The sourcing of critical minerals has been a topic of focus for the automotive and associated industries recently, especially pertaining to the minerals used in the production of batteries for electric vehicles (EV) that could be subject to a potential $7,500 tax credit under the Inflation Reduction Act. For vehicles to qualify for this tax credit, EV batteries are required to have at least 40% of their minerals sourced domestically or from free-trade partners. The U.S. has begun expanding domestic critical mineral processing in response to the provisions by enacting the Defense Production Act to bolster domestic output of critical minerals to reduce the reliance on China for supply, and awarding funding for domestic critical mineral processing.
Major trading partners have opposed the EV tax credits and have urged revisions to the provisions in the Inflation Reduction Act including Canada, Mexico, EU, UK, South Korea, and Japan, among other countries and trading blocs since the tax credits have been argued to undermine the USMCA provisions, and currently only apples to countries that have a current free-trade agreement with the U.S.
Japan does not currently have a formal free-trade agreement established with the U.S. However, On March 28, 2023, the United States Trade Representative announced a critical minerals agreement with Japan “with respect to the critical minerals sector to facilitate trade, promote fair competition and market-oriented conditions for trade in critical minerals, advance robust labor and environmental standards, and cooperate in efforts to ensure secure, transparent, sustainable, and equitable critical minerals supply chains.”
Specifically, the U.S. and Japan mutually agree not to impose export duties on critical minerals, cooperate in investment reviews within their countries for critical minerals, work together in potential effective and appropriate domestic measures to address non-market policies pertaining to trade in critical minerals and critical minerals supply chains, and establish labor and environmental standards, among other things. Additionally, provisions prohibit the sourcing of minerals from foreign entities of concern. Consequently, EV batteries containing critical minerals sourced from Japan would qualify for the tax credits outlined in the Inflation Reduction Act.
USTR Katherine Tai stated, “Today’s announcement is proof of President Biden’s commitment to building resilient and secure supply chains. Japan is one of our most valued trading partners and this agreement will enable us to deepen our existing bilateral relationship. This is a welcome moment as the United States continues to work with our allies and partners to strengthen supply chains for critical minerals, including through the Inflation Reduction Act.”
The agreement announcement has received opposition; House Ways and Means Committee Chairman, Representative Jason Smith (R-MO) stated, "The Biden Administration is clearly happy to hand out U.S. taxpayer dollars to foreign nations and risk American jobs solely to advance its radical ‘green’ energy agenda. This so-called ‘free trade agreement’ with Japan does nothing to shift critical mineral supply chains away from China.” Ways and Means Committee Ranking Member Richard E. Neal (D-MA) and Senate Finance Committee Chair Ron Wyden (D-OR) also released a statement reading, "The critical minerals agreement announced today is unacceptable. Without enforceable environmental or labor protections, the Administration abandons worker-centric trade policy and jeopardizes our climate work by opening the door for another environmental catastrophe. Mining is a challenging business, with ongoing violations of workers’ rights, child labor, forced labor, environmental degradation, and toxic chemical exposure all present in the industry. Even among allies, the United States should only enter into agreements that account for the realities of an industry, learn from past agreements, and raise standards."
USTR faced criticism from Congress that the USTR lacks the Constitutional authority to enter the U.S. into trade agreements without Congressional approval. The agreement appears to be the first of several agreements expected with U.S. trading partners in response to the controversial EV tax credits. President Biden reportedly agreed to prioritize qualifying critical minerals processed, mined or recycled in the EU under Inflation Reduction Act standards for electric vehicle batteries. A similar agreement with the EU is expected in the near future.
It remains to be seen whether Congressional objections will prevent these deals from being implemented.
Should you have any questions on EV tax credits, please contact any attorney at Barnes, Richardson & Colburn LLP.