US-China trade talks break down over Inflation Reduction Act energy tax credits

China's Ministry of Commerce on July 15 announced it would be escalating a trade dispute with the US regarding the Inflation Reduction Act's tax credits for electric vehicles and renewable energy projects, which China argues favors domestically produced components over imports in violation of international trade rules.

The US and China had been in talks since April regarding the Inflation Reduction Act (IRA) at the World Trade Organization (WTO), where China had called the IRA subsidies a set of unfair trade measures that go against the organization's rules and bylaws. But China now says the talks have broken down, requiring the WTO to step in and begin a formal dispute negotiation.

China's commerce ministry said in a statement that the IRA "artificially sets trade barriers, and pushes up the costs of green energy transition" by excluding "products from WTO members such as China." It further urged the US to abide by WTO rules "and stop abusing its industrial policies to undermine international cooperation on climate change."

In March, the ministry sent a letter to the US delegation at the WTO, requesting that it enter into talks on the IRA subsidies, which the US agreed to in an April 5 communique. At the time, the US emphasized that acceptance of China's invitation should not be seen as agreeing with China's claims that the IRA measures constitute a dispute requiring resolution.

China's March 26 letter requesting the talks claims that the IRA is in violation of a previous agreement between WTO members to reduce and mitigate the effects of climate change, which allows for non-discriminatory subsidies to be used to transition to clean energy.

"However, subsidies that violate the WTO agreement, including subsidies that are contingent upon the use of domestic over imported goods or that otherwise discriminate against imported goods, remain prohibited and threaten to undermine international cooperation on reducing and mitigating the effects of climate change," the letter contended.

"The subsidies at issue in this request for consultations are of this type," China added. "They are discriminatory, protectionist, and contrary to WTO rules. They do nothing to advance the shared interest that all members have in addressing climate change and are to be condemned."

China raised concerns with five specific IRA tax credits: the $3,750 electric vehicle tax credit; the investment tax credit for renewable energy property; the clean electricity investment tax credit for renewables; the production tax credit for electricity from renewables; and the clean electricity production tax credit.

US materials requirement

China's biggest concern is with the IRA's domestic content provisions, which require that components for EVs and renewables manufactured and deployed in the US be made from materials extracted in the US.

For example, to qualify for the EV credit, each qualifying vehicle must be manufactured in North America. Vehicles that meet the IRA's critical minerals requirement can earn a $3,750 tax credit. Meeting domestic battery component requirements can earn a separate $3,750 tax credit.

After 2024, China explains that "a clean vehicle will not qualify for the critical minerals component" of the tax credit "if it contains any critical minerals that were 'extracted, processed, or recycled by a foreign entity of concern'" that includes the People's Republic of China.

Likewise, the investment tax credit and production tax credit programs for renewable energy that existed prior to the IRA's passage were modified under the 2022 law to include bonus subsidy elements that are contingent upon the use of domestic components over those imported from other countries.

Meanwhile, a group of climate and trade advocates issued a statement calling for a moratorium on all climate-related trade dispute challenges at the WTO to encourage global investment in low-carbon energy technologies.

The group, the Trade Justice Education Fund, in a July 16 press release called China's attack on the IRA hypocritical, and supported the Biden administration's right to oppose China's dispute.

"More so, this attack should serve as the impetus for the US and other nations to begin working with one another towards an immediate moratorium on the use of trade challenges against climate action," Arthur Stamoulis, the fund's executive director, said in the press release.