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1 1 (October 23, 2023)

handle is hein.crs/govenfq0001 and id is 1 raw text is: Inf ormnin Weson I Resedrch Service Ih leasaive dea si n'e 1914 October 23, 2023 U.S.-Japan Critical Minerals Agreement On March 28, 2023, the United States and Japan signed a critical minerals agreement (CMA) covering five key minerals related to the production of batteries for clean vehicles (commonly referred to as electric vehicles or EVs). The U.S.-Japan CMA entered into force immediately upon signature. The CMA seeks to address Japan's concerns regarding certain content requirements for the consumer tax credit for new EVs included in P.L. 117-169, known as the Inflation Reduction Act of 2022 (IRA). The IRA requires a certain percentage of critical minerals in EV batteries to be sourced from the United States or U.S. free trade agreement (FTA) partners. Congress has approved all previous U.S. FTAs via legislation and typically set FTA procedures and requirements in Trade Promotion Authority (TPA), which expired in 2021. The United States and Japan do not have a congressionally approved FTA, but subsequent to the signing of the U.S.-Japan CMA, the U.S. Treasury Department issued a proposed rule including Japan as an FTA partner for the purposes of the IRA EV tax credit. The U.S.-Japan CMA and its designation as an FTA tie into a broader discussion about congressional and executive trade authorities. The CMA also raises issues for Congress regarding the broader U.S.-Japan trade relationship, CMA negotiations with other trading partners, and the implementation of the EV tax credit. IRA EV Tax Credit The IRA provides consumers a tax credit of up to $7,500 for new EVs (26 U.S.C. §30D). To qualify for the tax credit, vehicles must meet certain overall requirements, including final assembly in North America and retail price caps. Vehicles can qualify for partial credit if they meet content requirements related to the components or critical minerals in the EV battery. Specifically, the $3,750 critical minerals-related portion of the credit requires a certain percentage by value of an EV battery's critical minerals (as defined in 26 U.S.C. § 45X(c)(6)) to be extracted or processed in the United States or in a U.S. FTA partner country, or recycled in North America. The percentage requirement increases annually, starting at 40% as of April 18, 2023, and reaching 80% on January 1, 2027. In addition, starting in 2024 and 2025, respectively, EVs cannot qualify for the credit if they contain battery components or critical minerals from foreign entities of concern, which includes countries such as Russia and the People's Republic of China (PRC, or China), a dominant player in the EV supply chain. Treasury has stated that it will issue guidance on the foreign entity of concern provision by the end of 2023. Some analysts have expressed concerns about a high risk for potential disruptions to critical mineral supply chains because current mining and processing is concentrated in a small number of countries, notably China. Such analysts have commented that this challenge could become more acute as demand for critical minerals grows due to the global transition towards clean technologies. U.S. policymakers crafted IRA EV tax credit requirements that in part reflect concerns over U.S. dependence on PRC EV supply chains. FTA Partner Provision and CMA Negotiations There is no statutory definition for an FTA, but under World Trade Organization (WTO) rules, a regional trade agreement such as an FTA must cover substantially all trade between trading partners. The United States currently has 14 such comprehensive FTAs-authorized and approved by Congress-with 20 countries. During the Trump Administration, the United States and Japan signed the 2020 U.S.-Japan Trade Agreement (USJTA), which is not a comprehensive FTA. It reduces tariffs on some goods, but not those in the automotive or critical minerals sectors. Automotive industry groups and U.S. trading partners have urged the Biden Administration to broaden the definition of FTA (e.g., including the WTO Government Procurement Agreement) to allow more trading partners qualify. They have argued that it will be difficult to source adequate supplies of critical minerals from the United States and its comprehensive FTA partners, and that inadequate sourcing could negatively affect the resiliency of EV supply chains. The Administration has proposed new trade agreements focusing on critical minerals in EV batteries as a method of addressing the FTA partner requirement. The U.S.-Japan CMA was the first such agreement to be concluded; to date, the United States has also launched negotiations with the EU and the United Kingdom (UK). U.S.-apan C MA Overview Japan is the fifth-largest U.S. trading partner, and the automotive sector plays a major role in the U.S.-Japan economic relationship. In 2022, the United States imported $48.2 billion in vehicles and parts from Japan and exported $2.2 billion to Japan. Since 1982, Japanese automakers have invested $60.4 billion in U.S. manufacturing facilities, and have announced various investments in EV and EV battery production following the passage of the IRA and the 2020 United States-Mexico-Canada Agreement (USMCA), which has North American content requirements. The U.S.-Japan CMA changes neither U.S. law nor existing tariffs, and does not include other market access provisions. In the CMA text, the United States and Japan stated that the agreement's objective is to strengthen and diversify critical minerals supply chains and promote the adoption of EV battery technologies. The CMA defines covered critical minerals as cobalt, graphite, lithium, manganese, and nickel-all key EV battery inputs. Among other measures, the United States and Japan agreed to: (1) maintain the current practice of not imposing export