U.S., EU Try to Defuse Subsidies Dispute to Focus on Russia and China

Since Congress passed the climate and healthcare law called the Inflation Reduction Act last year, European officials have loudly complained about provisions that they fear disadvantage their own industries. They have taken aim at U.S. subsidies for electric vehicles that impose new requirements on the source of the materials used in the vehicles, as well as a wider range of tax incentives that officials believe could draw investment out of Europe and into the U.S. 

As part of the meeting between Mr. Biden and Ms. von der Leyen, the U.S. and EU are set to announce new initiatives to smooth over some of those concerns. They are expected to announce the formal beginning of talks on a new trade deal focused on critical raw materials, a step designed to allow minerals from Europe to meet a sourcing requirement for the electric-vehicle subsidies under the Inflation Reduction Act. 

The two leaders are also expected to discuss Europe’s own new plans to subsidize clean-energy technology. Biden administration officials had largely shrugged off earlier European demands to limit U.S. subsidies for clean energy, instead encouraging the EU to strengthen its own subsidies. The European Commission, the bloc’s executive body, announced those plans on Thursday, saying they would make it easier for governments to offer tax breaks and other benefits to clean-tech companies and in some cases allow them to match subsidies offered in the U.S. or elsewhere.

“Most in the EU want a progressive trade relationship across the Atlantic with as few barriers as possible,” said Irish Trade Minister

Simon Coveney

on Friday. “What we don’t want is EU companies disadvantaged in terms of doing business in the U.S.”

The EU plans to allow matching subsidies for specific European clean-tech sectors that officials believe are at risk from the IRA, including solar panel, wind turbine and battery manufacturing. The commission, which sought to limit the push by some member states for swift retaliatory action against Washington over the IRA, is also set to put forward legislation next week aimed at speeding up permitting and securing the raw materials needed to make clean-tech products.

Some industry leaders have warned that clean-tech companies could give priority to U.S. investments over Europe because of the IRA.

Volkswagen AG’s

technology chief warned recently that Europe is lagging behind in the battery industry and risks losing the race “for billions of investments that will be decided in the coming months and years.” 

Seeking to prevent a subsidy war between the two dominant Western economies, Mr. Biden and Ms. von der Leyen are expected also to roll out a new forum for discussing subsidies in the U.S. and EU, according to people familiar with the talks. Officials are hoping the forum will allow the U.S. and EU to communicate about the subsidies available to companies in each place while limiting companies’ ability to pit the two economies against each other.

The dispute over the clean-technology subsidies has weighed on a relationship that has been central to the global response to Russia’s invasion of Ukraine, as well as a Western effort to counter China’s growing global influence. The two leaders are expected to discuss both Russia and China as the U.S. and EU consider additional sanctions on Russia and new restrictions on investment in certain Chinese technology sectors. 

For now, European officials say there is no major divergence between the Biden administration’s approach to Beijing and theirs. The Dutch government this week bowed to longstanding U.S. pressure, announcing plans to restrict foreign sales of chipmaking technology, and a top EU official said this week the bloc could consider broader EU-wide restrictions. 

U.S. and EU officials say a move by China to supply arms to Russia, which Washington has warned of, would swiftly unleash sanctions against Chinese firms and that the two sides are working together to keep close tabs on this.

However, there are potential tensions ahead because Germany and some other European countries have dismissed calls to decouple their economies from China. European officials have so far preferred engagement with Beijing on the issue of its assistance to Russia and appear wary of penalizing Chinese companies as long as they steer clear of arms supplies. 

The push for a new trade agreement on critical minerals stems from a rule in the new electric-vehicle subsidies requiring much of the minerals in the vehicle’s battery to come from the U.S.—or a country with a free-trade agreement with the U.S. The EU, as well as some other close allies including Japan, don’t have a traditional free-trade agreement with the U.S., making them ineligible to meet the sourcing requirement. 

But the Inflation Reduction Act doesn’t define the exact terms of a free-trade agreement in law, giving Biden administration officials some leeway in deciding how to construe its terms. They are aiming to reach an agreement with the EU focused on labor and environmental standards and interpret it as a free-trade agreement for the purposes of the legislation. 

The Biden administration doesn’t intend to try to pass such a deal through Congress, a choice that has already started to anger some Democrats on Capitol Hill who are opposed to easing foreign access to the law’s subsidies. 

“The intent of the IRA was to strengthen American manufacturing and domestic production and no regulation should weaken the effort,” said Rep.

Ro Khanna

(D., Calif.). “At the very least I think they need to come to Congress before signing a new trade agreement that would create a new loophole around the domestic-content requirements.”

In Europe, approving the eventual trade agreement on critical minerals could take time if each of the member states must ultimately sign off on it, but officials have said the deal isn’t expected to be controversial for European governments. 

Striking a deal with the EU and Japan on critical minerals is seen as the first piece of a broader effort for the Group of Seven advanced economies to wean itself off Chinese suppliers of critical minerals. The U.S. is hoping for the G-7 to form a buyers club, using its market power to secure supplies of the critical minerals.

—Laurence Norman contributed to this article.

Write to Andrew Duehren at andrew.duehren@wsj.com and Kim Mackrael at kim.mackrael@wsj.com

Since Congress passed the climate and healthcare law called the Inflation Reduction Act last year, European officials have loudly complained about provisions that they fear disadvantage their own industries. They have taken aim at U.S. subsidies for electric vehicles that impose new requirements on the source of the materials used in the vehicles, as well as a wider range of tax incentives that officials believe could draw investment out of Europe and into the U.S. 

As part of the meeting between Mr. Biden and Ms. von der Leyen, the U.S. and EU are set to announce new initiatives to smooth over some of those concerns. They are expected to announce the formal beginning of talks on a new trade deal focused on critical raw materials, a step designed to allow minerals from Europe to meet a sourcing requirement for the electric-vehicle subsidies under the Inflation Reduction Act. 

The two leaders are also expected to discuss Europe’s own new plans to subsidize clean-energy technology. Biden administration officials had largely shrugged off earlier European demands to limit U.S. subsidies for clean energy, instead encouraging the EU to strengthen its own subsidies. The European Commission, the bloc’s executive body, announced those plans on Thursday, saying they would make it easier for governments to offer tax breaks and other benefits to clean-tech companies and in some cases allow them to match subsidies offered in the U.S. or elsewhere.

“Most in the EU want a progressive trade relationship across the Atlantic with as few barriers as possible,” said Irish Trade Minister

Simon Coveney

on Friday. “What we don’t want is EU companies disadvantaged in terms of doing business in the U.S.”

The EU plans to allow matching subsidies for specific European clean-tech sectors that officials believe are at risk from the IRA, including solar panel, wind turbine and battery manufacturing. The commission, which sought to limit the push by some member states for swift retaliatory action against Washington over the IRA, is also set to put forward legislation next week aimed at speeding up permitting and securing the raw materials needed to make clean-tech products.

Some industry leaders have warned that clean-tech companies could give priority to U.S. investments over Europe because of the IRA.

Volkswagen AG’s

technology chief warned recently that Europe is lagging behind in the battery industry and risks losing the race “for billions of investments that will be decided in the coming months and years.” 

Seeking to prevent a subsidy war between the two dominant Western economies, Mr. Biden and Ms. von der Leyen are expected also to roll out a new forum for discussing subsidies in the U.S. and EU, according to people familiar with the talks. Officials are hoping the forum will allow the U.S. and EU to communicate about the subsidies available to companies in each place while limiting companies’ ability to pit the two economies against each other.

The dispute over the clean-technology subsidies has weighed on a relationship that has been central to the global response to Russia’s invasion of Ukraine, as well as a Western effort to counter China’s growing global influence. The two leaders are expected to discuss both Russia and China as the U.S. and EU consider additional sanctions on Russia and new restrictions on investment in certain Chinese technology sectors. 

For now, European officials say there is no major divergence between the Biden administration’s approach to Beijing and theirs. The Dutch government this week bowed to longstanding U.S. pressure, announcing plans to restrict foreign sales of chipmaking technology, and a top EU official said this week the bloc could consider broader EU-wide restrictions. 

U.S. and EU officials say a move by China to supply arms to Russia, which Washington has warned of, would swiftly unleash sanctions against Chinese firms and that the two sides are working together to keep close tabs on this.

However, there are potential tensions ahead because Germany and some other European countries have dismissed calls to decouple their economies from China. European officials have so far preferred engagement with Beijing on the issue of its assistance to Russia and appear wary of penalizing Chinese companies as long as they steer clear of arms supplies. 

The push for a new trade agreement on critical minerals stems from a rule in the new electric-vehicle subsidies requiring much of the minerals in the vehicle’s battery to come from the U.S.—or a country with a free-trade agreement with the U.S. The EU, as well as some other close allies including Japan, don’t have a traditional free-trade agreement with the U.S., making them ineligible to meet the sourcing requirement. 

But the Inflation Reduction Act doesn’t define the exact terms of a free-trade agreement in law, giving Biden administration officials some leeway in deciding how to construe its terms. They are aiming to reach an agreement with the EU focused on labor and environmental standards and interpret it as a free-trade agreement for the purposes of the legislation. 

The Biden administration doesn’t intend to try to pass such a deal through Congress, a choice that has already started to anger some Democrats on Capitol Hill who are opposed to easing foreign access to the law’s subsidies. 

“The intent of the IRA was to strengthen American manufacturing and domestic production and no regulation should weaken the effort,” said Rep.

Ro Khanna

(D., Calif.). “At the very least I think they need to come to Congress before signing a new trade agreement that would create a new loophole around the domestic-content requirements.”

In Europe, approving the eventual trade agreement on critical minerals could take time if each of the member states must ultimately sign off on it, but officials have said the deal isn’t expected to be controversial for European governments. 

Striking a deal with the EU and Japan on critical minerals is seen as the first piece of a broader effort for the Group of Seven advanced economies to wean itself off Chinese suppliers of critical minerals. The U.S. is hoping for the G-7 to form a buyers club, using its market power to secure supplies of the critical minerals.

—Laurence Norman contributed to this article.

Write to Andrew Duehren at andrew.duehren@wsj.com and Kim Mackrael at kim.mackrael@wsj.com