Will the EU Get a Cut of the EV Tax Credits in the Inflation Reduction Act?

Because it wants one bad!

The European Union is taking issue with U.S. tax credits meant to encourage Americans to buy electric vehicles (EV) that passed in the Inflation Reduction Act (IRA). What’s its deal?!

It claims the credits, which as of now are only available for vehicles that are assembled in North America and include a lot of American-made components, are in violation of World Trade Organization rules that require countries to treat foreign and domestic firms in the same way.

As such, the EU has been lobbying the Biden administration to create a carveout so that European EVs can qualify for the credit too, and it appears it has made some headway toward getting one.

It’s not surprising the EU is trying to loosen the rules in the IRA. The American auto market is very big and a lot of EVs are gonna get sold in it in the coming years. European automakers with EV models want a piece of that action, and their EVs won’t be as competitive if they’re more expensive. The South Korean government – which has major automaker Hyundai and its subsidiary Kia to worry about – is pressing hard for changes, too.

But a big point of the IRA and its subsidies for American-made EVs was to induce more domestic manufacturing. The legislation was designed to create a more resilient industrial ecosystem by encouraging more auto and auto parts factories in the United States. It won’t be politically feasible to just gut those domestic component and assembly rules.  

So what’s gonna happen?

What’s likely to happen is that aforementioned compromise, not unlike the deal over European steel imports the Biden administration and the EU cut last year. In return for the U.S. lowering its Section 232 tariffs on European steel and aluminum, the EU dropped its retaliatory tariffs on things like Harley-Davidsons and Kentucky bourbon and agreed to a tariff-rate quota. That kept the American steel industry from harm and the Europeans left happy.

The point is, common ground was found between these two parties not even a year ago and a deal got struck.

Now, while it’s unclear what the Biden administration would extract from the EU in return for a European EV carveout to the IRA … you get the idea they’re already thinking about it. From the New York Times:

The Biden administration has downplayed the tensions, saying that it is relying on its strong relationships with other governments to talk through those differences and fight the bigger battle of climate change.

In an Oct. 7 speech at the Roosevelt Institute, a Washington think tank, Ms. Tai called out the European Union’s Carbon Border Adjustment Mechanism — a proposal that would encourage cleaner manufacturing by levying a tax on imported goods based on how many greenhouse gasses their production emits — saying that those European measure could also cause tensions with allies. But the United States and Europe should work through those differences to combat climate change together, she added.

“As we seek to reduce our carbon footprints and benefit our industries, we’re each going to do things that cause anxiety, whether it’s the Carbon Border Adjustment Mechanism or the Inflation Reduction Act. But this also creates an opportunity for us to work together, to tackle this existential crisis that threatens all of us,” Ms. Tai said.

Whatever it is, the Europeans are probably gonna get moving soon on some kinda industrial policy of its own. The European auto industry is bracing for sustained competition from Chinese EV manufacturers like BYD, whose cars were among the main attractions at the recent Paris Auto Show and who is being actively courted by some EU members looking to land a big, expensive auto plant investment. And it’s got the locals worried, reports Bloomberg.

“Chinese manufacturers are welcomed in Europe with a red carpet,” Carlos Tavares, CEO of the Jeep, Peugeot and Fiat maker, told reporters in Paris. “It’s not like this that we’re welcomed in China.”