As lawmakers continue to devise ways to address climate change, and other environmental policy priorities they must also consider U.S. international trading obligations that could prevent the implementation or modification of proposed measures.
To ensure compliance with international trade regulations and to achieve the desired climate change outcomes, lawmakers must draft all environmental measures solely with the intent of promoting and achieving these objectives.
In the House-passed edition of the Build Back Better (BBB), ActIn an apparent effort to promote green technology, Democrats proposed raising the federal electric vehicle tax credit from $7,500 to $12,500. However, the consumer must purchase an eligible EV manufactured in America where workers are represented by unions and the batteries meet domestic content requirements.
Maximum credit is $8,000 for vehicles that are not assembled at a U.S. unionized plant. $7,500 for cars that are not made in the United States. The bill also excludes all imported vehicles from credit eligibility beginning in 2027.
While this language might support some House Democrats’ policy objectives, such strengthening unions or other policies, these modifications to tax credit not only undermine their climate goals, but also violate U.S. commitments of national treatment (i.e., to not discriminate against goods of other countries), which the U.S. has committed to in the World Trade Organization as well as other bilateral trade treaties.
If the U.S. only offers a higher tax credit for cars made at U.S. union facilities with U.S.-made battery packs, it could lead to retaliatory tariffs against U.S. exports by trading partners.
Some might argue that if a portion of a measure addresses environmental concerns, it is sufficient to exempt the U.S. form any international treaty obligations. It is not as simple as that. The measure must be very narrowly crafted in order to successfully rely upon the environmental exemptions contained in these agreements.
Labor has no relationship with the environment. Therefore, tying the EV credit to labor requirements makes it appear that the credit is a way of arbitrary or unjustifiable discrimination or a disguised trade restriction on foreign trade.
Alternative Policy Ideas
Below are policy alternatives to the federal credit as proposed in the BBB Act. These would be limited to expediting the switch from EVs and achieving emission reduction goals. This would not run afoul U.S. trade commitments, or risking reducing the impact of the measure.
1. A tax credit for EV buyers that is solely focused on encouraging EV purchase.
As mentioned above, the federal government offers a $7500 tax credit for consumers when they buy an electric vehicle. However, this tax credit is subject to a threshold that automakers must meet before it is available for EVs manufactured by automakers that have sold more than 200,000 EVs.
It is possible to create an expanded tax credit by removing or lifting the cap on the tax credit for EV purchases. This will ensure that it is available for all vehicles and consumers.
Alternately, the federal government could increase the EV tax credit in a similar manner to the BBB Act proposal (which also eliminated a limit), provided such action did not include provisions related to other goals such as tying production in U.S. unionized plants to the credit and excluding the EVs our trading partners.
2. Additional support and promotion of the development EV infrastructure.
The Infrastructure Investment and Jobs Act, (IIJA), was signed into law in November 2021. It provided $7.5 billion for investments to EV-charging infrastructure. This will allow for the development of a nationwide charging network. However, additional funding and policy updates at both the federal and state levels are required to ensure that residential charging infrastructure is built and public charging networks are developed. This will allow Americans to decide that EVs are better than gas-powered vehicles.
These proposals, we believe, would directly achieve the goals related to emissions reductions and protect the environment more generally through the promotion EVs without violating international trade laws. If the policies are not implemented, our trading partners could view them as discriminatory of their products or as a disguised restriction to global trade.
It is crucial to comply with these trade requirements in order to develop long-term, effective and sustainable policies that promote green initiatives in America.
This article does NOT necessarily reflect the opinions of The Bureau of National Affairs, Inc., publisher of Bloomberg Law, Bloomberg Tax, or its owners.
Information about the Author
Stephen KhoAkin Gump is his international trade partner. He splits his time between Washington D.C. (DC) and Geneva (Geneva). He advises both government and private sector clients on international trade and investment issues, including World Trade Organization dispute resolution, free trade agreements, and bilateral investment treaty negotiation.
Kenneth J. MarkowitzAkin Gumps Washington, D.C., is his office. He is also the co-leader for the firm’s climate group. He provides advice to multinational clients on issues such as greenhouse gas mitigation, carbon pricing and regulatory compliance.
Sarah SprinkleAkin Gump’s international trading practice is her area of expertise. She advises U.S. clients and foreign clients on international trade law and policy issues related to unfair trade practices, free trading agreements, compliance with U.S. trade laws, and regulations.
Gabriel HarrisonAkin Gumps Public Law and Policy’s senior public policy specialist. He assists attorneys and policy advisors in the practice by providing analysis of federal policy actions, legislation, and guidance on global supply chain, climate change, and international trade.
Stacey H. Mitchell, an AkinGump partner Thor PetersenThis Insight was created by an associate of the firm.
