From: Jon Johnson
To: The US Senate
Date: November 25, 2021
Re: Biden Administration’s Flawed Bill H.R. 5376 – US international obligations must be respected
Without any Republican support, the House has now passed the Biden Administration’s Bill H. R. 5376. This legislation requires confirmation by the Senate before becoming law. The Senate can approve this legislation as is, demand changes, or refuse to approve.
Section 136401 of this proposed legislation should raise major concerns in your minds about unnecessarily raising the costs of manufacturing electric vehicles in North America. Under NAFTA, and now with the USMCA (referred to as CUSMA in Canada), Canada, the US and Mexico have developed a highly integrated automotive industry, with efficiencies achieved through the ability of automotive producers to source parts from throughout the CUSMA territories.
With climate change concerns, plug-in electric drive motor vehicles are becoming increasingly important for North American producers. Section 136401 of Bill H.R. 5376 provides tax credits to purchasers of such vehicles. However, the tax credit is available only if the vehicle satisfies “domestic assembly qualifications” and “domestic content qualifications.” For “domestic assembly qualifications” to be satisfied, final assembly must occur at a plant, factory, or other place which is operating under a collective bargaining agreement negotiated by certain defined employee organizations. For “domestic content qualifications” to be satisfied, the manufacturer must utilize at least 50-percent domestic (i.e. US) content in component parts for final assembly, and the vehicle must be powered by US manufactured battery cells.
These requirements clearly violate the WTO Agreement on Subsidies and Countervailing Measures that prohibits tax credits conditioned on the use of domestic over imported goods. Canada, Mexico, and other US trading partners could successfully challenge these provisions under the WTO dispute settlement procedures. However, the US administration could (as has occurred in the past) appeal an adverse WTO panel decision to the now non-existent Appellate Body and put the whole matter into limbo.
This scenario would create uncertainty for the industry about a rule that will constrict its ability to compete in this fast-growing segment, and slow down consumer adoption by raising the cost of these vehicles.
CUSMA has effective dispute settlement procedures that the US cannot avoid. Article 1410(2) prohibits advantages (such as tax credits) for investors that are conditional on granting preferences to domestic goods. This CUSMA provision would apply if the purchaser of an electric vehicle were using the vehicle in connection with a business, making the purchaser an “investor.” However, this would not apply to a purchaser buying the vehicle for his or her own personal use.
The recently enacted bipartisan Infrastructure Investment and Jobs Act requires that certain key provisions be “applied in a manner consistent with United States obligations under international agreements.” This solves the issue of complying with international obligations by making this a requirement of US law.
Some provisions of Bill H.R. 5376 are subject to the requirement that they be applied in a manner consistent with international agreements. For example, there are six provisions respecting [DS1] electricity generation subject to this requirement. H.R. 5376 seems to cherry pick certain provisions to be applied in a manner consistent with international agreements but not others.
Bill H.R. 5376 should make clear that all provisions of international agreements must be respected. The Senate should not approve this legislation unless this major flaw is corrected.
Jon Johnson is a former advisor to the Canadian government during NAFTA negotiations and is a Senior Fellow at the C.D. Howe Institute.
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The views expressed here are those of the author. The C.D. Howe Institute does not take corporate positions on policy matters.
