While far from a Trump-style trade war, President Biden and the U.S. Congress are walking a fine line after the new electric-vehicle subsidy law went into effect on Aug. 16, 2022. The Inflation Reduction Act provides a $7,500 combined tax credit for electric vehicles manufactured in North America. This change reduced the number of current models eligible for the credit from more than 60 to fewer than 20.

To little surprise, the European Union, South Korea and Japan object to the EV tax credit, saying it violates the World Trade Organization’s rules discriminating against other members. While most trade experts agree, the politicians and policymakers in Washington, D.C. disregarded those objections until now. President Biden indicated his willingness to try and resolve the issue. However, this might take some creative regulating by the Treasury Department or an act of Congress, which is unlikely. This does not include their objections to subsidies for U.S. industry under the new semiconductor CHIPS law.

Absent changes, the European Union is considering its own set of subsidies to promote their industries as part of a broader industrial policy. A subsidy race is equivalent to a shadow trade war at a time when the global economy needs stability among allies. The U.S.-EU Trade and Technology Council is meeting in an effort to negotiate a solution. As tensions with China increase and the war continues in Ukraine, President Biden will seek to de-escalate the situation with trade allies. As of right now, however, he is boxed in by his own law.