By Ana Swanson and Alan Rappeport
American and European officials meeting in Washington this week are trying to agree on the outlines of a limited trade deal that would allow European companies to qualify for some of the benefits of the Biden administration’s new climate legislation, in a bid to assuage a major source of tension between the allies.
The governments hope to announce their intention to begin negotiations over an agreement focusing on the critical minerals that go into electric vehicle batteries as soon as Friday, when President Joe Biden is set to meet with Ursula von der Leyen, the president of the European Commission, at the White House.
U.S. officials have also been carrying out similar conversations with the governments of Japan and the United Kingdom to see if some type of limited new agreement could be struck that would also offer Japanese and British companies certain benefits under the law.
At the center of the debate is the Inflation Reduction Act, a $370 billion bill that President Joe Biden signed last year to try to mitigate climate change by transforming U.S. power generation and the car industry. The bill offers generous tax credits to American consumers to purchase new and used electric vehicles, but it imposes tough restrictions on the types of vehicles that can benefit from these rules, in ways that disadvantage foreign carmakers.
The law specifies that, to receive a tax credit, cars must be assembled in North America and source the material for their batteries from North America, or from countries with which the United States has a free-trade agreement. Despite close ties, the United States does not have a free-trade agreement with the European Union, Japan or the United Kingdom.
The passage of the law has prompted harsh criticism from allies, who say companies in their countries will be penalized. European officials have been particularly outspoken, arguing that the bill comes at a delicate time for a European economy that is already contending with disruptions from the war in Ukraine and skyrocketing energy prices.
The dispute has raised the prospect of a subsidy war between the United States and the European Union, and threatened to strain relations at a time when both sides are trying to maintain a united front against Russia.
“I don’t think U.S. government officials anticipated this level of pushback and this level of disdain against this massive climate bill,” said Olga Khakova, the deputy director for European energy security at the Atlantic Council’s Global Energy Center. But she said emotions had now subsided a bit. “We are in this mode right now where we want to find a solution.”
The rift has set off a scramble within the U.S. government to try to scrape together some type of new trade deal that could be signed with allied governments to allow their companies to benefit from some of the law’s tax credits. With such an agreement, for example, a company based in the European Union could help to supply lithium, nickel or other battery materials for electric vehicles made in North America.
A Treasury official said that any new trade agreements would be evaluated during a rule-making process to ensure that they comply with the critical mineral requirements in the legislation. The official pointed to Chinese control over the critical mineral supply as a reason for the need for the United States to team up with like-minded countries.
A U.S. official said that the administration had been engaged in consultations with Congress about such an agreement, and that those briefings, and conversations with unions and private industry, would continue in the coming weeks.
The Treasury Department, in a white paper published in December, said that the Inflation Reduction Act did not define the term “free trade agreement,” and that the Treasury secretary could identify additional free-trade agreements for the purposes of the critical-minerals requirement going forward.
Treasury Secretary Janet Yellen said last month that the Biden administration was considering limited trade deals focused on critical minerals as a solution, and she suggested that these could be done without the approval of Congress. She emphasized that the intent of the law was not for the United States to steal jobs from Europe and that the law was meant to be aligned with the administration’s “friend-shoring” agenda.
“I think the word ‘free trade’ was meant to mean reliable friends and partners with whom we can feel we have secure supply chains,” Yellen said on the sidelines of the Group of 20 finance ministers meetings in India last month. “We’ve been very clear with Europe that this is not a subsidy war.”
With input from the Office of the U.S. Trade Representative, officials from the Treasury Department have prepared a document spelling out what kind of deal would constitute a “free-trade agreement” for the purposes of the legislation, according to people familiar with the plans.
It is not clear how quickly the solution could be completed, however, as the white paper said the Treasury Department and the IRS would seek public comment on “what criteria should be used to identify free-trade agreements for the purposes of the critical-minerals requirement.”
Political appetite for striking new free-trade deals has diminished in the United States in recent years, in part because of a perception that such pacts have helped multinational corporations move factories and jobs offshore.
Efforts to strike expansive trade deals with Europe and a group of Asian countries during the Obama administration fizzled, in part because of that political opposition. During the Trump administration, the United States signed a series of limited trade deals with South Korea, Japan and China that were carried out through executive orders, not by congressional approval.
It remains unclear how Congress will respond. Some lawmakers have expressed concerns that the administration is not adhering to the law’s original intent of promoting U.S. manufacturing. Many also disapprove of efforts by the executive branch to bypass congressional authority in approving trade deals.
But Democrats may also be sympathetic to the effort to smooth over relations with Europeans, and reluctant to reopen debate over their signature climate legislation. And at least one key lawmaker, Sen. Joe Manchin, D-W.Va., has said he didn’t realize that the European Union lacked a free-trade agreement with the United States in the first place.
Still, the dispute has elicited some criticism that American officials are going to great lengths to mollify Europeans, especially given that the European Union imposes some trade barriers on the United States, like a relatively high tariff on imported U.S. cars.
John G. Murphy, the senior vice president for international policy at the U.S. Chamber of Commerce, said it was his group’s view that the Biden administration should fight against various EU policies that discriminate against American companies “with the same doggedness European officials have brought to their complaints about the IRA.”