In Geopolitics This Week
China and Saudi Arabia Deepen Strategic Partnership, Europe’s Concerns over the Inflation Reduction Act, Hungary Vetoes the EU’s Financial Aid Package to Ukraine, and other stories.
China and Saudi Arabia Deepen Strategic Partnership
Chinese President Xi Jinping has heralded a “new era” of relations between China and the Arab world as he China’s leadership visited Saudi Arabia. In the discussions that followed, China and Saudi Arabia signed a series of agreements reportedly worth around $30 billion, deepening their strategic partnership in the process.
The announcement of a comprehensive strategic partnership between Saudi Arabia and China followed the signing of a number of agreements between the two. Saudi Arabia and China signed more than 40 agreements by the end of Xi Jinping's visit to the kingdom. The deals said to be struck between Chinese and Saudi firms are in green energy, information technology, cloud services, transport, construction and other sectors. Saudi Arabia's industrial diversification endeavours align with China’s Belt and Road Initiative.
One of the most significant outcomes of the meetings have been the signing of a memorandum of understanding between Saudi Aramco and China’s Shandong Energy Group that promises increased energy exploration opportunities. The agreement also specified they would seek ways to work together on renewable energy, hydrogen energy and carbon capture. The two countries also signed a strategic partnership on the digital economy, a deal that will see increased cooperation in artificial intelligence, quantum computing, robots and more.
Europe’s Concerns over the Inflation Reduction Act
The soon-to-be-implemented Inflation Reduction Act (IRA) promises to provide subsidies and financial assistance exclusively for US companies, which the European Union sees as discriminatory. The US Inflation Reduction Act may force the European Union to increase subsidies of its own in certain sectors.
The IRA — known as H.R. 5376 – Inflation Reduction Act of 2022 — covers a wide range of areas, including energy- related legislation. It increased the Investment Tax Credit for renewable energy projects from 26% to 30% and extended it to all storage projects. It also includes tax credits to manufacture solar panels, inverters, and racking components. In addition, there are more tax credits for electric vehicles, electrical panels, heat pumps, and many other products directly related to the renewable industry.
Brussels has since asked the US government to remove these discriminatory requirements. According to reports, the European Commission is seeking an amicable solution to the matter, although it hasn't excluded the possibility of bringing the issue of protectionist policies implemented by the US to the World Trade Organization.
The European Union sees the IRA's tax credits and subsidies as discriminatory toward EU industry and as an existential threat to European manufacturing. In response to the IRA, Brussels may introduce controversial requirements to privilege European over foreign production. Subsidies may help the EU avoid an exodus of investment in key industries and maintain competitiveness. However, it may come at the cost of alienating trade partners and distorting competition in the bloc's single market.
Hungary Vetoes the EU’s Financial Aid Package to Ukraine
Hungary has vetoed the approval of a new EU package of financial aid for Ukraine. Budapest’s veto means key votes on the EU’s agenda will be delayed, including the introduction of a minimum 15% corporate tax rate and proposals to unblock 5.8 billion euros ($6.1 billion) in grants for Hungary's pandemic recovery fund.
The European Union had planned to disburse an 18 billion euro ($18.9 billion) package of financial aid to Ukraine over the course of 2023 and had aimed to implement a global minimum corporate tax rate by December 2022, but both files require unanimity from member states to be approved. Hungary’s veto has compromised the EU's unanimity for these proposals.
Budapest has resisted pressure from Brussels, with Hungarian Prime Minister Viktor Orbán stating that his country is “ready to give financial assistance to Ukraine, on a bilateral basis.” Orbán has maintained that “huge piles” of EU debt is not the solution to supporting Ukraine. Orbán has protested the EU’s efforts to support Ukraine with financial assistance by arguing that the EU should avoid going “down the road towards a debt community”.
Hungary is attempting to leverage its veto to dissuade Brussels from freezing its cohesion funds. Should Brussels and Budapest fail to reach a compromise in the coming weeks, Hungary's veto will postpone the implementation of the tax rate and the disbursement of aid to Ukraine until early 2023. The EU may seek to approve both proposals through an enhanced cooperation that would allow Brussels to legally ignore vetoes.