I assume most readers of this blog will already understand what I'm about to say, but I'm writing it because I see a bit of confusion in the public discussion of issues surrounding the Inflation Reduction Act's electric vehicle tax credits.
These tax credits -- a bit of background description is here -- require assembly of the vehicle in North America, and include various domestic/regional content requirements in relation to the inputs for the vehicle. Requirements of this sort are almost certain to violate GATT Article I:1 or Article III:4 or SCM Agreement Article 3.1(b), although each particular aspect of the assembly/content requirements has to be examined separately, and the claims and possible defenses will vary a bit.
What's important to note here is that while protectionist domestic content requirements of this sort are very likely to violate WTO rules, not all protectionism is prohibited under WTO rules. Protectionism is constrained but not totally prohibited. For example, governments can, subject to the liberalization commitments they have agreed to, impose tariffs and can include "Buy National" requirements in government procurement. With tariffs, governments negotiate a schedule of concessions, promising not to charge more than a certain tariff rate for particular products; and with procurement, governments who are parties to the Government Procurement Agreement agree to have specific domestic government procurement entities covered by non-discrimination and other rules.
So what's the difference between these various forms of protectionism? Why be flexible with tariffs and procurement (allowing them to the extent agreed by negotiations), but very strict with domestic content requirements (basically prohibiting them)?
A key issue is variations in the difficulty of monitoring these measures. Tariffs and procurement entities are relatively easy to track and to establish rules for. Tariffs are set out in a domestic tariff schedule; procurement entities publish bids for government contracts. By contrast, a wide range of tax and regulatory measures, at the national, state and local levels, could include domestic content requirements, and it's difficult for anyone to follow all of them. You would have to check every proposed piece of legislation/regulation in order to know whether such requirements are being considered.
In addition, I'm not sure how you would negotiate constraints on the use of domestic content requirements, as has been done with tariffs and procurement. Tariffs can be scheduled by product and Buy National can be scheduled for each procurement entity. But with domestic content requirements, all or nothing seem seem to be the only practical option.
As a result, the current approach has been to prohibit domestic content requirements entirely, while steering political demands for protectionism to more transparent and easier to govern measures such as tariffs and procurement.
That approach makes sense to me, and I haven't heard a good argument as to why it should be reconsidered. If the Biden administration is thinking of revisiting this approach, and pushing for looser rules on domestic content requirements, it would open a big loophole in the trading system.
