TL/DR –
The US’s Inflation Reduction Act (IRA) has caused a dispute with the EU over the eligibility of European-manufactured electric vehicles (EVs) for US EV tax credits and rebates. For EVs to fully qualify, 40% of the critical minerals used in the battery must come from the US or a country with which the US has a free trade agreement, a figure set to rise to 80% by 2027. The US and EU are reportedly nearing an agreement, which would allow European EVs to qualify for half of the EV rebate provided by the IRA, currently $3,750.
US-EU Trade Relations Strained over EV Tax Credits
US and EU relations have been strained due to the Inflation Reduction Act, which limits tax credits and rebates for EVs produced in Europe. Last week’s Trade and Technology Council meeting between Brussels and Washington may be the final opportunity before the next US Presidential election to address this issue.
The Act includes protections primarily against China, but also impacts EU importers. To qualify for tax benefits, 40% of critical battery minerals must come from the US or a country with a free trade agreement with the US. Currently, this is limited to Canada and Mexico, but the requirement will rise to 80% by 2027.
The TTC conference conclusion only mentioned that negotiations will continue. However, a basic agreement mentioned in a March 26 version has now been deleted.
Inflation Reduction Act Impact on EU
Since its 2022 creation, the EU has criticized the Inflation Reduction Act, blaming it for driving green tech companies away. The EU has eased its own subsidy regulations in response, while trying to negotiate with the US.
President Joe Biden and EU Commission President Ursula von der Leyen announced their intention to negotiate on critical mineral sourcing for EV batteries in March 2023. However, disagreements over the agreement’s structure have stalled the negotiations.
Reuters suggests disputes over labor standards could be a significant hurdle, with the US insisting on on-site inspections to ensure adherence.
Potential to Reach an Agreement
EU trade chief Valdis Dombrovskis told Reuters that with new EU rules on forced labor, there’s a possibility for a deal on critical minerals with the US. If an agreement is reached, EU-made EVs could be eligible for half the EV rebate provided by the IRA.
Without a raw materials partnership, a “Minerals Security Partnership Forum” has been established by EU and US representatives. The proposed minerals deal would cover cobalt, graphite, lithium, manganese, and nickel, key to greener and more digitalized economies.
The Global Impact
The EV revolution has disrupted global automobile manufacturing. China’s monopoly on the supply of battery materials and components for EVs has led China to file a complaint with the World Trade Organization alleging the IRA contradicts existing trade rules.
The expected mass adoption of EVs is causing a significant shift in the auto industry. An agreement between the US and EU seems likely, given what is at stake.
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