Treasury Secretary Janet Yellen said Tuesday that she expects Japan and the European Union will need to negotiate new trade agreements with the United States to qualify for electric vehicle consumer tax credits included in the Inflation Reduction Act.
In order to qualify for the full $7,500 tax credit provision included in the law, automakers, among other provisions, are required to source 40% of their critical minerals used in EV battery production from countries that have a free trade agreement with the U.S. beginning in March. (That amount increases to 80% after 2026.)
The sourcing requirements provoked fierce backlash from U.S. allies that do not have traditional free-trade agreements with the U.S., including the EU, South Korea, and Japan. Leaders there have argued that Inflation Reduction Act provision is discriminatory and could violate international trade rules.
In a white paper published last month, the Treasury Department said Congress failed to define what constitutes a free-trade agreement under the Inflation Reduction Act and said it would draft additional guidance on the issue, which it plans to publish in March.
The delay had heartened some European and Asian leaders, who suggested that the Treasury’s lack of a formal definition meant the EU and Japan could be considered as having met the definition.
But Yellen dismissed that idea in an interview Tuesday, saying the EU and Japan would need to negotiate new trade deals with the U.S.
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“We don’t have something with Europe and Japan that we consider right now to be a free-trade area, but we could negotiate an agreement,” Yellen told the Wall Street Journal. “For example, there could be some agreement that has to do with trade in minerals and critical minerals and so forth”
“If countries signed up for it, we could find that something like that could qualify in the future as a free-trade area. We’re thinking along those lines,” she added.
Her remarks come as the administration has signaled its willingness to address at least some of the complaints from U.S. allies over the EV tax subsidies.
Last month, the Treasury released new documents stating that some EVs assembled outside of North America could qualify for the incentives through a separate commercial program on leased vehicles purchased by businesses.
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Yellen previously suggested the administration’s hands are tied in addressing these concerns, saying last fall that “the legislation is what it is” and the Treasury “[has] to implement the law that was written.”
