This is the second of two posts on trade agreements in the news over the last ten days.
During the holidays, Treasury and the IRS confirmed what many had already been discussing since President Biden signed the Inflation Reduction Act in November: that they might take an expansive definition of “free trade agreement” when determining if the “critical mineral requirement” is met for the new clean vehicle tax credit.
In their White Paper, Treasury and the IRS track the statutory language and describe the requirement:
… the critical mineral requirement will be met if the percentage of the value of the critical minerals in the vehicle’s battery that were extracted or processed in the United States, or in any country with which the United States has a free trade agreement in effect, or recycled in North America, is equal to or greater than 40 percent for a vehicle that is placed in service in 2023 after the date on which Treasury and the IRS issue proposed guidance.
The White Paper then states:
The term “free trade agreement” is not defined in the Inflation Reduction Act (or in any other statute). Treasury and the IRS expect to seek comment in the proposed guidance on what criteria should be used to identify free trade agreements for the purposes of the critical minerals requirement and expect to propose that these criteria include whether an agreement reduces or eliminates trade barriers on a preferential basis, commits the parties to refrain from imposing new trade barriers, establishes high-standard disciplines in key areas affecting trade (such as core labor and environmental protections), and/or reduces or eliminates restrictions on exports or commits the parties to refrain from imposing such restrictions, including for the critical minerals contained in electric vehicle batteries. Treasury and the IRS also expect to propose that the term encompasses, at minimum, the comprehensive trade agreements of the United States with the following countries: Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, South Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru and Singapore. Further, Treasury and the IRS expect to propose that the Secretary may identify additional free trade agreements for purposes of the critical minerals requirement going forward and will evaluate any newly negotiated agreements for proposed inclusion during the pendency of the rulemaking process or inclusion after finalization of the rulemaking.
Although this was unsurprising – this already came up in various conversations among scholars and among governments in November and early December – some on social media appeared dismayed by what they saw as the diminution of a statutory and household term and a questionable-to-them workaround.
Readers of this blog will know that, in addition to not being defined in U.S. statute, “free trade agreement” is not used in the GATT. Rather, GATT Article XXIV refers to “free-trade area”. (Last year, I asked students in my Law of Trade Agreements class to determine whether the arrangement created by IPEF -- or what we knew of it at the time of the class exam -- was consistent with Article XXIV of the GATT. This was of course partly a trick question. And implicit in the question was the issue of whether it mattered….)
Apart from these rather academic affairs, we all know what we mean when we say “free trade agreement”. We also know that the Biden Administration is not inclined toward those “comprehensive” agreements, to use the White Paper language. As with the Administration before it, other forms of trade-related deals are in vogue. Treasury and IRS go so far as to suggest that “newly negotiated agreements” could be coming. (Query here under what authority those agreements would be negotiated, but we’ve already had that conversation.)
More may not be needed, however. When it comes to the more than 1200 trade-related agreements that the United States maintains covering over 100 countries, they very often “reduce or eliminate trade barriers”, just not all of them. Consistent with what Treasury and IRS suggest in their illustrative list, these mini-deals or trade executive agreements could still be considered free trade agreements or at least “free-ing” agreements: they almost always make the exchange of goods and services easier. The United States has 107 such agreements with Japan and about 60 with the European Union, despite not having a comprehensive trade agreement with either partner. These agreements cover everything from avocados to zoning. The set of countries with which the United States has no agreement accomplishing what Treasury and IRS propose is quite small (check out the map).
That said, the matter may not be so easily resolved with members of Congress pushing back and the potential for litigation.
This is certainly not the first time trade-relevant rules have faced multidirectional challenges on implementation.
The new fisheries import rule followed a somewhat similar path. (The rule was intended to become effective on January 1 but recently was pushed back another year.) According to this rule, and generalizing considerably, the only foreign fisheries permitted to export fish and fish products to the United States will be those that the United States has approved. Approval turns on whether the fishery has sufficient protection in place, in the view of the United States, for marine mammal bycatch. Over the last several years, trading partners raised significant concern about the details of the rule while environmental groups put pressure on the executive branch to implement the law as Congress intended in the 1972 Marine Mammal Protection Act. The result has been a very long implementation process during which Commerce and USTR have worked hard to avoid ruffling feathers – or scales? – among major fish-exporting partners.
Whether albacore or zirconium, or others that may be coming, these separation-of-trade-law-powers implementation issues are likely to continue.
