First things first. Credit for this column’s topic goes to Gavin Bade at Politico,
who called me with a question, which started me thinking, which led to
what follows. I believe Gavin will be writing about it too, so watch for
that.
Those of you that have played video games know the term “Easter
eggs,” which refers to hidden little surprises that savvy players can
discover if they search carefully. It turns out that the same concept
applies to congressional legislation. You never know what you’re going
to find if you look carefully. A case in point is the pending
reconciliation bill.
That bill is not finished yet, so the final version may change, but
going on an Easter egg hunt in it turns up some interesting items that
have trade and other policy implications that go beyond the ostensible
purpose of some of its provisions. I’m going to talk about some of them
in the energy and climate part of the bill.
The one most noted publicly is the expanded tax credit for
electric vehicles (EVs), which is an increased credit for cars assembled
in the United States by union employees. Importing and non-union
companies have objected strenuously
to the credit, as have foreign governments, particularly Canada, which
has pointed out the trade issues this creates.
It turns out this is not a one-off provision. The bill also
provides expanded credits for renewable energy production and
installation of solar and other renewables and allows even larger
credits if the projects pay prevailing wages during construction and
meet registered apprenticeship requirements. There are also bonus
credits for certifying that the iron, steel, and manufactured products
used in the project were domestically sourced. For renewable energy
projects begun before 2025, that means 40 percent of the cost must be
from domestic components, a percentage that increases to 45 percent in
2026 and 55 percent after that. On top of that, large projects would be
limited in the amount of credit they can receive directly as a
government payment if they do not meet the domestic content
requirements.
There is a clear tilt in these provisions toward union wages
and domestic content. Those are not entirely new concepts—they have
appeared in other programs in the past, but this administration seems to
be making them larger and pushing them further. The simple explanation
is that this is just what Democrats do when they are running the show,
but I think it is more complicated and clever than that.
I have written in
the past about the dilemma the administration faces currently on solar
panel tariffs, where it is being pressed by the domestic industry to
extend Trump’s tariffs on imports, knowing that doing so will likely
slow down solar panel installations and the country’s conversion to
renewables. However, the credits in the reconciliation bill might rather
deftly avoid that trap by lowering the cost of domestic renewables
enough to permit them to compete successfully with imports. (Since none
of this has become law yet, it will probably not affect the immediate
decision on extending the tariffs, but it would justify removing them
later on.)
That means in this particular case a “protectionist” domestic
content policy might actually be more pro-trade than people think if it
ultimately justifies removing the protection that is already in place.
Unfortunately, that case may be unique. If you look at other renewables
or particularly at the EV credit, other protection that could be removed
does not exist. That leads me to three further thoughts.
First, it appears the administration is pursuing multiple goals
simultaneously. It wants to accelerate conversion to renewables, but it
also wants to create more domestic jobs and reshore manufacturing, so
climate policy and industrial policy are now joined in a way that
hopefully does not have them offsetting each other.
Second, Gavin and I discussed at some length whether this
approach is inflationary, something that matters a lot more now than it
did a year ago. I am inclined to think it is not, at least not directly.
It will mean higher production costs due to the use of domestic
materials and labor, but that cost will be offset by government
subsidies via the tax credits, so short-term costs might not increase.
In the long term, it will increase the deficit and eventually stick the
taxpayers with the tab, but as we have seen over the past decades,
eventual accountability may be a long time in the future.
Third, the provisions pretty clearly violate basic trade
principles and the United States’ obligations under the World Trade
Organization (WTO) and the Government Procurement Agreement (GPA). A
fundamental WTO principle is national treatment—essentially, treating
foreigner manufacturers the same as domestic. These provisions ride
roughshod over that and, depending on how they are administered, will
likely violate our GPA obligations, which are based on that same
principle.
In terms of actual trade, the harm done may end up being small,
but the message we are sending is devastating—that the United States is
deliberately ignoring the rules we have spent more than 70 years
building and defending. Because the WTO Appellate Body is not
functioning—also our fault in the eyes of everybody else—we will get
away with it, but the damage to the WTO and to our own image as defender
of the rule of law is incalculable. I would have expected that from
Donald Trump, but to see it coming from the people who promised a better
way is particularly sad. It appears these Easter eggs are rotten
indeed.
William Reinsch holds the Scholl Chair in International
Business at the Center for Strategic and International Studies in
Washington, D.C.