I wrote about the Inflation Reduction Act’s (IRA) tax credits for electric vehicles (EV) when they first became law, but I did not expect they would become as big a political issue as they have.
Apparently, neither did the administration, as the White House might have offered more resistance to them had administration officials known the issue would blow up. Instead, we have a big mess with an uncertain outcome that was not resolved at the U.S.-EU Trade and Technology Council (TTC) meeting on December 4 and 5. The best the two sides could do was to agree that they needed to agree.
This is not the first time protectionist trade measures—in this case content requirements, bans on imports from certain destinations, and tax credits dependent on meeting those requirements along with domestic final assembly—have come up in Congress. On previous occasions, the administration, regardless of party, has opposed them on the grounds they violate our international obligations. The outcome is usually either that they are dropped or that waivers and exceptions are added that give the administration flexibility in implementing the new rules.
Neither of those things happened this time, suggesting that administration officials were either MIA or complicit in the process. There appears to be a consensus among trade experts that the provisions violate several of our WTO obligations, and in the good old days, that mattered. Apparently, it does not anymore.
Objections quickly came from Europe—both the European Union and the United Kingdom—and Asia, both Japan and Korea. Canada and Mexico, for once, were off the hook, having been exempted in the statute. The original criticisms were the obvious one. Principle—the United States is breaking World Trade Organization (WTO) rules; and self-interest—the rules disadvantage foreign producers and will make their vehicles less competitive.
Recently,
however, the debate has changed. The affected companies continue to
complain about the discrimination against them, even while they are
moving to adjust to the new rules, but the governments, particularly in
Europe, have begun to focus more on the massive subsidies in the IRA and
their unwillingness or inability to match them. They worry that the
combination of subsidies and content requirements will push their
companies to move more production to the United States at the expense of
European jobs and growth.
They’re probably right about that, and the U.S. response, until last Thursday, did not improve their mood. It was, essentially, that the United States is not upset if companies want to move here, and if the foreigners don’t like it, they should do what we’re doing. That has led to suggestions in Europe to do just that—both “Buy Europe” legislation and new subsidies have been proposed, tempered by the realization that two wrongs rarely make a right and that they would be violating the same WTO rules they accuse the United States of ignoring.
So, the question is, what happens next? Last Thursday, at his press conference with President Macron, President Biden suggested there were “glitches” in the law and that we ought to find a way to fix them so the United States doesn’t discriminate against its European allies. U.S. observers have pointed out that the law does not appear to provide much flexibility, and that if the Treasury Department, which is charged with its implementation, simply pulls a waiver out of the air, it will be sued and will probably lose. On the other hand, Biden is president, and if he wants something to happen, there is a good chance it will, although a day later the White House press office “clarified” the president’s comment by saying the administration did not intend to ask Congress to amend the statute.
Adding to the confusion, Thierry Breton, EU commissioner for the internal market, apparently missed the press conference and announced he would not attend the upcoming TTC meeting because not enough attention was being paid to the issues raised in the IRA. So, at this point, President Biden’s comments either solved everything or solved nothing. We shall have to wait and see.
Further, as the Europeans and Asians continue to make their arguments, Congress is also getting into the act and contributing to the confusion with some members suggesting accommodation is in order and others saying, “over my dead body.”
In light of these developments, it is beginning to look like this is going where I predicted some time ago. The lawyers will convince the administration it cannot credibly create a waiver out of thin air, and all eyes will turn to Congress, despite the administration’s apparent reluctance to go there. Congress—faced with foreign objections, presidential pressure, and the climate activists pointing out that standards no one, including U.S. producers, can currently meet—will not accelerate the conversion to EVs, and will eventually consider legislation not to change the rules, but to provide more time to comply with them. Like all good compromises, that will please no one—too much for labor, too little for companies and foreign governments—but it is probably the best that can be achieved. Ironically, if that course is chosen, it could actually increase the incentive to move production to the United States, which the administration has wanted from the beginning because it would give foreign producers the time they need to adjust their supply chains to accommodate more U.S. content. That would turn lemons into lemonade for the United States, although it would still leave European and Asian governments holding the peels.
William
Reinsch holds the Scholl Chair in International Business at the Center
for Strategic and International Studies in Washington, D.C.