From: Jon Johnson
To: Canadian Trade Watchers
Date: November 28, 2022
Re: US Inflation Reduction Act – Canada Relieved While Japan, EU, Korea and UK Concerned
The Canadian auto industry breathed a collective sigh of relief when the Biden administration successfully enacted the Inflation Reduction Act of 2022, rather than the openly discriminatory Build Back Better Act.
The Inflation Reduction Act broadens the $7,500 electric vehicle subsidy provisions to cover automobiles assembled in Canada. The countries in which “applicable critical materials” – various grades of aluminum, graphite, lithium, manganese, and many other battery materials – may be extracted, processed or recycled include Canada. The countries in which components in EV batteries can be produced also include Canada. This means that EVs produced in Canada can be eligible for the subsidy
However, other major US trading partners – Japan, the EU, Korea, and the UK – have objected to the act.
In response to a US Treasury Department and Internal Revenue Service request for comments on credits for clean vehicles, Japan raised numerous objections, including about the condition that the extraction, processing, manufacture, or assembly of critical minerals or battery components be done in North America or countries with which the US has a free trade agreement.
The EU also responded to the request for comments with objections to the Inflation Reduction Act, including its discriminatory provisions respecting “clean vehicles” but extending well beyond that. The EU maintains that the “financial incentives deployed to meet the United States’ climate objectives unfairly tilt the playing field to the advantage of production and investment in the United States at the expense of the European Union and other trading partners of the United States.”
Korea’s response sets out specific answers to the questions raised in the US request. Unlike Japan and the EU, Korea (like Canada) has a free trade agreement with the US, and Korea wants assurance that the expression “free trade agreement” will be broadly interpreted to include as many US trading partners as possible. Korea’s response raises other specific questions as to how the US legislation should be applied but, unlike Japan’s and the EU’s responses, does not raise questions about violation of international agreements.
Meanwhile, the UK has not responded directly to the US request. However, in a Washington speech this month, Trade Secretary Kemi Badenoch raised concerns about the Inflation Reduction Act.
“The substantial new tax credits for electric cars, not only bars vehicles made in the UK from the US market, but it also affects vehicles made in the US by UK manufacturers,” she warned.
On October 24, US Treasury Secretary Janet Yellen said the US would take other countries’ concerns about new electric vehicle tax credits “into account,” but must “implement the law that was written.” As she put it, the legislation “is what it is.” This is potentially a significant impediment to a negotiated settlement because the provisions of concern to Japan, the EU, and the UK are largely embedded in the legislation and can only be changed by amending the legislation. Korea, with its free trade agreement with the US, may see a greater scope for accommodation.
Any amendments to the Act, however, would need congressional approval and as control of the House passes, White House thoughts of constructive legislative dialogue with the new Republican majority leadership may have diminished, at least judging from some of the early rhetoric. One can only hope Republicans may consider that a constructive rather than a destructive approach could increase their 2024 chances.
For its part, Canada may be tempted to lobby to preserve its supplier position under the current – and hard-won – arrangement that gives it and Mexico a privileged position. But in the rapidly transforming auto industry, supply chains will remain global; Canada’s competitiveness could also suffer from an inability to import qualifying components from outside North America.
The objections to the US scheme by many of our common trade partners could well build steam, and Canada will have to continually assess the possible impacts on its competitive position.
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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