Taking as an example one category of activity that the IRA seeks to catalyze – manufacturing of solar energy equipment – what are those key lessons and how are EU policymakers missing them?

Industrial policy lesson: help with operating expenses, not just capital expenses, is essential.

Capital formation is not the main barrier to growing solar manufacturing in Europe and North America. The “cost penalty” associated with manufacturing in the United States versus manufacturing in Asia is large enough that, prior to the IRA’s enactment, an investor awarded a “free” U.S. solar cell or module factory could have expected to operate that factory at a continuous loss as far as the eye could see. This is why the U.S. policy mix, post-IRA, now includes per-unit-of-output benefits properly sized to close the ongoing gap. Cap-ex help may be necessary, but it is nowhere near sufficient. This applies in the EU as well.

The EU discussion, sadly, has been almost exclusively about cap-ex incentives. This was apparent from arguments about how much EU-level money was available, whether various unused amounts of structural funds could be repurposed, whether new borrowing by the EU itself could occur, etc. Rather than looking for a specific number of euros to award for factory-building, the EU and its Member States could have made space (by amending state aid rules) for new factories to operate for ten or more years free of corporate income taxation. This step alone would cover a good portion of the ongoing cost disadvantage of manufacturing in Europe versus manufacturing in Asia.

Political economy lesson #1: the easiest-to-use fiscal tactic is tax expenditures that don’t forgo much actual revenue.

The $369 billion number assigned to the IRA’s renewable energy title is not real. It reflects scorers’ guesses about private companies’ likely behavior (increasing activity in response to incentives), about corporate profits that theoretically would result, and about the “revenue loss” associated with not taxing (or lightly taxing) those profits over a 10-year period. In the case of solar manufacturing, the calculations mostly involve new factories that, absent the IRA, would never be built. So the tax revenue the US government is “foregoing” through, for example, the new Section 45X credit (a subset of the $369 billion) is not revenue that it could, in a counter-factual scenario, hope to collect. Congressional scoring doesn’t use this kind of rigorous counter-factual analysis, but legislators understand that the actual revenue cost is essentially zero.

Dollars like these are the politically-easiest ones to “spend” on industrial policy. When the government promises not to collect money it could never collect anyway, no one else’s taxes have to rise. Democrats passed the IRA on their own, but Republicans’ motivation to sabotage it will be muted.

Deficit hawks understand that the “foregone” tax revenues were never really accessible anyway. And small-government conservatives might not hate the concept of new industrial facilities being born inside a brand new low-corporate-income-tax bubble within the US economy.

EU policy discussions show no sign of heeding this lesson. Instead of alleviating corporate taxes imposed at the Member State level, policymakers focused on identifying EU-level resources which quickly proved to be a morass. Delivering incentives through the tax system works differently in EU Member States than in the United States, but it is not impossible.

Political economy lesson #2: address deployment incentives and manufacturing incentives in tandem.

Green power generation bodog casino and green manufacturing are linked politically. Significant government incentives are still needed to increase renewables’ share of a developed country energy mix. These deployment incentives, while justified, are expensive. Political support for them is difficult to sustain when the equipment being connected principally comes from – and the related manufacturing jobs primarily exist in – another country. The IRA political strategy recognized this linkage and credibly set out a vision of new solar installations full of made-in-America equipment. The EU’s latest commitments on solar deployment were made independently of any strategy or vision for related manufacturing.

Political economy lesson #3: Worrying too much about where investments will locate is a recipe for getting nothing done.

The IRA passed with exclusively Democratic support, even though it was apparent that much of the new manufacturing investment would land in America’s “red” states. In the EU, some of the most promising early threads of public conversation on a robust industrial policy response seem to have fallen victim to infighting: there was no way to guarantee that incentivized manufacturing investments would spread evenly across poorer and richer Member States.

There are understandable reasons, especially after Brexit, for EU policymakers to take “unity” into account in everything they do. The US has a milder version of this “unity” problem and is accordingly better-situated for deploying industrial policy at a continental level. Challenges notwithstanding, the EU needs to find a way forward. A successful energy transition seems imperative, and it will need expensive government incentives, and public support for those will be difficult to achieve (much less sustain) if all the new renewable energy installations are full of equipment made outside Europe.

If the EU draws the right lessons from America’s experience with the IRA, and applies those lessons strategically in its own industrial policy formation, success is not out of reach. Circumstances are more challenging in some respects but easier in others, given that carbon pricing is already present in the EU.

A re-set and reinvigoration of the EU policy discussion is in order.

John Magnus, President, TradeWins LLC. 

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At their meeting in January, the three North American leaders said they intended “to forge stronger regional supply chains, as well as promote targeted investment” in strategic sectors like semiconductors and batteries. Seeing North America as a competitiveness zone — one that helps producers in all three nations meet or beat foreign competition — is why we did NAFTA in the first place. But it has taken a resurgence of great-power competition, this time with China, to make the United States fully appreciate the benefits of integration with its neighbours, so much so that Mexico and Canada receive preferential treatment under the Inflation Reduction Act’s tax credits and other supports, much to the frustration of our other trading partners. North American trade Bodog Poker ties, far from stoking fears of Ross Perot’s “giant sucking sound,” are now a vital part of U.S. economic development strategy.

This a unique moment for North America. U.S. policymakers can promote the competitive boost from trilaterally integrated supply chains with much less political blowback than in the past. This new political dynamic comes courtesy of the dramatic push to diversify sourcing from China but is aided by the unprecedented labour protections of USMCA/CUSMA, which include wage-enhancing rules of origin for autos and a “rapid response mechanism” to address unfair labour practices. Both lend political cover to a robust North American manufacturing, technology and services strategy.

Even in an environment driven by industrial policy and nearshoring, however, our nations need a coherent plan to attract investment to North America. It is not enough to chase subsidy dollars and assume companies eager to reduce their China footprint will commit to long-term investment here. Our three countries must create an investment climate characterized by certainty and predictability. And we must ensure that the agreement’s revived dispute settlement mechanism, which languished under NAFTA, is respected, preserved, and protected like the crown jewel it should be — particularly with the World Trade Organization dispute system having been severely hobbled.

North American dispute settlement is now the most efficient path to resolve challenges, with four panels requested thus far (dairy twice), a fresh consultation request from the U.S. over Mexico’s limitation of genetically modified corn imports and one looming over discriminatory Canadian digital policy. So far, all three countries have taken pains to reinforce dispute settlement’s credibility, with proceedings being managed professionally and generally in a timely fashion. The quality of the panel determinations has been unimpeachable, with the U.S. expressing “disappointment” about its recent loss in a case on auto rules of origin but also pledging to “engage Mexico and Canada on a possible resolution.”

At this juncture, all three nations need to show the world we are following the rules laid out by our agreement and are committed to making North America a “zone of predictability.” This will require flexibility in sensitive sectors from autos to agriculture to energy, where Mexico’s policies not only contravene agreed obligations but make energy supply and prices uncertain. Each partner will need to show it is moving towards compliance both in these disputed sectors and in those currently under discussion. Failure to demonstrate that the rules mean something will hurt all three.

Benefiting from nearshoring by default is one thing. But it would be better for North American workers and consumers alike if their governments were to signal they want the continent’s investment climate to be world-class and competitive. Doing so requires emphatic compliance with dispute panel determinations but also addressing disputes in agriculture, autos, and the digital realm before they become intractable. As the historical stigma of NAFTA finally fades in Washington, President Biden is due to visit Canada this month. There could be no better time to reinforce our joint commitment to preserve and protect the benefits of USMCA/CUSMA through rigorous compliance.

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There are two ways of bodog casino responding to this. One is to complain that this represents a very unfair deviation from the principles of ‘free trade’. The other is to join in the race to decarbonise economies, matching US incentives with similar policies of your own.

The EU has taken the approach of joining the race, introducing its own programme of incentives and allowing for exemptions to its rules on ‘state aid’. The UK response has been to put more emphasis on complaining, refusing to match US and EU policies, and missing out on opportunities both for British business and employment, and for contributing to the greening of the world economy.

The government worries that joining in the green economy race would cost money at a time when many Tory backbenchers are pressing for spending cuts. That is all the more reason for finding other ways of encouraging green economic sectors, such as ensuring continuing alignment with EU product standards, something the Tories’ current Retained EU Law Bill is designed to obstruct.

At the same time it is right to seek fair arrangements in the international trade system, and it may be that the new moves from the US and EU, combined with complaints from countries including the UK, will provide the catalyst for some renegotiation of rules in the World Trade Organisation and elsewhere.

Among the many changes required is the need to put an end to the ISDS system: Investor-State Dispute Settlement. This uses provisions in trade agreements enabling firms losing out from changes in legislation or regulation to sue a government making those changes. The assessment of these cases is not carried out through the ordinary courts but made by a separate private corporate system of tribunals. For example, the UK oil and gas company Rockhopper in September last year won compensation of £210m from the Italian Government because of a ban on oil drilling within 12 miles of the coast.

ISDS is included in the Energy Charter Treaty (ECT), signed up to by 50 countries including the UK. Germany, France, Spain, Poland, and the Netherlands have all announced their withdrawal, on the grounds that allowing compensation through ISDS gets in the way of taking action on climate change, and makes it more expensive. The UK still remains a member.

ISDS also features in the Comprehensive & Progressive Trans-Pacific Partnership (CPTPP), the Pacific trade bloc which the US withdrew from trying to join, but which the UK government is currently negotiating to take part in, as part of a policy of replacing European close trading links with so-called “Global Britain”. The House of Lords International Agreements Committee has warned of the dangers CPTPP membership would pose to British agriculture and the NHS.

Another area of trade ripe for change is the need to agree on the use of Carbon Border Adjustment Mechanism (CBAM) systems. The idea here is that countries shouldn’t get an unfair advantage for their exports through failing to tax the carbon emissions from their production. The adjustments compensate for this ability to undercut by imposing a tariff on importing these products. A CBAM system is being introduced gradually by the EU. The UK government has announced a consultationin spring this year on the possibility of bringing in a similar scheme here.

CBAM is a mechanism for addressing the problem of ‘carbon leakage’, whereby countries get their own carbon emission figures to look good by simply getting carbon intensive goods manufactured elsewhere and then imported, rather than being produced at home where they are being consumed. Year after year, this has been used by the UK Government to give a wholly misleading impression of success in cutting emissions, on top of taking advantage of the convention of excluding from the official figures any emissions resulting from international aviation and shipping.

The latest cabinet reshuffle and restructuring of departments includes the disappearance of the Department for International Trade. This may in turn mean the abolition of the commons international trade select committee, of which I am currently a member. Trade is crucially important, including for post-Brexit Britain and for international environmental issues. I hope our parliamentary bodog online casino scrutiny work can continue in whatever new arrangements are set up.

Lloyd Russell-Moyle is MP for Brighton Kemptown and chair of the all-party parliamentary group for rental reform.

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The full text of the legislation is here, but since reading legislative text is often a nightmare, I’m going to rely on this overview from U.S. trade policy expert Tori Smith:

Regional Content Requirements

In addition, the bill adds production requirements for automakers to have their vehicles qualify for the tax credits. For a vehicle to qualify, it must undergo final assembly in North America. This provision is less restrictive than a previous version of the policy, which required American production and favored unionized factories to manufacture these vehicles. Because of the integrated automotive supply chains in North America, neighboring countries were very concerned with the original proposal. Canada even suggested that the previous version would violate the United States-Mexico-Canada Agreement. The Inflation Reduction Act avoids that issue, but it could still be viewed as discriminatory against other foreign automakers, namely those based in the United Kingdom, the European Union, Japan, and South Korea. Automakers have diverse global supply chains, and some may not be as present in North America.

Starting in 2024, under the Inflation Reduction Act, EVs would need to have at least 40 percent of their critical minerals sourced for batteries from countries with which the United States has a free trade agreement (FTA).[4] Critical minerals can also be made from materials recycled in North America. The required percentage of content for critical minerals would then increase over the following two years and by 2026 the regional content for critical minerals would rise to 80 percent.

The bill also specifies that no vehicle produced after 2024 can have a battery with critical minerals that were “extracted, processed, or recycled by a foreign entity of concern.” A “foreign entity of concern” is defined very broadly and could feasibly apply to China.[5] That China performs an estimated 80 percent of global mineral processing and refining makes this particular provision problematic.[6]

Under the bill, the battery of an EV would be required to have at least 50 percent North American content by 2024 and be of 100 percent North American origin by 2028. In 2020, the United States was home to 70 percent of battery cell capacity, meaning an overwhelming portion of the end process to make a battery takes place domestically. The raw materials in a lithium-ion battery, however, represent most of the total cost of the battery. The cost of cathodes and anodes, the positive and negative electrodes in a battery, alone are estimated to represent 40 percent of the total cost of a lithium-ion battery.

In terms of the consistency of the IRA provisions with WTO law, I’m going to focus on the WTO’s non-discrimination obligations as applied to the assembly/content requirements, but there is also an issue with how the tax credit itself would be examined under the subsidy provisions. (And let me note that my thinking here has been informed by discussions with David Kleimann and Jesse Kreier, but of course all errors are my own).

As a general matter, domestic content requirements will violate GATT Article III:4. The law is clear on this, and in my view the policy is a good one. The WTO doesn’t bodog online casino prohibit protectionism entirely, but it does try to steer it towards more transparent methods such as tariffs. If governments want to protect their domestic EV industry from competition, they are allowed to do so, but they have to negotiate for that ability as part of an exchange of tariff concessions. If governments undermine the carefully crafted balance of tariffs by using domestic content requirements in national and local laws and regulations, the system could quickly fall apart. If one government does it, others are likely to respond with their own content requirements, and we could get into a protectionist spiral. A core purpose of trade agreements is to prevent this sort of thing from happening.

In addition, large wealthy countries would have a general advantage in a system without rules, but also a specific advantage in a system with complex domestic content requirements, because implementation of such measures is more technical than tariffs and requires more resources.

As a result, there is broad agreement that domestic content requirements are a bad idea, and they should be, and are, prohibited by WTO and FTA rules. Obviously, there are some protectionists (and perhaps a few others) who disagree, but I’m just saying the consensus is pretty clear on this.

Of course, this consensus doesn’t mean that governments never use these measures. It just means that when they do, a WTO complaint is brought in response, and there have been several WTO disputes over the past few years reaffirming all of this.

In the case of these new IRA EV tax credits, however, things get a little complicated. I’m not sure I have all the answers at this point, but I’m going to set out two key issues here and offer a few thoughts.

First, a “final assembly” requirement strikes me as different than a content requirement in ways that could be important. In theory, final assembly can take place with 100% foreign parts, and as a result, maybe it does not actually require that inputs be from any particular place. Thus, perhaps it is not the same thing as a “domestic content” requirement. Now, in practice, such a requirement might steer the assembler to use local or regional inputs, because those inputs are physically close to where the assembly has to take place. But that ends up being a de facto content requirement rather than a de jure one, and those can be difficult to prove.

Second, there is a question that comes up under all three of the aspects of the IRA EV tax credit measure (final assembly, critical minerals, batteries): Could these requirements be justified under GATT Article XXIV as measures related to a free trade area? Each of the three requirements works a little differently, but all of them are tied to the North American region (and thus perhaps to the USMCA) or to U.S. FTAs. I don’t see how else the U.S. can justify these measures under WTO law, so I’m wondering if at least someone involved in the creation of this measure had in mind an Article XXIV defense (others may not have been concerned about WTO law). 

It’s important to think about what WTO obligations we are talking about, and the obligations that come to mind here are GATT Articles I:1 and III:4, as well as SCM Agreement Article 3.1(b). With 3.1(b), there is a question about whether Article XXIV could apply at all to a non-GATT agreement. But putting that aside, does Article XXIV even work here? How do these requirements fit under GATT Article XXIV:8(b), which states:

(b) A free-trade area shall be understood to mean a group of two or more customs territories in which the duties and other restrictive regulations of commerce (except, where necessary, those permitted under Articles XI, XII, XIII, XIV, XV and XX) are eliminated on substantially all the trade between the constituent territories in products originating in such territories.

Are these North America/FTA assembly/content requirements just part of the elimination of duties and other restrictive regulations of commerce on substantially all trade in the free trade area, and therefore justified under Article XXIV? At this point, I’m not sure, and I’m reluctant to spend too much time thinking about it until 1) the measure actually becomes law, Bodog Poker and 2) the U.S. actually invokes Article XXIV. If the U.S. doesn’t invoke Article XXIV, it’s not clear to me what they will cite as a justification though. (Obviously there is GATT Article XX(g), but I don’t see how these requirements could satisfy the Article XX chapeau).

One other legal point here: The “foreign entity of concern” language probably means that GATT Article XXI (security) would be invoked for that specific provision.

Finally, with regard to the effectiveness of the policy as set out in this statute, Tori raises a point about the difficulty of fulfilling the particular requirements in the IRA:

The regional requirements in the Inflation Reduction Act are likely impossible for automakers to fulfill because they severely reduce the sourcing options for inputs. For example, Argentina is responsible for roughly 10 percent of lithium production, but the United States does not have a free trade agreement with Argentina. Moreover, virtually all cathode and anode production is concentrated in China, Japan, and South Korea. South Korea is the only country with which the United States has a free trade agreement, and it represents only 15 percent of cathode production.[7]

If we want these tax credits to be helpful in encouraging people to buy electric vehicles, fewer restrictions on their use would be better. A version of the measure that did not have assembly/content requirements would lead to more electric vehicles being used, but that is not the version we have right now. It will be interesting to see whether the vehicle-makers and government officials interpreting and applying the rules will find a way to adapt so that consumers can actually make use of them.

Simon Lester is President of WorldTradeLaw.net LLC and Trade Policy Analyst of the Cato Institute.

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