Shifting to a New Trade Policy Paradigm: The US Inflation Reduction Act
By: Professor J Anthony Vanduzer, Faculty of Law, University of Ottawa
Introduction
The WTO and other trade treaties have underpinned globalization of economic activity following World War II by reducing barriers to trade and securing market access.1 In the wake of the financial crisis in 2007 and, more recently, production and delivery delays flowing from the COVID-19 pandemic, spikes in fuel and food prices caused by the war in Ukraine, and geo-political shifts (especially the trade war between the US and China), concerns regarding the costs and skepticism regarding the benefits of globalization have become widespread. In particular, security concerns, broadly conceived, are shifting how countries think about the interdependence of their economies that flows from globalization. In turn, changing views regarding globalization are profoundly affecting trade policy in some countries. Traditional trade priorities like expanding market access in a non-discriminatory way are being subordinated to security concerns and the promotion of domestic economies through industrial policy.
Nowhere is this more evident than in the 2022 US Inflation Reduction Act (IRA), the centre-piece of the Biden Administration’s climate policy. The IRA provides massive subsidies to support US transition to a zero-carbon economy. But subsidies to US consumers who buy electric vehicles and other kinds of “clean” vehicles (“Clean Vehicle Subsidies”) are only available to vehicles that meet minimum thresholds for content from the US and some other countries. These features are primarily intended to encourage investment in the US and boost US jobs and are contrary to the basic non-discrimination norms of the multilateral trading system.
China’s supply chain dominance motivated the Clean Vehicle Subsidies in the IRA
Why do the Clean Vehicle Subsidies take the form they do? To ensure that US consumers have American made clean vehicles to buy, US industry needs secure access to the batteries they require. The challenge for the US is that China dominates supply chains for clean vehicle batteries and the critical minerals, like cobalt and lithium, that are essential to build them. China has major investments in critical mineral-producing countries world-wide and has a strangle-hold on supply. China is also dominant in the refining and processing of critical minerals and the largest producer of battery components. The US and its allies, by contrast, have few critical minerals deposits, limited capacity to refine and process them, and relatively few battery production plants.
The concentration of clean vehicle supply chains in China means that the supply of minerals and technology essential to carbon transition is at risk from local events in China, like flooding as seen recently. But the more important risk, however, is from state action, such as restrictions on critical mineral exports—a strategy that China has engaged in the past as recently as this year. Congress passed the IRA with the goal, in part, of reducing US dependence on China for components of the clean energy supply chain.2
The IRA Clean Vehicle Subsidies
How does the IRA reduce dependence on China? The Clean Vehicle Subsidies are only available for vehicles that are assembled in North America and meet content requirements for their batteries and the critical minerals in them that favour the US as well as Canada, Mexico and to a lesser extent, other countries with which the US has a free trade agreement. To be eligible for the subsidies, 40% of the critical minerals in vehicle batteries must have been extracted or processed in the US or a country that has a free trade agreement with the US or recycled in North America. The sourcing percentage for critical minerals will increase to 80% by 2027. As well, 50% of the vehicle battery components must be produced or assembled in North America. This percentage increases to 100% by 2029. By 2024, a vehicle cannot have battery components manufactured or assembled by a Chinese entity. Beginning in 2025, qualifying vehicles’ batteries cannot contain critical minerals extracted, processed, or recycled by a Chinese entity.
These conditions on the availability of Clean Vehicle Subsidies are meant to shift critical minerals extraction and processing, battery production, and clean vehicle production away from China and to the US and some of its allies. One goal is arguably environmental. The US needs resilient supply chains to secure access to inputs for the production of clean vehicles. But the Clean Vehicle Subsidies also seek to encourage the reorganization of supply chains for reasons that have nothing to do with the environment or climate change, such as:
- enhancing US economic competitiveness in clean vehicles and components by attracting investment in clean vehicle manufacturing, battery production, and critical minerals extraction and processing and boosting US jobs;
- improving the position of the US in its geo-political competition with China; and
- protecting US national security.
International reaction to the Clean Vehicle Subsidies
When the IRA was first announced, a number of key US trading partners, including the EU, Japan, and China, reacted very negatively. One obvious concern was that Clean Vehicles Subsidies would not be available to clean vehicles manufactured in countries outside North America, impairing the competitive position of clean vehicle exports to the US market and encouraging the shift of investment in final assembly to North America. Investment in North American battery production will also be encouraged.
The incentives to invest in the US are especially strong because there are additional IRA subsidies for US battery production. Canada, a beneficiary of most of the preferences in the Clean Vehicle Subsidies, was concerned that the IRA would make the US the preferred North American destination for investment in the clean vehicle supply chain. Some countries, including Canada, have responded by adopting significant domestic subsidy programs, raising concerns about the risk of a subsidy war, including non-WTO compliant subsidies.
Conclusion
The IRA overall is undoubtedly an “historic commitment to build a clean energy economy.”3 But the discriminatory features of the Clean Vehicle Subsidies are motivated more by a US desire to secure supply chains for critical minerals, batteries, and clean vehicles with substantially reduced participation of China than carbon transition. The discriminatory design of the Clean Vehicle Subsidies is partly to ensure the resilience of these supply chains in the interests of securing access to the inputs needed for US clean vehicle production, but it is also to promote domestic economic growth and security and advance US geo-political aims in relation to China. The US has never before made subsidies contingent on local content requirements. These overtly discriminatory features of the Clean Vehicle Subsidies are not consistent with WTO rules. They strongly confirm America’s drift away from respect for the WTO rules and toward a discriminatory “America First” industrial policy. Indeed, the Clean Vehicle Subsidies demonstrate the emergence of a new paradigm for US trade policy in which considerations related to security, economic security and geo-politics take precedence over traditional trade policy priorities, setting a worrying precedent for the future of the rules-based multilateral trading system.
- J Anthony VanDuzer, “A Canadian Perspective on Fifty Years of International Economic Law” (2023) 46:1 Dal LJ 441, online: <digitalcommons.schulichlaw.dal.ca/cgi/viewcontent.cgi?article=2213&context=dlj> [perma.cc/6PRD-ALW7].
- The White House, Building a Clean Energy Economy: A Guidebook to the Inflation Reduction Act’s Investments in Clean Energy and Climate Action (Washington: The White House, 2023) at 26, online: <www.whitehouse.gov/wp-content/uploads/2022/12/Inflation-Reduction-Act-Guidebook.pdf > [perma.cc/PF6E-VM6N].
- Ibid at 2.