In August, the Inflation Reduction Act (IRA) was signed into law in the United States, marking a major step by the U.S. government towards decarbonizing high-polluting industries and increasing green financing. The legislation, which allocated $369 billion in climate provisions, introduced new incentive-based policies aimed at cutting greenhouse gas emissions.
Such measures include a tax break for electric vehicles (EVs). However, several countries and automakers have called for reforms to the tax plan, with many opponents arguing that the credit could significantly disrupt the EV sector — and potentially violate free trade rules.
"The Act risks causing not only economic damage to both the U.S. and its closest trading partners, resulting in inefficiencies and market distortions, but could also trigger a harmful global subsidy race to the bottom on key technologies and inputs for the green transition," the European Commission said in letter submitted to the U.S. Treasury.
The EU has suggested other elements beyond EVs are also discriminatory, including credits for renewable electricity generation, clean electricity production, clean electricity investment and clean fuel. Further, it suggests the IRA provides discriminatory subsidies via tax credits on sustainable aviation fuel, clean hydrogen production and advanced manufacturing production.
For its part, the EV tax plan includes a credit of up to $7,500 for passenger vehicles, which proponents hope will boost demand for EVs and accelerate the country’s development of a nationwide charging station network.
The credit, however, is only available for vehicles with final assembly in North America. Most requirements are linked to critical mineral extraction, processing and recycling, and battery component manufacturing and assembly. As of January 2024, at least 40 percent of the critical minerals must come from the U.S. or a country that it has signed a free trade agreement with, while the battery must have at least 50 percent of North American content. These minimum thresholds rise to 80 percent by 2027 for critical minerals and 100 percent from 2029 for batteries.
"On its face, the requirement of domestic production requirements for EV tax credits violates the principle of national treatment, one of the core principles at the foundation of the international trade regime," said Michael Plouffe, an assistant professor of international political economy at the University College London.
Following the legislation being enacted, the U.S. government sought comment on the law’s implementation.
Japan, one of the world’s leading automaking countries, said it has "serious concerns" about the tax credit and warned that it could disrupt the ability of Japanese manufacturers to operate in the U.S. "Japanese automakers have been investing in the U.S. for more than 40 years, creating well-paid jobs in the U.S. and contributing to the U.S. society as good American corporate citizens," Japan’s statement read, adding that the requirements are "not consistent with the U.S. and Japanese governments’ shared policy to work with allies and like-minded partners to build resilient supply chains."
Brazil also requested that the U.S. government provide further details on what constitutes final assembly and mineral extraction requirements, noting specifically that the restrictions could negatively affect Brazil’s mining sector. South Korea, meanwhile, called for a three-year grace period to allow Korean companies time to finalize planned investments in the U.S. market.
Opponents also claimed that the tax plan could be in violation of international trade rules. The European Union, for instance, said in its statement that the tax plan contains "discriminatory" requirements that constitute a breach of countries’ commitments via the World Trade Organization. "Moreover, it risks creating tensions that could lead to reciprocal or retaliatory measures," the EU warned.
Several top car manufacturing companies and industry associations have also spoken out against the tax credit plan in its current form.
The Japan Automobile Manufacturers Association — whose members such as Honda, Nissan and Mitsubishi employ 110,000 U.S. workers, according to the organization — said the credit could "cause an extraordinary burden" to stakeholders and have a "counterproductive effect of narrowing consumers’ ability" to buy EVs. The Korea Automobile Manufacturers Association also said it was "deeply concerned" with the legislation.
U.S. automakers have raised concerns, too. In a letter to the U.S. Treasury, Ford Motors urged the government to clarify key provisions of the tax plan and ease rules around foreign manufacturers so that more EVs can be eligible for credits.
Ford wrote that while it "appreciates and supports the overall objective" of the legislation, an "overly expansive interpretation of this provision risks undermining that very same objective by making the clean vehicle credit largely unavailable."
The tax plan requirements could "have the effect of increasing supply chain rigidity, increasing corporate susceptibility to exogenous shocks," Plouffe explained. "This is particularly jarring, given that one of the prevailing lessons coming out of the pandemic was a need for flexibility and resilience in supply chains."
Efforts are underway to reconcile the concerns.
In late October, the EU and U.S. established an official Task Force on the Inflation Reduction Act to facilitate a series of high-level meetings to address the issues raised in Brussels. The U.S. Treasury Department is tasked with providing guidance on the final details of the credits’ implementation, but many experts have said the legislation leaves little room for maneuver.
"The task force is a welcome move. A trade dispute over green industrial policy would be damaging and suck oxygen from collaboration opportunities,” said Kimberley Botwright, the World Economic Forum's head of sustainable trade. "Further, since the issues impact countries beyond the U.S. and the EU, the two sides should also encourage discussion with other partners."
Going forward, experts suggest it is likely governments will tie green policies to domestic job creation, which brings both opportunities and challenges. "Countries need to evaluate how to strike the right balance, to avoid creating inefficiencies and international tensions," Botwright added.
Moreover, a key question, industry experts note, is how much domestic jobs focus will be politically necessary, or whether green policies can be justified more on their own strengths.