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European Union May Challenge Inflation Reduction Act on World Trade Organization

When we wrote about the Inflation Reduction Act, we mentioned that restricting the benefits to a few countries or North America would probably trigger a response from the World Trade Organization (WTO). The European Union (EU) confirmed that impression when it said that the new law is “discriminatory” and that it constitutes a “trade barrier.”
Inflation Reduction Act may cause headaches for the U.S. in the World Trade Organization (WTO) 6 photos
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The message came from Miriam Garcia Ferrer. The European Commission (EC) spokeswoman told the Associated Press that it is evident that the Inflation Reduction Act hurts free-trade principles defended by the WTO. The EC is the EU’s executive branch. Among many responsibilities, it is in charge of representing the 27 countries that are part of the EU. In other words, anything that restricts trade for one of these countries is an obstacle for them all.

The House of Representatives approved the Inflation Reduction Act on August 12. Joe Biden is expected to sign it next week, turning the bill into law. That will be the moment in which the first protests about the new rules may emerge in the WTO. Apart from the European Union, Japan, Brazil, and South Korea may join the complaints about the new American rules.

What these countries will argue is that the $7,500 federal tax credit reserved for vehicles with battery components or raw materials made in North America creates an artificial barrier to cars made elsewhere. And it is a meaningful one: with EVs that cost up to $80,000, it represents a 9.4% financial difference.

Brazil had a similar law to stimulate the local automotive industry. Worried about the lack of competitiveness with other markets, automotive executives and the Brazilian government conceived Inovar-Auto. The program allowed companies that announced manufacturing investments in the country to pay lower taxes. Jaguar Land Rover, Mercedes-Benz, and BMW built new factories in Brazil to access the advantages.

The plan was short-lived and did not bring the results the local industry expected. WTO condemned Brazil for it, and at least one company gave up on its factory. Mercedes-Benz sold its plant in Iracemápolis to Great Wall. Ford closed three factories in the country because they were not competitive.

Although WTO will likely condemn the American government due to the Inflation Reduction Act, the Biden administration should not give up on it. There’s too much at stake: the new law’s goal is to locally produce batteries and cell components made mainly in China nowadays. Until the U.S. can do that on its own, the law should not change. The American government may prefer to pay the price for this trade barrier – and it will not be cheap.

 
 
 
 
 

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