A new U.S.-Japan agreement that took effect this week could qualify Japanese electric vehicles for a U.S. consumer purchase tax credit that has raised concerns among major foreign automakers but came under quick condemnation from lawmakers on both sides of the aisle.
According to the Office of the U.S. Trade Representative, the agreement seeks to diversify the supply chains of electric vehicle battery critical minerals (lithium, nickel, cobalt, graphite, and manganese) and increase resilience against threats such as economic coercion and non-market policies and practices (a thinly-veiled reference to China). It establishes new commitments and areas for joint cooperation, including the following.
- refrain from imposing export duties on critical minerals exported to each other
- consult on domestic measures to address non-market policies and practices of other countries affecting trade in critical minerals and on issues relating to global critical minerals supply chains
- meet and confer on best practices regarding review of investments in the critical minerals sector by foreign entities
- take measures to promote more resource-efficient and circular economy approaches to reduce the demand for, and environmental impact of, virgin material extraction and related processes
- coordinate engagement, information-sharing, and enforcement actions related to labor rights in critical minerals extraction and processing
- identify opportunities to build the capacities of each country, and of other countries or regions whose producers supply their markets, to implement high labor standards in critical minerals supply chains
- share information on, and promote remediation of, violations of labor rights at entities connected to critical minerals supply chains
- review capacities to extract and process critical minerals every two years and decide whether to continue, terminate, or amend the agreement
The Inflation Reduction Act provides up to $7,500 in tax credits for purchases of electric vehicles in the U.S. A Reuters article notes that half of this credit “is reserved for North American-assembled vehicles and batteries” while the other half “is contingent on at least 40% of the value of critical minerals in the battery having been extracted or processed in the United States or a country with a U.S. free trade agreement or recycled in North America.”
A Politico article indicates that the Treasury Department would have to determine that the Japan agreement constitutes a free trade agreement for electric vehicles made with Japanese critical minerals to qualify for the credit. USTR has signaled its support for such an interpretation by revising its website to include the Japan agreement on a page listing the United States’ FTAs. Similar agreements the U.S. has vowed to negotiate with the European Union, and could pursue with Canada and perhaps other countries, would likely be so listed as well.
However, the Japan agreement and the approach it represents were immediately decried by key lawmakers who just days earlier had sharply criticized the Biden administration for attempting to circumvent Congress’ constitutional authority over trade by negotiating trade agreements the White House says don’t require congressional approval. Senate Finance Committee Chair Ron Wyden, D-Ore., and House Ways and Means Committee Ranking Member Richard Neal, D-Mass., called the agreement “unacceptable,” pointing out that it lacks enforceable labor or environmental protections in an industry known for violations in both areas and reiterating that the White House “does not have the authority to unilaterally enter into free trade agreements.”
On the other side of the aisle, Senate Finance Ranking Member Mike Crapo, R-Idaho, also criticized the agreement’s lack of “any binding or enforceable commitments” and chastised the administration for “not allowing the public to see the text of the agreement before it was signed or submitting it to Congress for approval.” Ways and Means Chair Jason Smith, R-Mo., cited the lack of transparency as well and added that the agreement “does nothing to shift critical mineral supply chains away from China.”
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