International trade agreements may have been violated.
Last month, Congress passed the Inflation Reduction Act. On face value, it seems to be a great idea with the goal of boosting domestic vehicle production, thereby bolstering the American economy and increasing jobs. It's already started to work, as numerous automakers are hurriedly setting up production facilities on US soil or repurposing existing ones, which means a huge influx of US investment. But not everyone is on board. South Korea and Germany have raised concerns and noted that this legislation breaks economic alliances and discriminates against foreign nations and their automakers.
Japan is also not impressed. Japanese newspaper Nikkei has reported that the nation's Industry Minister Yasutoshi Nishimura has told his American counterpart that the new law on tax credits for EVs may violate international law. Is he right? Let's see.
Japan's Ministry of Economy, Trade and Industry confirmed that the minister raised these concerns when meeting with US Commerce Secretary Gina Raimondo in Los Angeles. The two met while the Japanese minister was participating in Indo-Pacific Economic Framework talks on Wednesday.
Similarly, Reuters reports that a spokesperson for the Japan Automobile Manufacturers Association has voiced worries over the Act, too, saying that the association "will keep a close watch on future developments and will consult and consider how to respond to them in cooperation with the government."
While Toyota and Honda have made big investments in America in response to the IRA, Nissan is poring over the 725-page document to look for loopholes. Clearly, this Act is making things very difficult for the majority of foreign automakers to remain competitive in the burgeoning EV market.
For many zealous patriots, the answer to this challenge is simple albeit arrogant and exclusionary: "If you don't like it, go home!" But the purpose of the United Nations, the World Trade Organization, the International Chamber of Commerce, et cetera, is to bring the global community closer together. The US relies on exports just as much as other nations do, but is the passing of the Act truly a legal contravention of some sort, and what impact could it have on the US economy in the long run?
To find out, we looked for clarification on various international trade agreements and laws. This led us to the website of the Coalition for a Prosperous America (CPA) and its evaluation of the impact that the IRA has had on the multilateral trading system, which came into effect on October 30, 1947. The following information is based on the report of the CPA.
The multilateral trading system is an informal name for the General Agreement on Tariffs and Trade (GATT), the global agreement on intellectual property (TRIPS), and several other smaller agreements. These are overseen by the World Trade Organization (WTO) and constitute a single undertaking, meaning that the agreements cannot be agreed to in part - "a nation must agree to all the responsibilities of all the agreements to get the benefits."
The GATT is the oldest and most significant of these agreements because it sets "Most Favored Nation" (MFN) tariff rates for every participating country. These are essentially a promise that a nation won't charge more for a given product, but of the 164 WTO members, the US has the lowest bound tariff rates with an average of 3.4%. The CPA calls this "economic suicide." We won't go into too much detail, but in the 1980s and 1990s, the US chose to combine the GATT and TRIPS as a single undertaking. As a result, rights for intellectual property holders abroad were prioritized over domestic production in US trade policy.
Here's where it gets interesting. The IRA moves away from the "IP rights abroad" era and essentially ignores the multilateral trading system, says the CPA. How so? The answer can be found in the third article of the GATT, an excerpt from which specifically says that WTO members' tax codes "should not be applied to imported or domestic products so as to afford protection to domestic production."
Let's look back at the IRA. For an electric vehicle to qualify for the full $7,500, it must - among other things - have final assembly in North America, and 40% of the critical materials in the battery must be sourced from either the US or one of the 20 countries with which America has a free trade agreement. That percentage will increase to 50% in 2024 and rise by 10% every year until 2027, when 80% of the materials must be sourced from the US or the nations with which it has an FTA.
There's a lot more information in the CPA report (linked at the bottom of this article), but although the IRA appears to be a phenomenal stimulant for the US economy, it essentially forces a $7,500 tariff on cars that are not produced in the US. And it seems that the US could not claim that this decision is based on a bigger issue like national security.
By only allowing battery materials to come from America's FTA partners, the rest of the WTO's member states are essentially shunned and sanctioned. When it comes down to it, the IRA appears to be an explicit rejection of the fundamental purpose of the multilateral trading system and alienates the rest of the global community.
At this stage, several foreign nations are looking to discuss the IRA with President Biden's government, but the vast majority demand that, for the US to remain part of the WTO, it must remove these so-called sanctions. If no progress is made, Japan, South Korea, and Germany will likely file a complaint with the WTO.
Europe and Asia would almost certainly win a WTO lawsuit and would be within their rights to retaliate with their own tariffs against the US if changes are still not forthcoming, thus damaging the US economy. We already saw this when President Trump imposed tariffs on aluminum and steel imports, and the EU responded with 25% tariffs on agricultural products.
On the one hand, a blanket tax credit applicable to all EVs prioritizes environmental sustainability and makes it easier for you to get behind the wheel of an Audi e-tron, for example, but the IRA is clearly boosting the US economy in the near term.
America can do nothing and absorb huge tariffs, withdraw from the WTO in a Brexit-like move, or remove all domestic content requirements from the IRA. The last would be easiest in terms of international politics, but domestically, things could go south.
Alternatively, the US could remain part of the WTO and simply negotiate higher tariff rates as part of the GATT. We haven't seen the end of this debacle, and some major changes could be coming to the Act soon.