DThe EU is working flat out with the American government on a plan to relax clauses in the Inflation Reduction Act that discriminate against European manufacturers. EU Commission President Ursula von der Leyen could present an agreement in principle during her visit next week, an EU official confirmed after talks in Washington. The US government’s top trade representative, Katherine Tai, said in a Bloomberg interview that the conflict with the EU would be settled.
At its core is a clause in the Inflation Reduction Act that grants buyers full subsidies for electric cars if initially 40 percent (later 80 percent) of so-called critical materials in the drive battery come from North America including Canada and Mexico, or from countries with which the US has a free trade agreement. The EU does not belong to this circle, nor do Japan and Great Britain.
But now a solution is emerging. The US Treasury Department pointed out the legal way when it made it clear that the term free trade agreement is not defined in law. This opened up scope for less comprehensive agreements below a classic free trade pact.
Time for an agreement is pressing
There is now a limited trade agreement between the two economic blocs on critical materials, which includes clauses on sustainable promotion and employee protection. The American government could fix such an agreement by government decree (executive order), the EU member states would have to ratify it. The procedure would have the advantage of leaving the US Congress outside. Democratic Senator Joe Manchin, one of the lead authors of the Inflation Reduction Act, has previously criticized attempts to water down the law and threatened legislative action. Brussels apparently does not expect any opposition to such an agreement from the EU countries.
The time for such an agreement is pressing. The US Treasury wants to make public in March how the subsidy rules are to be interpreted. Days to a few weeks are needed to formulate the text for the agreement, said the EU official. Ratification by the EU states could take more time.
From the EU’s point of view, such an agreement would be the second breakthrough in the negotiations with the United States: In December, both sides agreed that the rules for local production should not apply to leased vehicles. This allows American consumers to claim the full subsidy in the form of a $7,500 tax credit if they buy European electric cars and meet the other eligibility criteria.