What are Free Trade Agreements?
The US Treasury Department and the Internal Revenue Service recently addressed this issue when providing guidance on electric vehicle (EV) tax credits under the Inflation Reduction Act (IRA). what is the answer? Unknown. The Treasury and he IRS he recognizes two types. Critical Mineral-specific trade largely prevents export bans.
What’s the point of this exercise? To keep China out of tax credits.
Easy to say, hard to do. Consider the current negotiations between Washington and Brussels on an important minerals deal. The European Union (EU) sources 98% of its rare earth elements (REE) entirely from China. The EU mines cobalt but cannot process it due to its own environmental regulations. A deal between the US and the EU may avert the trade disputes caused by the IRA, but other than that it will do little.
And how much does it cost? Boasting a long list of traditional free-trade agreements, Brussels has questions about the content of key mineral deals. Especially since the Biden administration has hinted that it wants to implement the US-EU deal by executive order.
All this for a $7,500 tax credit?
Here’s the back story.
EV is one of President Joe Biden’s priorities. He wants to tally up half of all new car sales by 2030. To reach this goal, Tesla would have to make 20 million EVs a year, up from his current production of 500,000. This requires staggering amounts of rare earth elements and other metals. The company needs his 40% of all permanent magnets mined worldwide to make enough motors, and nearly double the cobalt currently available worldwide for batteries. Tesla also uses 30% of the nickel on the planet, and he uses four times the amount of copper per EV he needs to build the average non-EV car.
But the inconvenient truth is that almost all of these REEs and other metals are imported. About 80% of REE is sourced from China, including his 80% of the world’s neodymium, which is used to make permanent magnets for EV motors. Half of the cobalt on earth for batteries comes from the Democratic Republic of the Congo. Even with reliable sources in the US, there are supply chain risks. For example, the United States imports aluminum from Canada, but Canada does not mine any of the bauxite used to make aluminum. This exposes the US to “hold-up” problems upstream.
The EV tax credit has sparked outrage among US trading partners. reshoringAs Treasury Secretary Janet Yellen explains, the tax credit will increase the number of EV consumers, create “American manufacturing jobs,” and contribute to the country’s “energy and national security.” The purpose is that.
There are two $3,750 tax credits. One for critical minerals and one for battery components. Both require an “applicable percentage” of the value of the extraction or processing of these minerals to take place in the United States, North America, or countries with which the United States has free trade agreements. This last permission was added later to the IRA, but was never defined.
So, what is a free trade agreement?
First, there are agreements like the US-Canada-Mexico Agreement that cover “substantially all trade.” Although the language is from the WTO and has no definition of what it means, it is clear that these are what the Treasury Department and the IRS consider “traditional” free trade agreements.
Second, like the US-Japan Critical Minerals Agreement (CMA), it does not cover virtually all trade, and there may be agreements that do one or more of the following: (B) prevent new trade barriers; (C) establish high standards in “key areas affecting trade,” including labor and environmental standards; and/or (D) prohibit export restrictions;
The Treasury and IRS explained that the CMA checks boxes (C) and (D).This is because free trade agreements no All four criteria must be met. Importantly, (D) is arguably the most important key, as (A) must be included in traditional free trade agreements or it would be illegal under the WTO.
Importantly, the WTO already prohibits export embargoes pursuant to (D). The WTO dispute China-Rare Earths has received a lot of attention in this regard. The point of this overall exercise in redefining free trade agreements, therefore, seems to be to exclude China.REEs and other metals continue to come directly or indirectly from China and other non-aligned countries. It is inconceivable because the
Back to the proposed US-EU deal. The definition of a free trade agreement is twisted to get a deal with the EU, which is even more dependent on China than the US for REEs.
Without trade, there is no future for EVs. Importing REEs and other metals is the lifeblood of your business. The global race to manufacture and recycle EVs will put allies and adversaries to the test. The neighbor beggar tax credit will only force the country back into her WTO. Just like the Treasury Department and her IRS slipped back in defining free trade agreements.
Mark L. Bush is the Carl F. Landegger Professor of International Business Diplomacy at the Walsh School of Foreign Service at Georgetown University and a Global Fellow of the Wahba Institute for Strategic and Competitive Studies at the Wilson Center. Follow him on Twitter @marclbusch
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