The U.S. and the European Union announced March 13 their intention to negotiate an agreement aimed at avoiding trade retaliation over U.S. subsidies for electric vehicles.

The U.S.’ Inflation Reduction Act signed into law in August 2022 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 response, a joint task force has been working on this issue, seeking to align approaches in the IRA and the EU’s Green Deal Industrial Plan on “strengthening and securing supply chains, manufacturing, and innovation on both sides of the Atlantic.”

Toward that end, President Biden and EU President Ursula von der Leyen announced this week their intention to “immediately begin negotiations on a targeted critical minerals agreement for the purpose of enabling relevant critical minerals extracted or processed in the European Union to count toward requirements for clean vehicles in the Section 30D clean vehicle tax credit of the Inflation Reduction Act.” These mineral include lithium, nickel, and cobalt. An article in The New York Times said the U.S. has “also been carrying out similar conversations with the governments of Japan and the United Kingdom.”

The U.S.-EU agreement “would further our shared goals of boosting our mineral production and processing and expanding access to sources of critical minerals that are sustainable, trusted, and free of labor abuses,” the two leaders said. “Cooperation is also necessary to reduce unwanted strategic dependencies in these supply chains, and to ensure that they are diversified and developed with trusted partners.”

The two sides said they will also “take steps to avoid any disruptions in transatlantic trade and investment flows that could arise from their respective incentives.” To aid in that effort they have launched a Clean Energy Incentives Dialogue that will become a part of the EU-U.S. Trade and Technology Council. This dialogue will coordinate U.S. and EU incentive programs so that they are mutually reinforcing and will also facilitate information sharing on non-market policies and practices of third parties (e.g., China) to serve as the basis for joint or parallel action and coordinated advocacy on these issues in multilateral or other fora.

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