French Toast?

by Elwin de Groot, Head of Macro Strategy at Rabobank

French president Macron and his wife have arrived in Washington for a two-day state visit to the White House. After a joint press conference with President Biden, dinner will be served on Thursday. We may not be in for the same intense moments that Macron had in his encounters with Biden’s predecessor. Take that famous handshake moment with Trump in May 2017, just after Macron’s election, with which Macron intended to show that he was not somebody to mess with. But the to-and-fros were mutual and over time the relationship between the two remained volatile. During Macron’s state visit in 2018, Trump said: “We have a very special relationship, in fact I’ll get that little piece of dandruff off,” Trump said. “We have to make him perfect — he is perfect.” In reality, they already were miles apart. At a G7 meeting in June 2018, Macron threatened to exclude Trump from participating in a joint declaration with other leaders. The tariff wars, including steel and aluminium tariffs on Europe were also a drag on the relationship. In December 2019, Trump called Macron “very, very nasty” after the French leader criticized the US for withdrawing troops from Syria.

This week’s state visit is seen as a possibility to reset those relations and “orient squarely towards the future”, as White House spokesman John Kirby put it on Monday. Yet, from a geo-political (or should we say, geo-powerful) perspective, the French president is starting from an underdog position. Aside from the painful decision by Australia in September 2021 to engage in a trilateral security pact with the UK and US for the Indo-Pacific region that would help Australia to acquire nuclear-powered submarines from the US rather than French diesel-propelled subs as per the original plan, the biggest sting at the moment is the Inflation Reduction Act (IRA) that was signed into law by President Biden on August 16 and aims to address climate change. France and many of its European partners, however, argue that parts of that Act violate WTO rules. In particular subsidies for electric vehicle purchases are seen as unfair competition as they discriminate against foreign (car) producers. Under the IRA, electric car buyers are eligible for a tax credit of up to $7,500 as long as the vehicle has a battery that is built in North America, with minerals mined or recycled on the continent.

One option for Europe is to engage in a ‘tit-for-tat’ strategy, by launching similar subsidies and regulations for European manufacturers. In a recent interview with French daily Les Echos, Macron said: “I strongly defend a European preference in this area and strong support for the automotive industry. We must stand by this and it must happen as soon as possible […] We must wake up, neither the Americans nor the Chinese will give us such gifts! Europe must prepare a strong response and move very quickly. […] I have been pushing for more European sovereignty for five years. The software of many Europeans is changing,”

Some commentators suggest that by asking President Biden for ‘permission’ to engage in a similar type of subsidies scheme, Europe could re-invigorate its goals of achieving  form of ‘(open) strategic autonomy’. Yet, the fact that Macron’s meeting with Biden is being perceived by some as asking for permission, that very much underscores Europe’s current lack of strategic autonomy and the power to pursue it on its own.

Moreover, there are numerous risks attached to such a tit-for-tat strategy. By openly going against WTO rules themselves, the EU would undermine the “open” part of its strategic autonomy strategy. As recently as February 2019 it signed a significant Economic Partnership Agreement with Japan, on which the EU themselves note that it “removes tariffs and other trade barriers and creates a platform to cooperate in order to prevent obstacles to trade; and helps us shape global trade rules in line with our high standards and shared values, and; sends a powerful signal that two of the world’s biggest economies reject protectionism.” Clearly, agreeing with the US to erect trade barriers goes against the grain of such views.

Another question is whether the US would play ball. In fact, why would they? As Europe is puffing under the weight of potential energy shortages and high energy costs, its (energy-intensive) industry already has a significant competitive disadvantage vis-à-vis US producers. Plus, Europe will need significant additional US LNG supplies in the coming years. The US has also provided the majority of military equipment and funding for the Ukraine to fend of Russia; the EU has been playing second fiddle. Even though Biden may not be as inclined as Trump to make French toast of Macron if he doesn’t like his proposals, he does not have many reasons to agree to them