German Chancellor Olaf Scholz and French President Emmanuel Macron have agreed that Europe needs to retaliate against unfair competition from the United States.

According to Politico, during a recent meeting, Scholz and Macron agreed that recent U.S. government subsidy plans are market-distorting measures designed to persuade companies to move their production to the United States. And this is a problem they want the European Union to solve.

The mutual agreement on this issue has followed public disagreements in recent weeks on key policy issues such as energy and defense.

But even though their lunch was awkward, both leaders agreed that the EU cannot stand idly by while Washington advances its Inflation Reduction Act, which offers tax cuts and energy incentives for companies investing in U.S. territory. In particular, the U.S. law encourages consumers to 'Buy American' when it comes to choosing an electric car, a move particularly irritating to major auto industries such as France and Germany.

The message of the Paris dinner is that if the U.S. does not turn away from this path, the EU will have to retaliate. Similar incentive schemes for companies will be needed to avoid unfair competition or loss of investment. This move risks plunging the transatlantic relationship into a new trade war.