EU Complains About EV Tax Credit; Analyst Says Could Be Defensible at WTO

A day before the House is expected to pass a bill, the Inflation Reduction Act, that includes electric vehicle tax credits with strings attached for sourcing and assembly, activists and analysts are reacting to European Union's argument that the EV tax credit violates World Trade Organization rules.

The spokeswoman for the European Commission told reporters in Europe Aug. 11 that because the cars and trucks eligible for the tax credit must be assembled in North America, that is discriminatory, and therefore violates WTO's non-discrimination principle.

"So we continue to urge the United States to remove these discriminatory elements from the bill and ensure it's fully in compliance with the WTO," a spokeswoman said.

Of the European automakers, only Nissan and Volkswagen assemble an EV in the U.S. or Mexico that is cheap enough to qualify; all of BMW's electric vehicles are too expensive, as are two of the three Mercedes EVs.

The Sierra Club's Hebah Kassem issued a statement in response to the EU: "As President [Joe] Biden is likely poised to sign the IRA into law soon -- the single largest investment ever in climate action -- it is a shame that one of the U.S.'s closest allies is threatening this progress, citing antiquated trade rules written long before governments were taking climate change seriously. It’s clear that the time for a Climate Peace Clause is now -- so that all countries can get to the urgent business of taking bold climate action without fear of unnecessary challenges from trade agreements."

Global Trade Watch Director Melinda St. Louis said in a statement that spending to create green jobs is a key way to garner the political support needed to transition away from fossil fuels. The Inflation Reduction Act is nearly all carrots, not sticks, when it comes to reducing the nation's carbon emissions. "It’s time to end this circular firing squad where countries threaten and, if successful, weaken or repeal one another’s climate measures through trade and investment agreements. The EU should withdraw this threat and instead celebrate that the U.S. is finally taking these first critical steps to address the climate crisis, and the U.S. and trading partners should immediately agree to a Climate Peace Clause to protect future climate policies around the world from trade challenges," St. Louis said.

Tesla and General Motors seem like the big winners with the new tax credit, as both companies produce batteries domestically and both have graduated from the existing tax credit eligibility due to their EV sales volume. However, the battery and critical minerals sourcing requirements may be impossible for all to meet.

The American Action Forum's Tori Smith published a blog post Aug. 4 that said, "The regional requirements in the Inflation Reduction Act are likely impossible for automakers to fulfill because they severely reduce the sourcing options for inputs. For example, Argentina is responsible for roughly 10 percent of lithium production, but the United States does not have a free trade agreement with Argentina. Moreover, virtually all cathode and anode production is concentrated in China, Japan, and South Korea. South Korea is the only country with which the United States has a free trade agreement, and it represents only 15 percent of cathode production."

Simon Lester, a former legal affairs officer at the WTO's appellate body, blogged Aug. 11 that the U.S. might be able to defend the EV sourcing requirements as measures related to a free trade area, since they are either linked to USMCA countries or, in the case of critical minerals, any country that the U.S. has a free trade agreement with. "I don't see how else the U.S. can justify these measures under WTO law, so I'm wondering if at least someone involved in the creation of this measure had in mind an Article XXIV defense (others may not have been concerned about WTO law)," he wrote.

He also said that he believes a North America final assembly requirement is not the same as a domestic content requirement. "In theory, final assembly can take place with 100% foreign parts, and as a result, maybe it does not actually require that inputs be from any particular place. ... Now, in practice, such a requirement might steer the assembler to use local or regional inputs, because those inputs are physically close to where the assembly has to take place. But that ends up being a de facto content requirement rather than a de jure one, and those can be difficult to prove."

He said that the security exemption in WTO rules could apply to the "foreign entity of concern" restriction, which takes effect in a few years; it will mean that no critical mineral mined or processed in China or by a Chinese company will be allowed in a vehicle eligible for the EV tax credit.