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BRUSSELS: EU leaders meeting in Brussels on Thursday will focus on a trade dispute with key ally the United States that threatens to trigger a subsidy race between the economic superpowers.

European Commission chief Ursula von der Leyen sent a letter ahead of the summit urging leaders to back a plan to compete with billions of dollars in new US subsidies and tax cuts for car makers.

Brussels views the “Buy American” condition for purchasers of electric vehicles mainly made in the United States as discriminatory against European car manufacturers.

It is also concerned Washington’s plan will drain investment from the EU to the United States and that they violate World Trade Organization (WTO) rules.

But, with US President Joe Biden refusing to change course beyond some promised “tweaks”, the commission is now looking to match the US move by loosening its own state aid rules and boosting public investment in cleaner energy.

Von der Leyen said the e-vehicle subsidies contained in a broader US Inflation Reduction Act (IRA) “risk un-levelling the playing field and discriminating against European companies”.

The EU emphasises its close cooperation with the United States – especially on supporting Ukraine and fighting climate change.

But it is worried Washington is working up a trade advantage over it while it was going through an energy crunch, economic headwinds and was still recovering from the coronavirus pandemic.

Against a ‘trade war’

German Chancellor Olaf Scholz, whose country is the EU’s main car exporter, said Wednesday that Europe was united in the dispute, but should solve it through talks “rather than a big conflict”.

Commission Vice President Margrethe Vestager told the European Parliament the US move was “counter-productive in terms of climate and sustainability… it’s also a violation of international trade rules”.

She added: “We already have war in Europe. The last thing we need is a trade war on top.”

US import prices fall for fifth straight month in November

Von der Leyen’s spokeswoman sought to calm the rhetoric, insisting the commission was avoiding any mention of “a subsidy race, or on anything linked to a trade war”.

She and other officials emphasised that talks were continuing with the US administration on the issue through a special task force, and preferred that route before resorting to the WTO.

The EU summit was to also examine the situation, and consequences in Europe, of Russia’s war in Ukraine, which European Council President Charles Michel said was at “the heart of our concerns”.

The gathering was set to be less fractious than initially feared, after EU member Hungary this week dropped its veto of 18 billion euros ($19 billion) in financial aid to cash-strapped Kyiv.

In exchange, the bloc’s other countries agreed to reduce the amount of EU funds frozen because of Hungary’s democratic backsliding to 6.3 billion euros, from 7.5 billion euros initially recommended by the commission.

Another 5.8 billion euros from a post-Covid recovery fund was conditionally approved for disbursement next year – if Budapest showed progress in restoring EU rule of law.

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