This is a guest post from Victor Crochet, Trade lawyer and PhD student at Cambridge University
In response to the United States of America (“US”) Inflation Reduction Act and regained interest in industrial policies, the European Union (“EU”) recently announced its Green Deal Industrial Plan. The EU’s goal with this plan is to remain competitive in green technologies in light of increasing competition by the US and the already established dominance of China in several supply chains.
Under this plan, the European Commission has already loosened State aid rules to allow EU Member States to provide public funding to enterprises in green sectors and is planning to loosen them further in the coming weeks. The EU has also ramped up financing at EU level and is now suggesting the creation of a European Sovereignty Fund to finance emerging technologies.
To complement these initiatives, the European Commission just released two legislative proposals, namely the Net-Zero Industry Act (“NZI Act”) and the Critical Raw Materials Act (“CRM Act”). These proposals are two sides of the same coin with the NZI Act focusing on downstream green technologies, such as wind and solar powers as well as electrical batteries, and the CRM Act targeting the minerals necessary to manufacture these technologies.
The first goal of these acts is to enhance domestic production of green technologies as well as mining, processing and recycling of raw materials in order to reduce reliance on foreign supplies. To do so, the EU is planning to cut down red tape for new projects and simplify available public financing in order to facilitate rapid deployment. With regard to net-zero technologies, it is also suggesting encouraging innovation and skills development. Similarly, when it comes to critical raw materials, the EU is additionally banking on encouraging recycling by introducing measures such as recycled content requirements.
The second goal of these acts is to reduce supply chain risks through diversification. Indeed, the EU is concerned about potential disruptions as it currently heavily relies on specific countries for green technologies and minerals. For example, most of the EU’s supply of solar technology comes from China. Likewise, the EU is largely dependent on Chile for lithium and China generally for rare earth materials. Both the NZI and CRM Acts thus indicate that the EU should not rely on a single country for more than 65% of its supply for net-zero technologies as well as critical raw materials by 2030.
With regard to the CRM Act, this benchmark is perhaps more aspirational as it seems to mostly play a role in assessing whether to designate a project as strategic, thereby allowing it to benefit from simplified administrative procedures and preferential financing. Indeed, the EU’s approach to resilience under this Act seems to be focused on monitoring dependencies, due diligence obligations and stockpiling mechanisms. This is to be complemented by agreements with resource-rich third countries to integrate their value chains with those of the EU.
However, when it comes to the NZI Act, this benchmark potentially has more teeth. This Act provides that in government procurement procedures for net-zero technology as well as auctions to deploy renewable energy, a tender’s contribution to “sustainability and resilience” should be taken into account. “Resilience” is focused on whether a single country has a market share of more than 65% for the relevant product in the EU. The same criteria should also be taken into account by EU Member States when designing consumer incentives for the purchase of green technologies.
These provisions will certainly have less trade distortive effects than the US’ local (and free trade agreement partners) content requirements found in the Inflation Reduction Act and which have attracted the ire of the US’ trading partners in recent months. However, they could still run counter to the most-favoured nation and national treatment principles as they could detrimentally affect the conditions of competition for goods originating in a country which supplies more than 65% of the EU’s needs.
Yet, when it comes to the national treatment obligation, Article III:8 of the GATT expressly excludes government procurement for governmental purposes from the scope of this obligation enshrined in Article III. While the EU committed to respecting this principle in government procurement procedures for commercial purposes under the GATT as well as for covered government procurement procedures for governmental purposes under the Revised Government Procurement Agreement and certain free trade agreements, recital 30 of the proposed NZI Act expressly indicates that the tender’s contribution to resilience should not be taken into account when the country of supply is a party to the Revised Government Procurement Agreement or has a free trade agreement with the EU covering government procurement. It should also not play a role in government procurement for commercial purposes, thus avoiding any potential violation of the national treatment principle under the GATT, Revised Government Procurement Agreement and free trade agreements. When it comes to the most-favoured nation principle, it remains disputed whether government procurement procedures fall within the scope of this obligation under the GATT and thus whether countries to which the resilience requirement might be applied could potentially raise an issue with it under Article I:1 of the GATT. EU Member States’ consumer incentives for the purchase of green technologies using the resilience criteria might end up running afoul of both principles enshrined in the GATT without any straightforward exception available, however.
Thus, the EU seems to have so far managed to deploy its own brand of green industrial policy in response to the US Inflation Reduction Act, including improving the resilience of its supplies, without blatantly running afoul of international trade rules. Yet, without taking a hard-line approach similar to that of the US, it remains to be seen whether the EU’s strategy will end up more bark than bite.
