Leibowitz: Clean Car Tax Credit Sends Mixed Trade Message

These cars are in various stages of development. Congress wanted to kick-start production and have them compete with traditional vehicles. Did the tax incentive do a good job?

As is common with tax incentives, the clean vehicle tax credit came with strings attached. The strings cast some doubt on the effectiveness of the legislation. For example, only vehicles assembled in North America (or a country with which the US has a free trade agreement) qualify for the tax credit. Moreover, not all clean vehicles are eligible for the tax credit. There’s an income limit and a price limit on it. High-income buyers need not apply.

If the overriding purpose of the tax credit were to encourage more production and sales of clean vehicles, these limitations would not be there. But wait—there’s more. To claim the tax credit, the major components of electric vehicles must also be assembled in North America, including the batteries that power them.

Electric vehicle production depends largely on lithium-ion batteries that contain rare elements. Mining lithium can be expensive and environmentally challenging. And as the auto fleet electrifies, production of lithium and lithium-ion batteries will have to scale up enormously. To build in energy security for clean vehicles, the mining and manufacturing must be in North America.

So, which is more important: getting more electric vehicles in garages in the US and around the world, or creating American jobs? The IRA serves both masters—but serving one goal necessarily weakens others.

Note that electric vehicles won’t have to be made in the United States to benefit from the credit—it only has to be made in North America, which includes Canada and Mexico too. The battery production requirement also appears to include batteries made in North America. Eventually, a certain percentage of lithium and other “critical materials” will have to be produced in North America. By 2028, all batteries for cars that are eligible for the credit will need to be made here. But aren’t other countries with firm ties to the US also a piece of the energy security puzzle—Japan, the UK, the EU, South Korea?

Clearly, the drafters of the IRA wanted to “stretch” the ability of North American producers to make more clean vehicles. The production process should encourage developing more secure (and local) sources of production. Look at the massive supply chain disruptions of 2021 and 2022.

Again, there are qualifications. Each of the necessary minerals and production centers for clean vehicles will entail environmental costs. That could create obstacles in communities that are unwilling to pay those costs.

If we make it easier to localize production by subsidizing it, we will get more of it, and we’ll get it faster. It is another example of government policy to expand favored industries. But traditional industries will try to slow that down. It is not clear that the $7,500 tax credit will really do the job in the face of such resistance.

Global trade rules are another obstacle to the domestic assembly requirements. Requiring manufacturing within North America will exclude cars assembled in the factories of important US allies: Japan, South Korea, the UK and the European Union. These places have already objected. Katherine Tai, the US Trade Representative, is spending the long weekend in Korea to discuss this issue.

The World Trade Organization will be busy handling dispute settlement cases, no doubt. Requiring North American production has a good chance of violating international trade rules. Of course, the lack of an effective and binding dispute settlement system means that these disputes will remain unresolved. The hurt feelings will therefore persist.

If climate change is the biggest issue facing the planet, it is clearly a global problem. And it is not one the United States can (or should) solve by itself. The US should want new clean vehicles and technologies to be available everywhere. Picture a world where every country subsidized clean vehicles only if they were locally made. Clean electric vehicles would be more scarce and much more expensive. The climate effects would last longer and be harder to solve.

Tax breaks are blunt instruments. The local production requirements for tax credits sidestep another global imperative—the challenge of Russia’s war on Ukraine. Our friends that support our global view should be treated better than our enemies in as many ways as possible. New markets for clean vehicles will reduce demand for oil and gas, which will help Ukraine.

International solidarity suggests that treating friends better than adversaries is good policy. The clean vehicle tax credit discriminates against our friends. They deserve a better deal, it seems to me, especially in these uncertain times.

Lewis Leibowitz

The Law Office of Lewis E. Leibowitz
5335 Wisconsin Avenue, N.W., Suite 440
Washington, D.C. 20015
Phone: (202) 617-2675
Mobile: (202) 250-1551
E-mail: lewis.leibowitz@lellawoffice.com