As part of its green transition, the United States recently introduced a tax break program that favors domestically produced electric vehicles. This has excluded Asian automakers, which produce many of the electric vehicles purchased from the US, which they say accuse the Biden administration of violating international law. Commercial lawyers distinguish between legal disputes, legal remedies, and future benefits.
Unfazed by the energy security crisis exacerbated by the oil shocks and the Russia-Ukraine war, the Biden administration has stepped up efforts to strengthen America’s green credentials. In August, the White House signed into law the 2022 IRA (IRA), which dedicated more than $370 billion to increase home energy and transmission programs and promote the sustainable economy.
While the IRA’s impact on inflation is still being seen, it was considered the largest climate and energy shutdown in American history. Most notably, the law introduced a tax break program for electric vehicles aimed at supporting the domestic auto industry. American consumers can get a tax credit of up to $7,500 if they buy used vehicles assembled in North America.
The project sparked reactions. Respondents agree that accelerating America’s electric transition and strengthening supply chain security are essential to compete with China, the current dominant player in the EV field. Bloomberg projects that by 2030, more than half of all passenger cars sold in the US will be electric thanks to incentives.
But the requirements have limited the list of eligible EV models to one-fifth of the world’s available models. As a result, major auto manufacturers in Asian countries, many of which are major trading partners of the US, are showing grievances that could lead to disputes.
Under the new rules, Japan’s Toyota and South Korea’s Hyundai are among the hardest hit, as their environmentally friendly vehicles are currently manufactured in non-US plants. Seoul and Tokyo have lodged diplomatic protests with the White House, threatening to disrupt America’s relationship with the Asia-Pacific region.
The political headache isn’t the only challenge facing policymakers in Washington. South Korean and Japanese leaders have warned the Biden administration of violating free trade agreements (FTA) and rules promulgated by the World Trade Organization (WTO), which the US has helped to the design.
“The IRA questions the commitment of the United States to the pillars and principles on which the WTO was built, namely non-discrimination, national treatment, tariffs on content provisions, etc.,” said a Robert Kossick, an international trade lawyer at Harris Bricken. “At the very least, the law requires an increase in the US of the organization, as opposed to the legal, way to trade.”
Kossick proposes existing legal measures to protect the interests of non-US auto manufacturers. “For manufacturers from countries with FTAs focused on the US, including South Korea, dispute resolution mechanisms in FTAs can protect the nature of the tariff,” e he said.
Maria Tan Pedersen, a partner at Dechert, says investment treaties can give non-US automakers the right to become foreign investors. “These treaties, for example, require the US to pay treatment for investors that is not less favorable than that given to investors from other countries; guaranteeing the same equality of investors to domestic investors in similar situations; and to ensure that these investors are not subject to unfair or unfair practices,” he said.
When disputes arise, these treaties open the door to federal government-sponsored litigation against non-U.S. carriers, which can “argue that discriminatory treatment under U.S. law violates the reasonable expectation of the investor,” says Kossick.
“If a claim is settled, the arbitral tribunal has considerable discretion to award compensation or other relief,” Pedersen said.
For markets that have not entered into free trade agreements with the US, including Japan and China, Kossick suggests that they turn to the dispute resolution procedures included in various WTO agreements by filing complaints with the marketing team.
“The main charge is found to be a violation of Article III of the General Agreement on Tariffs and Trade (GATT). This will emphasize the discriminatory nature of the final session and the content requirements of the US EV tax credit program,” Kossick said, adding that countries in this category could also argue that the law is not in accordance with the member’s obligations under the Agreement on Trade Assurance.measures.
But Kossick cautions against seeking settlement under the Agreement on Credit and Injuries, as the claim is “harder to sustain because China and other countries are offer EV tax credits, even without meeting and content requirements.”
In the event that the government disagrees with the decision of the WTO dispute settlement body, the matter will be referred to the WTO. Pedersen is concerned about less control over the Body due to the shrinking quorum resulting from the ban on new US members.
Kossick offers a different take. “Even though the Faith Group has been sidelined, the organization’s debate groups continue to meet and issue group reports. These countries can send tariffs to the US “and their complaints are strong, he said.
There are several lines of defense the US can take during a WTO complaint, Kossick said. For example, the state could argue that the last congressional provision supporting the EV Tax Break program is not a domestic provision. It can also enforce the law by labeling a measure that affects a trade area, protection of natural resources, or national security interests, thereby seeking appropriate exemptions under the GATT.
Although legal avenues exist, few people like the adversary’s actions, which sometimes take a long time. According to Kossick, the parties involved should be prepared to negotiate and discuss before filing a complaint to minimize problems.
However, the US government is not the only one involved in the law. Asian automakers are also facing increasing disputes with third parties due to the EV emissions criteria set by the IRA. Starting in 2023, EVs must get 40 percent of their essential minerals for batteries from the US or countries that have FTAs with the US The threshold will rise to 80 percent by 2026. Essential minerals from “foreign entities of concern,” such as China and Russia, would also be denied tax credits. The new regulations put most EV manufacturers in a tight spot because 75 percent of all lithium-ion batteries and 50 percent of battery-powered materials currently come from China.
Pedersen fears the policy will make Asian automakers reject commercial liabilities.
“Some of the Japanese and South Korean automakers, for example, have already started focusing their engines and battery production in the US,” he says. “Such actions could disrupt existing arrangements with third parties, require renegotiation of existing agreements, and potentially lead to commercial disputes over alleged breach of contract. Such disputes may lead to litigation or commercial arbitration claims, in accordance with contractual dispute resolution clauses.”
According to Kossick, a reliable and robust method of investigating the source of EV battery-related minerals is essential to ensure the continued participation of automakers in the long term. . But the force can only be “non-cooperation between China and Russia,” he added.
Navigating the legal complexities of the new EV rate program, Kossick says, requires lawyers to be well-versed in many areas related to mining, customs and trade, environmental law, and supply chain management.
Currently, when parties seek to enforce investment treaty protections, “there may be an increasing demand for advice from legal experts familiar with investor-state dispute resolution, from the US and Asian perspective,” Pedersen said.