The U.S. appeared to slow momentum toward a potential transatlantic trade war with the European Union recently by taking a step toward partially ameliorating EU concerns over new U.S. electric vehicle subsidies.

The U.S. Inflation Reduction Act signed into law last August includes two tax credit programs for purchases of electric vehicles, one for commercial operators and one for private consumers. Among other things, these programs require a specified percentage of the value of the critical minerals in the vehicle’s battery to be extracted or processed in the U.S. or a country with which the U.S. has a free trade agreement in effect (or to be recycled in North America).

The EU has said this requirement discriminates against EU automotive producers (echoing similar complaints from Japan and South Korea) and warned that retaliatory action could follow unless it is changed.

In a recent document outlining the “anticipated direction of forthcoming proposed guidance” on the IRA (likely to be issued in March), the Treasury Department said it expects to propose that the criteria used to identify FTAs for the purposes of the critical minerals requirement include whether an agreement reduces or eliminates trade barriers on a preferential basis, commits the parties to refrain from imposing new trade barriers, establishes high-standard disciplines in key areas affecting trade (such as core labor and environmental protections), and/or reduces or eliminates restrictions on exports or commits the parties to refrain from imposing such restrictions, including for the critical minerals contained in electric vehicle batteries.

Treasury said it expects that this will include existing U.S. FTAs at a minimum, that other FTAs may be identified going forward, and that any newly negotiated agreements will be evaluated for proposed inclusion as well.

The European Commission welcomed this news, asserting that the Treasury document provides that the IRA’s commercial credits “will be available to EU companies without requiring changes to established or foreseen business models of EU producers.”

However, the Commission said it wants similar non-discriminatory treatment for EU producers under the IRA’s other credits as well. The Commission said that in its current form this scheme “de facto excludes EU companies from benefiting,” which “violates international trade law and unfairly disadvantages EU companies on the US market, reduces the choices available to US consumers and ultimately reduces the climate effectiveness of this green subsidy.”

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