By- Masad Khan & Ameya Sharma
The Inflation Reduction Act, 2022 (herein after the ‘IRA/Act’) has been enacted by the United States to bring ‘historic’ reductions in inflation rates and radical climate actions to build a better America. While this Act is promulgated as a multifarious affair directed towards the efficient utilization of America’s production potential and healthcare needs, there is increased skepticism about its counterproductive goals that incentivize domestic production. Moreover, it seems to be the last straw that has crumbled the cumulative relations between the US and the World Trade Organization (hereinafter “WTO’).
In this article, the authors have challenged the said legislation due to its inherently discriminatory domestic content requirements and attempted to bring the deficiencies of the aforementioned act to the fore. Alongside, the authors have placed reliance on the laws and principles of WTO to show the unfair practices being followed by the American administration and the impact thereof.
IRA IN BRIEF
The United States signatured its autonomy from the WTO with the IRA enacted on August 16, 2022. The law commits to an America built on the foundations of clean energy and climate with additional agendas focusing on health. However, the legislative intent of the IRA is called into question because of the overt display of American favoritism in its provisions. For example, Section 30(D)(1)(g) of the Act defines a “clean vehicle” as one that is assembled entirely in North America. As per Section 30(D)(a), owners of such “clean” motor vehicles shall be allowed a credit against the taxable amount during the taxable year. This provision inevitably aims to compel international EV producers to set up their manufacturing hubs in North America, which may be disadvantageous to other countries such as South Korea which is responsible for a substantial share of the world’s production of motor vehicles.
Further, Section 30(D)(e) provides a swift passageway to the batteries “extracted or processed” in the United States or recycled in North America in meeting the critical mineral percentage requirement for the battery used in the electric motors. The aforementioned criteria are also relaxed for the 20 countries the US has a Free Trade Agreement (FTA) in force with. However, the major manufacturers of electric batteries such as CATL (based in China) are discriminated against as far as the American market is concerned. This provision is also indicative of the disregard towards some of the largest electronic battery manufacturers in Asia and the European Union.
CONTRAVENING WTO PRINCIPLES
The above-mentioned clauses conveniently allow all EVs manufactured in North America to be eligible for the benefits while being in clear contradiction with the WTO rules.
The primary objective behind the genesis of the WTO was ‘to help its members use trade as a means to raise living standards, create jobs and improve people’s lives’. Even though the United States has been a member of the WTO since 1995, it fails to show compliance towards the global trade principles set in motion by the organization.
Article I of the General Agreement on Trade and Tariff, 1994 (hereinafter ‘GATT’) entails exhaustive clauses that enforce a strict barrier against the ‘Most-Favored-Nation’ treatment offered by a member against the other. More relevance is to be placed on Article I (1) of the GATT which specifically allows any special immunity and privilege offered to one member state to apply to all its members. In the present context, the US stands in clear violation of the GATT provisions by extending special treatment and favors only to itself and its FTA partners.
Further, Article III (1) of the GATT restricts any internal quantitative regulations that function to protect domestic industries. But Section 30(D)(e) of the IRA contradicts the aforementioned clause by pre-supposing an acceptable percentage of minerals in electric batteries that were extracted or processed in North America or within the territory of its selected trade partners.
WTO RULING ON SIMILAR CASES
The government of the province of Ontario established a law in 2009 to promote the generation of power from wind or solar generators, which included a system to acquire a minimum quantity of constituent parts and services from companies in Ontario. The government paid above-market prices for renewable energy suppliers’ electricity power, but only to those enterprises that acquired the majority of their equipment locally. The aforesaid law was challenged in the WTO dispute panel by Japan and the European Union as discriminatory and protectionist since it demanded a minimum level of indigenous or local content. The WTO appellate body found that the law’s provision on local content was discriminatory and that Canada was in violation of Article III:4 of GATT and hence ipso facto a violation of Article 2.1 of Trade-Related Investment Measures (hereinafter ‘TRIMs’).
Similarly, in 2010, India decided to provide renewable energy subsidies based on the use of indigenous solar module inputs. The US filed a complaint against India’s initiative as it hampered the import of its solar modules and cells. The WTO panel rejected India’s contention that its policy is exempted under Article XX(j) of GATT as the impugned products are not in “general or local short supply” in the appropriate market. The panel observed that the domestic content requirement provides “favorable treatment” to the products of national origin therefore, it violates Article III:4 of GATT and accordingly Article 2.1 of TRIMs.
ECONOMIC REPERCUSSIONS ON DEVELOPING NATIONS
As mentioned earlier, the scope of the IRA extends beyond the bona fide objective of climate change. It also envisages a positive shift in the economic advantages for the US economy with a subsequent impact on China and developing countries.
Section 30(D)(d) has been amended to limit the definition of ‘new clean vehicle’. It precludes vehicles such as minerals which have been processed or assembled ‘by a foreign entity of concern’. This indicates a clear protective step against China. While this act is a step forward in an attempt to reduce USA’s dependence on China, it results in inadvertent repercussions for other developing countries that do not have a free trade agreement with the Superpower.
The restrictive provisions of the act are detrimental to the objective of establishing Hydrogen or Solar Energy based vehicles. Even though Indian production hubs won’t be precluded by way of Section 30(D)(d), it would be difficult for them to level with the US Production hubs which can avail tax benefits due to their geographical advantages, especially in the field of Solar and Hydroelectric energy. Consequently, this would compel the producers to shift their base to the United States thereby incurring drastic economic repercussions for the developing nations.
A recent example is reflected by the steps adopted by Honda Motors Co., a Japanese multinational conglomerate, which recently announced its plans for setting up Auto Plants and EV Hubs in Ohio and Marysville among others.
US’ DISREGARD TO WTO
This scenario is aggravated by the fact that the global power is willing to disadvantage its core trading counterparts as well as developing nations merely to further its agenda.
In 2018, during the presidency of Donald Trump, the administration authorized a 25% tariff on steel imports by virtue of Section 232 of the Trade Expansion Act, 1962 citing national security concerns under exceptions listed in Article XX of GATT. The WTO panel renounced the existence of any security concerns and found the US guilty of violating the WTO mandate. Incidentally, the WTO appellate body is not functioning for around two years due to the lack of a required quorum necessary to hear appeals because the appointment of judges was vetoed by the US over concerns about its sovereignty. Consequently, the WTO ruling panel against US’ metal tariffs is unlikely to have any significant practical impact on the US trade as it will probably appeal to the WTO appellate body and this would lead to a dispute in oblivion.
Bolstered by its virtual invincibility in WTO and influence on the larger geopolitics, the Biden administration has recently enacted The Creating Helpful Incentives to Produce Semiconductors and Science Act, 2022 (herein after the ‘CHIPS Act’) with an objective to support the domestic semiconductor manufacturing industry by providing subsidies for enhancing American chip industry infrastructure. Under the garb of national security, the CHIPS Act extends a conscious advantage to American manufacturers. While the intent behind the act is to provide an opportunity to flourish for small businesses and disadvantaged communities, the act itself is discriminatory towards developing nations.
The IRA, undoubtedly, is a step in the right direction for the US in achieving its clean energy goals and will help the country in reducing its dependence on renewable energy sources. However, such decisions cannot be taken by jeopardizing global trade rules and WTO mandate. The subsidy requirement for domestically manufactured EV batteries seriously infringes the trading rights of several countries including US’ strategic allies like the EU and violates WTO obligations. Protectionist measures should not impede the adoption of high-quality, cost efficient and innovative clean energy measures.
Additionally, the US should revoke its veto on the appointment of judges to the WTO appellate body as it renders the whole dispute resolution ineffective. It immunes the powerful states like the US to foster their protectionist regime, in violation of WTO rules, without facing any repercussions.
Cite as: Masad Khan & Ameya Sharma‘Protectionist Policies of US and Contempt for WTO’ (The RMLNLU Law Review Blog, 6 July 2023 )