The Inflation Reduction Act contains new rules to bolster EVs in the country. Offering tax credits for electric vehicles could prompt many European companies to move production to the US and potentially breach WTO rules.

EU officials fear that the new tax credits for electric vehicles introduced by the US Inflation Reduction Act (IRA), the landmark green legislation passed in August, discriminate unfairly against EV production in Europe and other countries. 

The IRA will provide tax credits for electric vehicles produced in North America to make them more affordable and help low-income households shift away from gas-powered cars. The new law requires EV batteries – the majority of which are produced with minerals, components, and battery cells imported from China – to be made in North America. More precisely, it stipulates that at least half of all car batteries must come from the US, Mexico, or Canada by 2024, rising to 100% by 2028. 

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In a recent interview with the Financial Times, Europe’s competition enforcer Margrethe Vestager urged the US to rethink the “discriminatory” tax breaks, which risk disadvantaging the EU by prompting domestic car manufacturers to move production across the Atlantic. European Commission spokeswoman Miriam Garcia Ferrer called the move a potential “trans-Atlantic trade barrier” that is “discriminating against foreign producers in relation to US producers.”

Since the IRA became law, the EU has been working on examining whether the tax credits violate World Trade Organization (WTO) rules. “As a matter of principle, you should not put this up against friends,” Vestager told the FT. “You have what we see as an unbalanced subsidy.”

The European Union is not the only country that has since accused the newly introduced tax credits on electric vehicles of breaching WTO rules. In August, South Korea’s trade ministry released a statement asking US trade authorities to ease battery component and final vehicle assembly requirements, Reuters reported. 

“Korea is deeply concerned that the recent US Senate’s EV tax incentive bill includes provisions for providing tax incentives discriminating between North American made and imported EVs & batteries,” a letter released in August by the Korea Automobile Manufacturers Association (KAMA) read.

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