech innovation and manufacturing a key priority in its five-year plan," she said, adding that  "It dominates global production in sectors like electric vehicles or solar panels, which are essential for the transition." 

She lamented Beijing's "luring" of European companies: "China has been openly encouraging energy-intensive companies in Europe and elsewhere to relocate all or part of their production, they do so with the promise of cheap energy, low labour costs, and a more lenient regulatory environment."

She noted: "We need to focus on de-risking rather than decoupling, this means using all our tools to deal with unfair practices, including the new Foreign Subsidies Regulation, we will not hesitate to open investigations if we consider that our procurement or other markets are being distorted by such subsidies."

This year's World Economic Forum theme, "Strengthening collaboration in a divided world," is essential given the urgent need for economic recovery in post-epidemic nations and the necessity of tackling climate change and the energy problem together.

From a business perspective, the need to address climate change and the energy issue is without a doubt urgent, but finding a solution will require coordinated action from all nations to encourage economic transformation and structural energy adjustment.

China-EU trade up by 5.6% in 2022

China's official data showed that, in 2022, China's trade in goods with the ASEAN, the EU, and the US surged respectively by 15 percent, 5.6 percent, and 3.7 percent to 6.52 trillion yuan, 5.65 trillion yuan, and 5.05 trillion yuan.

China's forex reserves expand in December 2022

According to Xinhua, China's foreign exchange reserves rose to 3.1277 trillion U.S. dollars at the end of December 2022, up 0.33 percent from a month earlier, data from the State Administration of Foreign Exchange showed Saturday.

Chinese Mission to the EU responds to EU-NATO declaration

On January 10, NATO Secretary General Jens Stoltenberg, President of the European Council Charles Michel, and President of the European Commission Ursula von der Leyen signed a new Joint Declaration on EU-NATO Cooperation. A spokesperson for the Chinese Mission to the EU pointed out: "The Joint Declaration on EU-NATO Cooperation, the first public statement of the EU and NATO's shared stance on China in an official document, reveals their arrogance and prejudice against China. We firmly reject the unreasonable accusation against China and stand against the Cold War mentality advocated by the declaration.

EU calls on TikTok to fully comply with EU regulations

The Chinese social media company TikTok could face a ban in the European Union if it does not step up efforts to comply with EU legislation before September, the top official overseeing the EU's internal market told the company's CEO on Thursday.

TikTok needs to bring its business in line with the EU's Digital Services Act (DSA) well ahead of the Sept. 1 deadline, European Commissioner Thierry Breton told Shou Zi Chew, according to an EU readout of a video call between the two.

The Digital Decade policy programme 2030 takes effect.

The Digital Decade programme came into force on January 9, 2023. The Digital Decade is the European Commission's forward-looking strategic vision for the development of the digital economy and the transformation of European businesses by 2030. The plan, presented by the European Commission on March 9, 2021, aims to support a prosperous digital future for all.

What are experts talking about?

"Europe's 'overdependence' on China? This is a false proposition," wrote Zhao Junjie, a researcher at the Institute of European Studies of the Chinese Academy of Social Sciences. Recently, the "over-dependence theory" has emerged in European politics, arguing that Europe should reduce its dependence on Chinese products, technologies, and supply chains, even advocating a "decoupling" from the Chinese economy. The article argues that this is in fact a wrong interpretation of the close economic and trade relations between China and Europe, which are mutually beneficial and win-win, and deliberately exaggerates Europe's dependence on China while ignoring China's dependence on Europe.

"The Impact of the Ukraine Crisis on International Trade," published by Bruegel by Zsolt Darvas and Catarina Martins. The three main policy implications of their research are as follows: the war and sanctions are not the most important drivers of energy prices; the direct goal of sanctions appears to have been achieved; and the Russian state's capacity to finance the war from fossil fuel revenues is bound to shrink.

Please note: the English version of this issue is slightly different from our Chinese one. The views and opinions expressed in this article do not necessarily reflect the official position of the CCCEU.