In a surprise development last night, Senate Majority Leader Chuck Schumer (D, N.Y.) and Senator Joe Manchin (D, W.Va.), with support from President Biden, announced a deal on a massive tax, energy and healthcare legislative package. Sen. Kyrsten Sinema (D-Ariz.), as of the time of this writing, has not indicated her support, and she’s a critical vote. Nonetheless, whatever the bill’s fate, there is a big development worth taking stock of: top Democrats, as well as the Trudeau Government in Canada, have cast aside the World Trade Organization, and its seventy-five year old foundational document, the General Agreement on Tariffs and Trade (GATT). They want protection from overseas imports of electric vehicles. Policy makers in both countries should build on this by liberating our nations from the shackles of GATT-bound tariff rates.
Much of this bill (formally, “The Inflation Reduction Act”, informally, the reconciliation bill) is good policy, including much needed investments in domestic energy production. For solar especially, this is a must, after American solar producers were thrown to the wolves in June.
In this article, we’ll focus on the bill’s reforms of the $7,500 tax credit for electric vehicles (EVs). It’s remarkable: the leaders of both the United States and Canada have come together in support of an effective tariff of $7,500 on every electric vehicle imported from overseas.
Good news for Canadian workers! We are encouraged that vehicles assembled in Canada are now eligible for the proposed US EV tax credit.
Read my full statement: pic.twitter.com/qAHHy1VIr0
— Mary Ng (@mary_ng) July 28, 2022
The Current EV Tax Credit Versus this New One
For over a decade, American buyers of electric vehicles have been entitled to a $7,500 tax credit. This is a sweet perk. There was a cap, however, of 200,000 sales per manufacturer. After a manufacturer hit 200,000 U.S. sales, its EVs were no longer eligible. Tesla and GM were the first, respectively, to lose access to the credit. Which is a shame, because their EVs were the only EVs to be assembled in the United States at any serious volume. So the effect has been, for the last couple years, that we exclusively subsidize imported electric vehicles. Needless to say, it’s an untenable situation. In 2021 I wrote in the Detroit News that it was time to reform the EV tax credit, or kill it. But the status quo couldn’t remain.
Things have only gotten worse, as the Made-in-China Polestar 2 EV has ramped up production in China, and correspondingly, its exports to the United States. We are actually subsidizing our industrial replacement to the tune of $7,500 a car. 0% subsidy for Tesla, 100% subsidy for Polestar.
America’s status as a signatory to the GATT and WTO Agreements meant we had to extend $7,500 credit to countries everywhere, including China, or have no credit at all
The core commitment of the GATT, and any trade deal, is that once an importer has paid their tariff, they won’t face any discrimination for their product once it’s been imported. For example, we have a GATT-bound tariff of 2.5% on cars. Once a car has been imported and paid that 2.5% tariff, it shouldn’t face any further discriminatory taxes or regulations. For example, if Michigan decided to charge double the registration fee for imported cars, they would be violating our GATT National Treatment obligation. They’d also be violating identical National Treatment violations in USMCA and all our other trade deals, too.
Now, National Treatment isn’t a bad idea. It’s a concept older than America. Promising National Treatment to France was one of the first things we did, in our Treaty of Amity and Commerce with them following Independence. With National Treatment, you concentrate your ‘discriminatory’ taxes on imported products at the ports, where it’s easy to administer, and then keen your internal market dynamic and loose.
National Treatment only became a problem when we bound our tariffs at a paltry average of 3.4% for the whole world, without any reciprocity, and extended all the GATT benefits like National Treatment to major adversaries, like China. See our article from 2020, “Electric Vehicle Tax Credit Highlights China WTO Folly“.
America, and apparently Canada, are finished with the GATT after 75 years. New EV tax credit is proof.
The old $7,500 credit was for an EV, regardless of where it was made. But the new proposed $7,500 credit cares A LOT about where the EV was made. To get the $7,500, the car has to:
- Have final assembly in North America; and
- 40% of the critical minerals in the battery must be sourced from the United States, or one of the 20 countries with whom we have an FTA. This 40% increases to 50% in 2024, 60% in 2025, 70% in 2026 and 80% in 2027.
Handing a $7,500 check for the purchase of every North American EV, but not overseas EVs, is functionally no different than imposing a $7,500 tariff. For example, the popular Hyundai Kona EV, imported from Europe, will lose its $7,500 check for which it’s currently eligible. Same with the Made-in-China Polestar 2. This is an absolute rejection of the GATT, if it passes. The core promise is broken. And this point is double-emphasized by the critical minerals criteria, which does preserve our National Treatment promise from our FTAs to those countries, at least for purposes of battery minerals.
The battery criteria has an additional provision, looking beyond just where a component came from, but also who made it. The law allows the Treasury Secretary to deem ineligible battery metals or components from “entities of concern.” This is certainly putting China’s CATL, the biggest global battery maker, on notice. Just last week, China’s CATL announced plans to build a battery factory in Mexico. But car makers may want to think twice about relying on CATL in perpetuity, less they find themselves ineligible. Also just last week, Ford announced a major deal with CATL, and that CATL would be supplying Ford batteries for the lower-tier trims of the Ford F-150 Lightning and the Mustang Mach-E.
Is… is Congress actually about to enact an industrial policy to keep us from outsourcing our auto market to China? Could it be?!
Both nations should formally quit the GATT and WTO, and phase-in tariffs to decouple from overseas instability.
If enacted, this EV tax credit reform will be the critical difference maker in ensuring we do not allow China to dominate our auto market (assuming we’re not dumb enough to rescind our additional 25% tariff on Chinese cars – that must also remain too).
A lot of Americans enjoy European-made cars, and may not like the idea of cars from Europe facing an equivalent $7,500 tariff. Well, maybe Europe can come to the table and negotiate. Europe charges a 10% GATT tariff on American-made cars, compared to our 2.5%, so we’ve never had a square deal with the EU on the auto trade.
But the nice thing about forgoing the GATT, is that we, Canada, and Europe, have been the suckers at the GATT table for decades. The table below says it all. Let’s cancel the GATT, and pivot to managed-trade deals with allies, based on reciprocity and balance.
Two final thoughts:
- Before the GATT, the United States had 30 bilateral FTAs. Then we, along with Europe and Canada and other WW2 allies, merged them all into the GATT in 1947, a free trade deal with the world. The first post-GATT trade deal we entered was the The Canada-U.S. Auto Pact of 1965, which liberalized the auto trade. So it’s ironic that the U.S. and Canada would join forces 57 years later to knife the GATT, once again on autos.
- Canada, much like the United States, was built behind a protective tariff. The first prime minister of Canada, Sir John A. MacDonald, built the country on his own version of Henry Clay’s National Policy of protective tariffs and national infrastructure. Canada hasn’t seen the same return to its roots in recent years as the United States, but we can hope this is the start of an awakening up north.