The Treasury Department proposed new tax guidance Friday that would open the door for more foreign exporters' electric vehicle products to receive expanded U.S. subsidies than initially expected.
The guidance represents a deescalation of an international trade conflict between the United States and allies in Europe and Asia that had been brewing for months after Congress passed the Inflation Reduction Act, which put new restrictions on eligibility for the electric vehicle tax designed to favor North American EV and battery products and to reshore manufacturing away from China.
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The Treasury Department's guidance, which comes after months of delay, details how the department intends to enforce the revamped consumer clean vehicle tax credit, which was rewritten in the Inflation Reduction Act to include the new strict content requirements for vehicles to be eligible.
The credit, when it was initially passed into law, sparked fury among allied nations and their manufacturers, who argued it tilted the scales against their products.
To be eligible for the full $7,500 tax credit, whose content and manufacturing requirements were included in the legislation at the demand of Sen. Joe Manchin (D-WV), a vehicle must be assembled in North America, and an increasing share of its battery components also must be manufactured or assembled in North America.
For 2023, that share is 50%, rising incrementally to reach 100% beginning in 2029.
The credit also requires that the critical minerals contained in the battery be extracted or processed in the U.S. or a country with which the United States has a free trade agreement or be recycled in North America. In 2023, that percentage is 40% and rises incrementally each year to reach 80% beginning in 2027.
The North American assembly requirement is already in effect. Vehicles sold on or after April 18, 2023, will be subject to the battery and minerals requirements, Treasury said.
Allied nations and their manufacturers, such as Mercedes-Benz and Hyundai, sought flexibility with the requirements so that their products would not be excluded, and Treasury is working some into implementation of the credit.
The department proposed Friday to implement a broad definition of the term "country with which the United States has a free trade agreement in effect" to include countries that don't have an active comprehensive FTA with the U.S., and it allows for new agreements on minerals reached between the U.S. and other countries to be covered.
"The Treasury Department and the IRS propose to identify the countries with which the United States has free trade agreements in effect for purposes [the tax credit] consistent with the statute’s purposes of promoting reliance on such supply chains and of providing eligible consumers with access to tax credits for the purchase of new clean vehicles," the guidance said.
Neither Japan nor European countries are among the 20 FTA countries with which the U.S. has a comprehensive agreement in place.
The Biden administration has been negotiating with both Japan and Europe after leaders expressed anger over the tax credit's exclusionary language, and Trade Representative Katherine Tai announced a new agreement with Japan on critical minerals on Tuesday.
Treasury's guidance referenced the agreement as an example of how a country may be covered for the credit's purposes, even if it does not have a comprehensive trade agreement in place.
Other elements of the guidance define key processes, such as "processing," which under the proposed guidance would include chemical or thermal processes involved in refining but exclude physical processes involved in refining.
The guidance also proposes to exclude "constituent materials" from the definition of "battery components," the latter of which much be manufactured in North America.
Such constituent materials which would then be protected from that manufacturing requirement include powders of cathode active materials, powders of anode active materials, foils, metals for solid electrodes, binders, electrolyte salts, and electrolyte additives.
Manchin, who has been angered by the guidance's delay and warned the administration against working in too much flexibility, said Friday that Treasury strayed from Congress's intent with the guidance.
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“It is horrific that the Administration continues to ignore the purpose of the law which is to bring manufacturing back to America and ensure we have reliable and secure supply chains," Manchin said, adding that the guidance would "cedes control to the Chinese Communist Party."
China dominates the global supply chain for EV batteries and minerals processing. More than 75% of global graphite extraction and battery production occurs in China. The Chinese also control the lion's share of global anode and cathode production, according to data from the International Energy Agency.