Analysts, stakeholders tamp down US-EU trade war worries over EV tax credits

Although tensions remain high, prospects for a US-EU "Transatlantic trade war" precipitated by green energy subsidies in the Inflation Reduction Act have likely been overblown, analysts and stakeholders said Jan. 19.

Representatives of EU-based think tanks and industry groups, who spoke on condition of anonymity, said the IRA created a degree of nervousness as the US promoted many of the same green initiatives that EU member states backed, but at a greater scale, speed, and impact.

The EU's gripes stemmed mostly from language in the IRA that requires the final assembly of electric vehicles to take place in North America and for batteries of those vehicles to be built with minerals mined or recycled in North America or by a US trade partner for buyers to qualify for a tax credit of up to $7,500.

While some EU companies investigated how they could benefit by creating or expanding operations in the US, others braced for billions of dollars of diverted investment and suggested that the US was violating World Trade Organization rules.

Tensions diminishing

Those think tanks and industry groups now see the risk of trade disputes diminishing, given the high degree of coordinated discussion between officials of the EU and the US and shared recognition that a trade war would harm both sides. New assessments, including a Jan. 18 paper from the German Economic Institute, have also shown that some of their early concerns may have been exaggerated.

Concerns persist, however, as domestic production and manufacturing requirements are still viewed as discriminatory by some in Europe and elsewhere that believe such incentives should provide all companies an opportunity to deliver on climate commitments. And the large scale of the subsidies also made some anxious that it could lead to a global subsidies race.

The consensus among EU think tanks and trade groups on a Jan. 19 panel coalesced around not rushing a response from the EU until more study has been conducted to give a clear picture of the actual impacts of the US tax provisions at issue.

Benjamin Salisbury, director of research and senior policy analyst at Height Capital Markets, in a Jan. 19 research note, offered a similar sentiment to those EU stakeholders, as he noted considerable "progress being made by EU and US negotiators to resolve differences before restrictive IRA EV tax credit provisions go into effect."

"In our view, the 'Transatlantic trade war' framing may distract the public from what is really going on, namely that EU and EU member state politicians are using [the World Economic Forum in Davos, Switzerland] as a soapbox to articulate their divergent positions on internal EU industrial policy," he said.

Salisbury contended that "the risk of a trade war is relatively low and largely depends on unintended consequences, including miscalculation as policymakers and stakeholders grapple with changing rules of the road."

Emerging 'friend-shoring' strategy

Salisbury added that the Biden administration is likely to put greater emphasis on the emerging strategy of "friend-shoring" as China, rather than US allies in Europe and the Pacific, was the likely target of the new tax policy's more onerous requirements.

Friend-shoring, a term used by US Treasury Secretary Janet Yellen last year, refers to relocating supply chains so that manufacturing occurs in politically friendly and reliable countries.

Information the Treasury Department put out last month to bring some clarity to its implementation plans for EV provisions of the IRA was seen as being in line with that concept, although it triggered harsh criticism from Senator Joe Manchin, the moderate West Virginia Democrat that leads the Senate Energy and Natural Resources Committee and was behind the IRA provisions at issue.

The Treasury white paper, issued Dec. 29, addressed the critical minerals and battery components requirements and the process for determining whether vehicles qualify under these requirements.

The white paper, intended to shed light on the anticipated direction of the Treasury and the Internal Revenue Service, advocates flexible guidelines that allow a broad interpretation of "free-trade agreement" that would make minerals from or processed in 20 countries immediately eligible under the critical mineral requirement, with the potential to add more countries to that list.

It also promotes flexibility for automakers to use foreign-manufactured battery intermediates as long as that aspect makes up less than 50% of the battery's final value.

Analysts at Rapidan Energy Group said Treasury's proposal would help shield the tax provisions from WTO challenges. "However, a future Republican president could reverse these free trade designations which, combined with a collapsing EV growth outlook, undermines the peak oil demand narrative."

Guidance coming in March

Treasury specified in a press release and the white paper itself that the document was not to be considered as formal guidance, which is notable as the IRA's critical mineral and battery component requirements only apply to vehicles placed in service after the IRS proposes guidance interpreting the law.

Rather, Treasury has said that proposed guidance triggering those requirements will not be issued until March.

Manchin accused Treasury of ignoring a deadline to release that guidance by the end of 2022. "This is an unacceptable outcome and I call on Treasury to pause the implementation of both commercial and new consumer EV tax credits until they have issued the appropriate guidance," he said in a Dec. 29 statement.

Manchin committed to introducing legislation in the coming weeks that he said would clarify the original intent of the law. He contends that the Treasury's "dangerous interpretation" of the IRA provisions "bends to the desires of the companies looking for loopholes" and puts the US on a path of continued reliance on China and Russia for materials and manufacturing.