Will Europe fight back against Congress’ proposed electric vehicle tax credits? Don’t bet against

Congress is have your ears full these days America’s trading partners on the tax credits it offers on electric vehicles (EVs).

The complaint is that these tax credits, as written, are biased against imports and go against world trade rules. Canada and Mexico, for example, are talk about challenge United States-Mexico-Canada Agreement (USMCA) tax credits. Others, including Korea and Japan, say they could file disputes with the World Trade Organization (WTO). Last week the European Union (EU) wrote to the Senate leadership that, unless rewritten, electric vehicle tax credits will “unjustifiably discriminate” against European cars and auto parts. This letter is a game-changer, as the EU is presumably ready to strike back.

First of all. As I wrote recently, the tax credits are $ 12,500 per vehicle, but with the small protectionist print. Build Back Better proposes that $ 4,500 of this sum be contingent on the car being made by unionized workers, and that an additional $ 500 go to electric vehicles with at least 50% American content in value and an American battery. The total tax credit of $ 12,500 would require both by 2027. The Senate version ties $ 2,500 to final assembly done by unionized workers, and an additional $ 2,500 if the manufacturing plant is located in the USA. By 2026, however, the full tax credit would require both boxes to be checked.

The surprise is not that Congress wrote the tax credits for electric vehicles to promote local content. Other countries are doing it too. Canada, for example, has been in trouble for a “feed-in tariff” that the Ontario government has also based on the use of local content, drawing the wrath of Japan, and a big deal. WTO loss.

On the contrary, the surprise is that there is nothing subtle, even remotely, in the terms of the proposed tax credits for electric vehicles. Of course, clean energy, as industrial policy, is a politically powerful drink, but these provisions are amateurish.

The United States has no choice but to do something with Canada and Mexico because neither of the President BidenJoe Biden Photos of the Week: Former Sen. Dole is in the State, Capitol Sunset and Instagrinch Overnight Health Care – Brought to you by AstraZeneca and Friends of Cancer Research – Court quits Texas abortion ban, clears Overnight Energy & Environment lawsuits – Brought to you by ExxonMobil – Biden orders to end overseas coal funding MOREVE’s goals can be achieved without these countries helping out. Japan and Korea, along with other countries, could win at the WTO, but an appeal would leave the decision in a legal vacuum, as the United States blocks the Appellate Body (AB). Europe, however, has several unique cards to play.

First, the EU has a one-sided stick for such an occasion. It is Regulation 2021/167, and it paves the way for Europe to “quickly suspend concessions”, that is to say retaliate, while BS is not working. Additionally, the text provides for cross retaliation, meaning that in response to Congressional tax credits for electric vehicles, the EU could retaliate against US services and intellectual property. On purpose, the WTO would be loath to allow this.

Second, the EU has a nuclear option: to challenge the USMCA at the WTO. In 2019, the EU to entertain the idea of ​​going to the WTO and arguing that the USMCA was, under its “rules of origin” on cars, more trade restrictive than the North American Free Trade Agreement (NAFTA). That’s because the USMCA makes duty-free treatment conditional on 75% North American content by value, compared to 62.5% under NAFTA, making it less likely that manufacturers will source. in pieces in Europe. Tax credits for electric vehicles would only make matters worse and could push Brussels to the brink. As for the follow-up of a shutdown, see EU regulation 2021/167.

The United States needs to make lemonade out of these EV tax credit lemons. US electric vehicle exporters will be on the losing side of similar incentives abroad. Either as part of a larger effort under the WTO Environmental Goods Agreement or separately, tax credits for electric vehicles should be disciplined globally.

Marc L. Busch is Karl F. Landegger Professor of International Trade Diplomacy at the Walsh School of Foreign Service at Georgetown University. Follow him on Twitter @marclbusch.