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Janet Yellen Expects EV Subsidy Rules to Prompt New Trade Deals

Treasury Secretary

Janet Yellen

said Japan and the European Union would need to negotiate new trade agreements with the U.S. to meet the mineral-sourcing requirements for an overhauled electric-vehicle tax subsidy.

As part of the 2022 Inflation Reduction Act, the U.S. revamped a tax credit for consumers who buy electric vehicles in hopes of reducing U.S. reliance on China. To qualify for the full $7,500 tax credit, among other requirements, 40% of the value of the minerals in an electric vehicle’s battery must come from a country that has a free-trade agreement with the U.S. That amount is set to rise to 80% after 2026.

The requirements have irked allies that don’t have traditional trade agreements with the U.S. Some trade experts and European officials raised the possibility that because the Treasury hasn’t settled which trade deals count, the EU and Japan could be considered to already meet the requirement.

But Ms. Yellen said in an interview that new trade deals would likely be necessary.

“We don’t have something with Europe and Japan that we consider right now to be a free-trade area, but we could negotiate an agreement, ” she said. “For example, there could be some agreement that has to do with trade in minerals and critical minerals and so forth.”

“If countries signed up for it, we could find that something like that could qualify in the future as a free-trade area. We’re thinking along those lines,” she added.

European officials have vigorously criticized the requirements for the electric-vehicle subsidies as well as the broader clean-energy incentives included in the Inflation Reduction Act, the climate, tax and healthcare law Congress passed last summer with only Democratic support. 

In addition to the mineral requirements, at least 50% of the value of a vehicle’s battery components must be manufactured or assembled in North America to qualify for the full tax credit. That percentage rises to 100% after 2028. 

The vehicles must also be assembled in North America. The credit is restricted to vehicles sold for less than $80,000 for most car types, and consumers face income limits for claiming the credit. 

President Biden’s Inflation Reduction Act calls for at least 50% of an electric vehicle’s battery to be made in the U.S. to qualify for a federal discount. WSJ’s George Downs breaks down a battery to explain why that is going to be a challenge. Illustration: George Downs

The Treasury delayed the release of its final rules on the electric-vehicle tax credit until March as it sorts through technical and diplomatic issues. The credit’s battery component and mineral requirements won’t go into effect until the rules are put into place.

In a white paper on the issue published in December, the Treasury said that Congress didn’t define what constitutes a free-trade agreement and said it would seek guidance on how to make that definition. It said the term would at least encompass agreements the U.S. currently has with 20 countries, including Australia, Chile and Canada. China is currently a leading source of critical minerals, a source of concern for U.S. officials.

When it released initial guidance on the tax credit’s rules in December, the Treasury said that electric vehicles purchased for lease wouldn’t have to meet the same requirements to be eligible for the $7,500 credit.

That decision heartened European officials, who said it would allow their car manufacturers to better compete in the U.S. auto market. Sen. Joe Manchin (D., W.Va.), a centrist who was the key to congressional negotiations over the subsidies, said exempting leased vehicles from the rules violated the law’s intent and said he would introduce new legislation addressing the issue.

Write to Andrew Duehren at andrew.duehren@wsj.com

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