Domestic Content Requirements: Contrasting Treatment

The Biden administration has demonstrated that it can be flexible in carrying out its ‘Made in America’ agenda when necessary to accomplish other goals. This flexibility can be seen in its contrasting approaches to implementing domestic content requirements in the bipartisan infrastructure law and the Inflation Reduction Act. This post explores those differences.

In implementing the Infrastructure Investment and Jobs Act of 2021, the Biden administration is seeking to close what it regards as a “giant loophole” that has allowed infrastructure projects to be built with products (other than iron and steel) “sourced from anywhere in the world.” To that end, it is broadly applying the Act’s mandate to use American-made iron, steel, manufactured goods, and construction materials in infrastructure projects supported by federal funds, and in doing so, minimizing the use of foreign goods, even when the project is covered by a trade agreement.

In contrast, with respect to domestic content requirements in the Inflation Reduction Act (IRA), Biden’s team is taking a much more flexible approach. The IRA, heralded as the single largest climate investment in US history, provides a $7,500 tax credit for purchasers of new electric vehicles (EVs) if the vehicle is assembled in a North American plant and meets certain domestic content requirements relating to critical minerals and battery components. Half of the tax credit is available if a certain percentage by value (at least 40% beginning in 2023, increasing incrementally to 80% by 2027) of the EV battery’s critical minerals are extracted or processed in the United States or in any country with which the US has a free trade agreement, or recycled in North America. Another $3,750 of the tax credit is available if the battery components are manufactured or assembled in North America. 

European officials welcomed the IRA’s climate investments but criticized its discriminatory local content provisions and its manufacturing subsidies amid fears that the incentives might induce European firms to shift their production to the US. They also asserted the IRA’s local content provisions may violate WTO rules by favoring U.S.-based producers and suppliers. Other trading partners such as Japan, South Korea, and Britain expressed similar concerns.

The administration has taken measures to assuage foreign concerns. For example, at the end of 2022, the Treasury Department clarified that ‘commercial clean vehicles’ produced by European and other foreign carmakers will be eligible for IRA benefits if they are leased and not purchased. In a more significant move, the administration has redefined what is meant by an ‘FTA’ in order to expand the countries that meet the domestic content requirement for critical minerals. 

In proposed guidance, issued on April 17 (for public comment by June 16), the Treasury Department outlined a process for determining eligibility under the IRA’s critical mineral and battery component requirements. It included an important concession to US trading partners with its interpretation of what constitutes a country with an FTA with the US and eligibiity for the critical minerals portion of the tax credit. It defined qualifying countries as: (i) countries with which the US has “comprehensive FTAs,” described as “agreements covering substantially all trade in goods and services between the parties, including trade in critical minerals;” and (ii) additional countries based on certain criteria. Those criteria include whether the US has agreements on critical minerals with them to reduce, eliminate, or refrain from imposing trade barriers or export restrictions, or establishes high-standard trade-related disciplines (such as core labor and environmental protections).

While “free trade agreement” is not defined in the IRA or other statutes, it has to date been used to refer to comprehensive agreements negotiated under Trade Promotion Authority and implemented after approval by Congress. In support of Treasury’s proposed expansion of pacts that are considered to be an ‘FTA’ for purposes of the IRA, the US Trade Representative’s (USTR) website now lists two types of FTAs. One is “comprehensive free trade agreements,” listing the 20 countries with which the US has such FTAs. The other, which is new, is “an agreement focusing on free trade in critical minerals;” it lists Japan.

On March 28, 2023, the US-Japan Critical Minerals Agreement (CMA) was signed and immediately entered into force. It aims to strengthen, secure, and diversify critical minerals supply chains and promote the adoption of EV battery technologies. Its specific commitments include the following:

• Refrain from imposing export duties on critical minerals exports to the other country;

• Consult on domestic measures to address non-market policies and practices of other countries affecting critical minerals trade and global supply chains;

• Consult on best practices regarding review of critical minerals investments within their territories by foreign entities;

• Advance robust labor and environmental standards; and 

• Expand cooperation in efforts to ensure secure, sustainable, and equitable critical minerals supply chains. 

In its guidance, Treasury cited the US-Japan CMA as an example of an agreement that it expects to consider an FTA for the purpose of the IRA tax credit. It credited the agreement with “containing robust obligations to help ensure free trade in critical minerals.” Both Treasury and USTR commented that the CMA built on limited trade agreements that the US and Japan had entered during the Trump presidency.

On March 10, the US and European Commission presidents announced their intention to immediately begin negotiations on a targeted critical minerals agreement that would allow EU vehicles to be eligible for the EV credit despite the lack of a traditional FTA. The US wants a Japan-type deal with the EU. However, Borderlex reports that characterizing such an agreement as an FTA is difficult for the EU, since it does not fit its approach to FTAs. (The two partners were unsuccessful in earlier efforts to negotiate an FTA, the Transatlantic Trade and Investment Partnership.) In addition to a critical minerals agreement, the EU is seeking flexibility on the IRA’s local assembly requirement.

Other countries are lining up for their own critical minerals agreement with the US, including Indonesia and the Philippines.

The administration’s flexibility with respect to an element of its ‘Made in America’ agenda is an encouraging development. However, it remains to be seen whether its expansion of the concept of an ‘FTA’ will set a precedent for good or for ill or prompt action by Congress. Several members have criticized the administration’s categorization of the US-Japan CAM as an FTA. Members have also contended that the administration lacks the authority to unilaterally enter into FTAs.

Jean Heilman Grier

May 3, 2023

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