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1 1 (April 4, 2024)

handle is hein.crs/goveowu0001 and id is 1 raw text is: Congre &iona R Fesedrch Service hnformino Ih lecisIlive deat sin'e 1914 Updated April 4, 2024 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. Department of the Treasury issued a proposed rule including Japan as an FTA partner for the purposes of the IRA EV tax credit. The U.S.-Japan CMA ties into a broader discussion about congressional and executive trade authorities. Other issues for Congress include implications for U.S.-Japan trade relations, ongoing and future CMA negotiations, 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). U.S. policymakers crafted IRA EV tax credit requirements that, in part, reflect concerns over U.S. dependence on the People's Republic of China (PRC, or China). China dominates the EV supply chain, including mining and processing of critical minerals and production of EVs and EV batteries. To qualify for the tax credit, EVs must meet overall requirements, including final assembly in North America and retail price caps. EVs can qualify for partial credit if they meet content requirements related to the components or critical minerals in the EV battery. Specifically, as of January 2024, the $3,750 critical minerals-related portion of the credit requires 50% by value of an EV battery's critical minerals to be sourced from the United States or a U.S. FTA partner. The requirement will increase annually until reaching 80% in January 2027. In addition, starting in January 2024 and January 2025, respectively, EVs cannot qualify for the credit if they contain battery components or critical minerals from foreign entities of concern (FEOC), which includes countries such as Russia and China. In December 2023, Treasury and the U.S. Energy Department proposed rules defining FEOC to include all entities headquartered or operating in a FEOC country. The guidance indicates that FEOC-tied operations in the United States and FTA partner countries as well as arrangements such as licensing agreements could be either IRA compliant or noncompliant, depending on the specific corporate situation. The guidance also proposes a transition rule (until 2027) that would provide flexibility for certain low-value critical minerals that may be difficult to trace through the supply chain under current industry standards. Some companies have expressed uncertainty about whether current and planned operations will qualify for the credit and have called for more clarity regarding the definition of FEOC. 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 urged the Biden Administration to broaden the definition of FTA (e.g., including the WTO Government Procurement Agreement) to allow more trading partners to qualify. They argue that it will be difficult to source adequate supplies of critical minerals from the United States and its comprehensive FTA partners within the outlined timeframe. The Administration 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 launched negotiations with the European Union (EU) and the United Kingdom (UK). In November 2023, the United States and Indonesia agreed to develop a critical minerals action plan with a view toward future CMA talks. US-apan CMA Overview As of 2023, Japan is the sixth-largest U.S. trading partner (goods and services). The automotive sector plays a major role in the U.S.-Japan economic relationship. In 2023, the United States imported $54.7 billion in vehicles and parts from Japan and exported $2.6 billion to Japan. Since 1982, Japanese automakers have invested $61.6 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 for duty-free automotive trade. The U.S.-Japan CMA changes neither U.S. law nor existing tariffs, and does not include other market access provisions. The United States and Japan stated that the CMA's