Abstract
The United States’ Inflation Reduction Act (IRA) introduces new eligibility requirements for the existing USD 7,500 tax credit provided to electric vehicles. The new requirements condition the credit upon North American final assembly and North American-sourced materials and components. As tensions flare between the US and China, these new local content requirements reflect the US’s effort to establish a supply chain for electric vehicles that circumvents China. The blow, however, is felt elsewhere, namely by South Korean auto makers whose electric vehicle models are no longer eligible for the significant tax credit necessary to compete in the American market. As South Korea considers submitting a complaint to relevant international bodies, this paper dissects the IRA’s relevant provisions and analyzes the applicability of international trade law rules of the WTO and the Korea-US Free Trade Agreement to the new local content requirements of the IRA.
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Notes
- 1.
The White House (2022).
- 2.
Ibid.
- 3.
Ellen (2022).
- 4.
Lee (2022).
- 5.
26 U.S.C. §30D (2020).
- 6.
26 U.S.C. §30D(b) (2020).
- 7.
The existing requirement on battery capacity remains after the amendment with adjustment to the minimum wattage (from 4 to 7 kw/hour).
- 8.
26 U.S.C. §30D(a) (2020).
- 9.
26 U.S.C. §30D(g)(2)(C) (2020).
- 10.
Inflation Reduction Act of 2022, Pub. L. 117–169, Title I, § 13,401 (a), 136 Stat. 1818, 1954 (2022).
- 11.
Relevant percentages depend on the date on which the vehicle was placed in service: entry into force until December 31, 2023: 40%; January 1, 2024 until December 31, 2024: 50%; January 1, 2025 until December 31, 2025: 60%; January 1, 2026 until December 31, 2026: 70%; after January 1, 2027: 80%. Id. at § 13,401 (e).
- 12.
Defined in 26 U.S.C. §45X(c)(6).
- 13.
The term is defined in Sect. 40,207(a)(5) of the Infrastructure Investment and Jobs Act. The definition includes any entity owned or subject to jurisdiction of a “Covered Nation,” which, under a different statute, includes China, Russia, North Korea and Iran.
- 14.
Bazillian (2022).
- 15.
Ibid.
- 16.
Swindells (2022).
- 17.
Inflation Reduction Act of 2022, Pub. L. 117–169, Title I, § 13,401 (a), 136 Stat. 1818, 1954 (2022).
- 18.
Relevant percentages depend on the date on which the vehicle was placed in service: entry into force until December 31, 2023: 50%; January 1, 2024 until December 31, 2025: 60%; January 1, 2026 until December 31, 2026: 70%; January 1, 2027 until December 31, 2027: 80%; January 1, 2028 until December 31, 2028: 90%; after January 1, 2029: 100%. Id. at § 13,401 (e).
- 19.
Cho et al. (2021).
- 20.
Ibid.
- 21.
Inflation Reduction Act of 2022. Final Assembly in North America means that a manufacturer must assemble a vehicle for delivery to dealer or importer with all components parts necessary for the mechanical operation of the vehicle in North America.
- 22.
Ibid.
- 23.
Chavez (2022).
- 24.
Lin and Weng (2020).
- 25.
Inflation Reduction Act of 2022.
- 26.
The IRA also includes the modification and creation of the following tax credits for clean energy: (1) modifying existing tax credit for electricity produced from renewable resources; (2) modifying tax credit for investment in certain energy properties with higher credits for clean energy properties; (3) creating new tax credit for clean electricity produced from facilities with zero carbon emissions; and (4) creating a new tax credit for investment in facilities with zero emissions. For all of these provisions, the IRA provides additional credit (in addition to the base credit) for projects that satisfy the “domestic content” requirement. It requires that “any steel, iron or manufacture product which is a component of such facility … was produced in the United States.” Inflation Reduction Act of 2022.
- 27.
Smith (2022).
- 28.
General Agreement on Tariffs and Trade, Oct. 30, 1947, 61 Stat. A-11, 55 U.N.T.S. 194 [hereinafter GATT] Article III:4.
- 29.
Panel Report (2019c).
- 30.
Montana Annotated Code MT Code § 15–32-703 (4) (2015).
- 31.
Ibid. [Emphasis added].
- 32.
Montana Annotated Code MT Code § 15–32-703 (1) (2015).
- 33.
US-Renewable Energy, 7.89.
- 34.
Nonetheless, the Panel argued that the analysis might have been different if the US were able to show that there is a difference between Montana-origin and non-Montana origin feedstock as an input into biodiesel or that the biodiesel made from Montana-origin feedstock is in any way different from non-Montana-origin feedstock. Ibid. 7.3.2.4.
- 35.
Ibid. 7.151, citing to Panel Report (2019a) [hereinafter Brazil-Taxation].
- 36.
Ibid. 7.152.
- 37.
Ibid. 7.157.
- 38.
Ibid. 7.159 citing to Panel Report (2000) [Emphasis added].
- 39.
Ibid. 7.190.
- 40.
Ibid. 7.272.
- 41.
Nelson and Puccio (2021).
- 42.
US–Renewable Energy, 7.151–52; Panel Report (2016) at 7.307–11 (interpreting the terms “laws and regulations” in accordance with ordinary meaning of the terms and finding that the terms refer to “legally enforceable rules of conduct under the domestic legal system of the WTO member concerned”) [hereinafter India-Solar Cells and Solar].
- 43.
US–Renewable Energy, 7.157–59.
- 44.
The IRA imposes a maximum price limit for different types of vehicles eligible for the credit; for sedans, the limit is USD 55,000. A USD 7,500 credit will thus be at least 13% (7,5000/55,000) of a sedan’s purchase price.
- 45.
US-Renewable Energy, 7.161.
- 46.
Supra note 16, at 19 and accompanying text.
- 47.
An argument may be made that Article XXIV’s exception for customs union or free-trade area may apply to the IRA’s Clean Vehicle Provisions given that the LCRs include North American imports—subject to the US-Mexico-Canada Free Trade Agreement—and imports of other FTA-partners of the US. Nonetheless, the language of Article XXIV makes quite clear that “the purpose of … a free-trade area should be to facilitate trade between the constituent territories and not to raise barriers to the trade of other contracting parties with such territories.” The IRA’s Clean Vehicle Provision, as examined above, is a trade-restrictive measure that does not facilitate trade among US’s trade partners; rather its newly introduced onerous conditions make it more difficult for FTA-partners—including South Korean firms—to trade with the US; additionally, the IRA most certainly makes trade even more difficult for the non-FTA trading partners of the US. Thus, if an argument were to be made that the IRA violates GATT Article I:1’s Most-Favored Nations provision and that the preference granted to Mexico and Canada should be extended to other members of the WTO, the US is unlikely to be able to defend its measure by relying on Article XXIV’s exception.
- 48.
GATT art. XX [Emphasis added].
- 49.
Panel Report (2019c) 7.514.
- 50.
Ibid.
- 51.
Ibid. 7.584.
- 52.
Ibid. 7.585.
- 53.
Ibid. 7.539.
- 54.
Supra note 23 and accompanying texts.
- 55.
Chavez, supra note 23.
- 56.
See analysis of subparagraph (b) above. In India-Solar Cells and Solar, however, the Appellate Body clarified that the “essential” language in subparagraph (j) provides a more stringent legal threshold for the “necessity” test and should be interpreted to mean closer to requiring “indispensability” in achieving the stated purpose. See Appellate Body Report (2016) 5.60.
- 57.
Ibid. 5.75 (reciting and affirming panel’s finding) (quotation marks deleted).
- 58.
Ibid.
- 59.
Rutherford (2020) [Emphasis added].
- 60.
Supra note 14 [Emphasis added].
- 61.
Blinken (2022).
- 62.
Panel Report (2019b) (herein after Russia—Traffic in Transit) 7.27.
- 63.
It is worth noting that in this case, the US, as an observer, sided with Russia on the issue of reviewability. Ibid. 7.51.
- 64.
Ibid. 7.103 [Emphasis added].
- 65.
Ibid. 7.131.
- 66.
Nam and Lee (2019).
- 67.
Russia—Traffic in Transit, 7.130.
- 68.
Ibid. 7.135.
- 69.
Ibid.
- 70.
Ibid. 7.138.
- 71.
Ibid. 7.136 (finding that “in the case at hand, the emergency in international relations is very close to the ‘hard core’ of war or armed conflict”).
- 72.
In India-Solar Cells and Solar, India argued that the trade-restrictive measures in question were necessary to achieve India’s “energy security,” but did not invoke Article XXI’s security exception. India-Solar Cells and Solar¸ supra note 42.
- 73.
Agreement on Subsidies and Countervailing Measures, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, annex 1A, 1869 U.N.T.S. 14. [hereinafter SCM] Article 1.1 (a)(1)(ii). The SCM has been interpreted to cover subsidies provided to purchasers, such as the IRA’s Clean Vehicle Provision, under the assumption that the benefit of the tax credit provided to the purchaser of a product is deemed, without proof to the contrary, to have been provided to the producer. See e.g., Panel Report (2002) 7.229.
- 74.
SCM art. 3.1 (b).
- 75.
Appellate Body Report (2000) 142.
- 76.
The SCM also prohibits “actionable subsidies”—subsidies that are “specific” and those that cause an “adverse effect” to the interests of another Member including by causing injury to the domestic industry of another Member. Even if the Clean Vehicle Provisions are found to fall outside the scope of Article 3.1(b), they are likely to be condemned as actionable subsidy.
- 77.
Hestermeyer and Laura Nielsen (2014).
- 78.
Free Trade Agreement between the Republic of Korea and the United States of America, U.S.-S. Kor. (30 Jun 2007 modified 5 Dec 2010 and 1 Jan 2019) [hereinafter KORUS FTA], Chapter Two National Treatment and Market Access for Goods, art. 2.2, https://ustr.gov/trade-agreements/free-trade-agreements/korus-fta/final-text.
- 79.
KORUS FTA Chapter Twenty-Three Exceptions, art. 23.1.
- 80.
Ibid. fn. 2.
- 81.
Cho (2018).
- 82.
KORUS FTA Chapter Twenty-Two Institutional Provisions and Dispute Settlement, art. 22.2–22.10.
- 83.
Ibid. annex 22-A.
- 84.
Nedumpara and Venkataraman (2020).
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Nam, S. (2023). Inflation Reduction Act’s Clean Vehicle Provisions: Analysis of Potential International Trade Law Violations. In: Lee, E.Y.J. (eds) Revolutionary Approach to International Law. International Law in Asia. Springer, Singapore. https://doi.org/10.1007/978-981-19-7967-5_9
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