US Says No To EV Subsidies For Cars Built In EU
The US and the EU may be all warm and cozy inside their NATO mutual defense blanket, but America has given Europe the cold shoulder recently when it comes to cars manufactured on the Old Continent being eligible for US EV tax credits and rebates. A meeting between the two sides took place last week as part of the Trade and Technology Council, a regular format for dialogue between Brussels and Washington. Since it was the last such meeting before the next US presidential election in November, there may be no more chances to open up the Inflation Reduction Act to European manufacturers before that election takes place.
The US has added numerous protectionist rules to the Inflation Reduction Act, especially against China. However, EVs imported from the EU are also affected due to their place of production and the origin of the components and materials used to manufacture the batteries for those cars. For electric cars to be fully eligible, 40 percent of the critical minerals in the battery used must come from the US or a country with which Washington has a free trade agreement. To date, such a free trade agreement only exists with Canada and Mexico. The required share of critical minerals will increase to 80 percent by 2027.
Brussels and Washington have yet to achieve a breakthrough in the negotiations. The joint final declaration of the TTC meeting states only that the intention is to continue with negotiations. A version from March 26 made available to Handelsblatt still mentioned a “basic agreement,” but that passage has since been deleted without new language to replace it.
The IRA & The EU
The Inflation Reduction Act, which was signed into law in 2022, created the issues that are in dispute between the US and the EU. From the moment it became law, the European Union has criticized the IRA, saying it was leading to an exodus of green technology companies to the US. The EU took countermeasures by relaxing its own regulations on subsidies, while trying to reach an agreement with the US.
In mid-March, 2023, President Joe Biden and EU Commission President Ursula von der Leyen first announced their intention to negotiate an agreement on critical minerals for EV batteries. A short time later, the US government presented a concept paper. In May 2023, it was reported that negotiations between the US and the EU on the planned raw materials partnership were taking longer than expected.
Politico, citing insiders with knowledge of the negotiations, is reporting that there are disagreements over the formal structure of the agreement. While the US insisted on a binding pact, the EU was pushing for a more flexible agreement that would not require the approval of all 27 member states — a cumbersome and time consuming process. Behind closed doors, the EU is even said to have discussed whether the agreement was worthwhile at all. At another summit meeting between the US and the EU that took place in October 2023, the two sides again failed to reach an agreement.
Reuters reports that a key issue holding up an agreement involves commitments to labor standards. The US insists on the right to inspect individual sites to ensure those standards are being upheld. The issue is connected to the widely held belief that parts of the supply chain may involve forced labor requirements in some parts of China. Since China is the source for the vast majority of battery materials, the US is intent on verifying that fair labor standards are being upheld at every point in the supply chain if companies expect to qualify for benefits under the IRA.
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US & EU Are Nearing Agreement
New European Union rules that will ban products made using forced labor scheduled to go into effect later this year have raised the prospect of concluding a deal on critical minerals with the United States, EU trade chief Valdis Dombrovskis told Reuters on April 5, 2024. He went on to say the two sides were making progress in negotiations and that it was feasible for a deal to be completed this year, with the EU and the United States firmly aligned on labor rights and the elimination of forced labor. “The new EU legislation on eliminating forced labor is providing us also with some new openings in this regard. The question is basically how to make it fit it into both our legal systems,” he said.
If the US and the EU are able to agree to a raw materials partnership, electric vehicles from Europe would be eligible for half of the EV rebate provided by the IRA — currently $3,750. The full benefit of $7,500 is only available if the vehicles are intended for commercial use or leased in accordance with the provisions of the IRA. The leasing loophole was created by the Biden administration at the beginning of 2023 as a concession for European and South Korean car manufacturers. It was bitterly opposed by Senator Joe Manchin of West Virginia, who claimed it was directly contrary to the understanding he had with the administration when he voted in favor of the IRA.
According to Handelsblatt, the leasing loophole currently applies to around 50 to 60 percent of EVs imported from Germany. But if those manufacturers want to sell their electric vehicles directly to customers in a way that exploits the provisions of the IRA, they will need to assemble them in the United States.
In the absence of a raw materials partnership, representatives of the EU and the US government established a new working group called the “Minerals Security Partnership Forum” at their most recent meeting. The minerals deal is likely to cover cobalt, graphite, lithium, manganese, and nickel, all of which are critical to making economies more digital and green. The EU may not have extensive mining or processing facilities for battery materials, but an EU official said a minerals deal was still important, as it would see the EU treated more like Canada and Mexico in terms of supply chains. “This is about our status. It provides a signal to industry,” the official told Handelsblatt.
The Takeaway
The EV revolution is roiling automobile manufacturing worldwide. China took advantage of a lack of interest by Western countries to create a state sponsored juggernaut that gives China a virtual monopoly on the supply of battery materials and components for electric vehicles. The Inflation Reduction Act makes many of America’s important trading powers unhappy, but it has led to Volkswagen and Northvolt deciding to build important new battery factories in Canada, which has elected to match production credits provided by the IRA. The US and Europe are petrified by the prospect of a flood of cheap electric cars and have taken steps to prevent that from happening, which let China recently to file a a complaint with the World Trade Organization alleging the IRA is illegal under existing trade rules.
Suffice to say there is a seismic shift in the auto industry taking place as electric car and truck sales begin to reach the level where mass adoption takes place. There is a lot of jockeying for position among nations and manufacturers as they try to prepare for what comes next. It seems likely an agreement will be arrived at between the US and the EU eventually. There is too much at stake for it not to happen.
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