U.S. Moves to Appease Allies on EV Subsidies

The documents were released to clarify which vehicles will qualify for the program that provides up to $7,500 per vehicle in tax incentives under the Inflation Reduction Act. According to one document, which the Treasury Department released in question-answer format, the commercial EV program also provides $7,500 in tax credits for cars and SUVs. 

The European Union, South Korea, Japan and the U.K. have complained that the local-vehicle assembly and battery-content requirements discriminated against their companies and that they might violate international trade rules. Most EVs from foreign manufacturers don’t qualify for the consumer tax credit as they are assembled overseas. 

The number of North American-built vehicles eligible for tax credits will increase significantly after Jan. 1. The new program replaces a previous scheme that provided up to $7,500 for electric or plug-in hybrid vehicles as long as the manufacturer hadn’t sold more than 200,000 vehicles. Under the new program, the cap will be lifted, allowing vehicles from top U.S. EV manufacturers, including

Tesla Inc.

and

General Motors Corp.

, to qualify for incentives again. 

In addition to the local assembly rule, the new program requires EVs to have at least 40% of their critical minerals for batteries sourced in the U.S. or countries that have free-trade agreements with the U.S., starting in 2023. That threshold is set to rise to 80% by 2026. 

At least 50% of the parts and components in the batteries also must be manufactured or assembled in North America by 2024, with that percentage rising gradually to 100% by 2028.

The Treasury Department also suggested it might expand the list of countries eligible for the critical minerals requirement, an issue that has particularly irked allies, such as the EU and Japan, that don’t have traditional free-trade agreements with the U.S. 

One of the documents released Thursday pointed out that because the legislation doesn’t define what a free-trade agreement is, the Treasury Department might consider other types of trade agreements to expand the eligibility. The department didn’t provide examples of such agreements, but trade lawyers have suggested that the 2019 bilateral trade agreement with Japan and the World Trade Organization’s government procurement agreement could be candidates.  

Following a meeting with French President

Emmanuel Macron

in early December, President Biden said the U.S. could offer what he called tweaks to the program to make it easier for European countries to participate. 

The final decision on the critical minerals requirement won’t be available until the Treasury Department proposes rules on battery contents in March. The department said last week it would delay the issuance of the battery-content rules, while allowing other aspects of the program to go into effect on Jan. 1 as scheduled.

Once the battery rules are issued, many, if not all, North American-built vehicles eligible for the full $7,500 credit on Jan. 1 are expected to see the incentive amount decrease because of high hurdles imposed by the critical minerals requirement. 

Write to Yuka Hayashi at [email protected]