U.S. pumps the brakes on EU clean car deal

Sep 24, 2023

Trade

Brussels had hoped for a quick resolution of its spat with Washington over electric vehicle tax credits. It's taking longer than expected.

For the U.S., a deal will need real commitments to fortify the supply of critical minerals used to make electric car batteries in exchange for the tax perks created by Democrats' climate law last year. | Keith Srakocic/AP Photo

By Barbara Moens, Steven Overly and Sarah Anne Aarup

05/22/2023 04:30 AM EDT

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Washington and Brussels are at odds over a deal to make European automakers eligible for U.S. electric vehicle tax credits.

The European Union has been pressing for a more flexible agreement on the critical minerals used in electric car batteries that won't require the time-consuming approval of its 27 member countries.

But that doesn't work for the Biden administration, which is under immense pressure from lawmakers to broker a binding pact. The U.S. wants Europe to make commitments that boost the supply of those minerals in exchange for the tax perks, which were part of the historic climate law Democrats passed last year.

The impasse, described to POLITICO by a dozen officials on both sides of the Atlantic, is likely to drag out negotiations into the summer, leaving European automakers at a disadvantage in the U.S. car market in the meantime. And it threatens to exacerbate the rift over U.S. efforts to promote domestic EV manufacturing at a time when the longtime allies aim to present a united front against climate change, China's market power and Russia's war in Ukraine.

U.S. President Joe Biden and EU President Ursula von der Leyen launched the critical minerals talks at the White House on March 10. But hopes have largely faded that an agreement will be finalized before a summit of top U.S. and EU officials at the end of the month.

The EU's top trade civil servant, Sabine Weyand, said earlier this month that the EU is "in intensive discussions with the U.S. in order to secure this agreement, but we also are in intensive discussions with our member states, because this is not something you can do from one day to the next. So we are trying to do this as fast as possible."

Biden's landmark Inflation Reduction Act was designed to give American manufacturing a boost in its competition with Beijing and, simultaneously, wean the U.S. off of its dependence on Chinese minerals for the green transition. China, for instance, processes 85 percent of the world's rare earth minerals, which are crucial components in everything from electric cars to smartphones to wind turbines.

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To achieve that aim, the U.S. law, passed in August 2022, created a tax credit for electric vehicles with batteries made with critical minerals harvested or processed in the U.S. or countries with which the U.S. has a free trade agreement. Countries including Australia, Canada and South Korea all have formal free trade agreements with the U.S., making them eligible for the credits, but major auto-producing nations such as Japan, Germany, France and other members of the EU do not.

In March, the U.S. struck a truce with Japan in the form of an agreement that prevents both sides from imposing tariffs on five critical minerals used in electric car batteries. EU trade chief Valdis Dombrovskis subsequently described the Japan deal as a "good basis" for the U.S.-EU talks, and several people who have seen the initial U.S. proposal say it's similar.

But so far, the EU and U.S. have not been able to reach a comparable agreement.

One major sticking point: The way the Inflation Reduction Act is written creates a semantic imperative for Brussels and Washington to call any minerals deal a "free trade agreement," even though such pacts have traditionally required the approval of the U.S. Congress and, in the European Union, the bloc's member countries as well as the European Parliament.

To avoid that lengthy ratification process, Brussels is pushing Washington to instead opt for a "non-binding instrument," according to four EU diplomats, speaking on the condition of anonymity as they were not authorized to speak freely on the issue. Others have suggested calling it an "executive" agreement. "In this case, substance follows form," explained one EU diplomat. "The more binding the instrument is, the more scrutiny it will get from EU countries."

But any nonbinding arrangement appears to be a non-starter in the U.S. A senior administration official, who spoke on the condition of anonymity to discuss ongoing negotiations, told POLITICO "there have to be binding commitments on trade" for the pact to qualify as a "free trade agreement" under the terms of the Inflation Reduction Act, a definition set by the Treasury Department.

The Japan critical minerals deal satisfied that requirement because it was considered an addition to a 2019 trade pact, which was not a traditional free trade agreement approved by Congress. However, it contained commitments for both countries to lower tariffs on agricultural and industrial goods, the U.S. official noted. There is no comparable existing agreement with the EU or any other country.

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But the issue is also politically sensitive for the Biden administration after members of Congress strongly objected to the Japan critical minerals deal and accused the administration of undermining congressional authority by allowing the Treasury Department to designate free trade agreements without putting such deals to lawmakers for a vote.

"Leaving aside whether Treasury's guidance on the definition of ‘free trade agreement’ is appropriate, repeating either the substance or the process associated with the Japan critical minerals agreement would be troubling," one Democratic congressional aide, who was not authorized to speak publicly, told POLITICO.

A second congressional staffer added that lawmakers channeled their frustrations directly to the White House and the Office of the U.S. Trade Representative with a clear message that the Japan agreement should not be repeated with the EU.

"Many members will tell you that if the agreement that they are negotiating is a free trade agreement used to give out incentives included in the Inflation Reduction Act that has to come to Congress for a vote," said the second staffer, who was also not authorized to talk to reporters. "You definitely can't dole out tax credits without congressional approval. That's the position of many members of Congress."

The Biden administration heard the frustration, the senior administration official said, though there are no plans "at this time" to submit the final EU agreement for a vote. "It very much does inform, together with our legal constraints, the path we’re choosing and we will be consulting [lawmakers] on an ongoing basis throughout the negotiations with the EU," the official said.

The political dynamic in the U.S. and the disagreement between U.S. and EU officials over the legal structure of the agreement makes it less and less likely that a deal can be struck before top EU and U.S. trade officials meet for the biannual Trade and Tech Council in Sweden on May 30 and 31. The four EU diplomats and a U.S. official dismissed the chances of getting a deal in time.

U.S. negotiators "haven't really had that in our mind as a deadline," the administration official said, but the EU had been optimistic a deal could be wrapped up in time. Still, no one wants to exclude the possibility of a last-minute political push making it possible to finish the deal. The draft statement of the Trade and Tech Council, as seen by POLITICO, has a placeholder for the agreement.

If talks continue beyond the TTC meeting, another potential deadline could be the upcoming EU-U.S. summit, which is set for the fall.

But behind closed doors, some EU diplomats are even wondering whether the deal is still worth it. After all, the political discussion about the effect of the Inflation Reduction Act has grown quieter in recent months. "If the scope the U.S. proposes is not sufficient, then it doesn't make sense for us to negotiate anything," said one of the EU diplomats mentioned above, speaking on the condition of anonymity as they were not authorized to speak freely on the issue.

Nevertheless, Dombrovskis and his counterpart, U.S. Trade Representative Katherine Tai, are meeting monthly to push for progress on critical minerals and other trans-Atlantic issues.

According to a U.S. readout of their most recent virtual meeting, both sides stressed that "an ambitious U.S.-EU CMA would further our shared goals of boosting our mineral production and processing and expanding access to sources of critical minerals that are sustainable, trusted, and free of labor abuses."

Moens and Aarup reported from Brussels. Overly reported from Washington. Camille Gijs and Mark Scott contributed to this report.

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