Is the Cure Worse Than the Disease?

Eakinomics: Is the Cure Worse Than the Disease?

The Inflation Reduction Act (the IRA that is neither a saving vehicle nor a paramilitary organization) contained a $7,500 refundable tax credit (aka, cash) for the purchase of clean energy vehicles. The design was straightforward protectionist industrial policy that violated U.S. commitments under the World Trade Organization because the IRA’s domestic content requirements for electric vehicle (EV) and battery production openly discriminate against our trading partners. Weirdly, this totally irked said trading partners who have complained loudly to the administration and begun retaliatory subsidies of their own. It also limited the number of eligible vehicles, which offended certain domestic interests.
 
So, as nicely explained by Tori Smith, the Biden Administration got busy. First, it announced a new critical minerals (used to make batteries) agreement with Japan. Three days later, the Treasury and the Internal Revenue Service released long-awaited guidance and a notice of proposed rulemaking, respectively, that indicated that this agreement was actually a “free trade agreement” and that any such new executive agreements negotiated by the U.S. Trade Representative (USTR) would make countries eligible to participate in the critical mineral and battery supply chains under the IRA. Protectionist disease solved!
 
Unfortunately, now the administration had a new problem: Congress. “These two actions drew significant attention in Congress, with some members calling the proposed rule, interpretation of ‘free trade agreement,’ and agreement with Japan unconstitutional. Ways and Means Trade Subcommittee Ranking Member Earl Blumenauer (D-OR) accused the Biden Administration of ignoring ‘congressional intent and unilaterally circumvent[ing] Congress’ constitutional role on international trade.’ Senate Finance Committee Ranking Member Mike Crapo (R-ID) claimed the administration’s efforts were meant to ‘bypass the American people.’ Senator Joe Manchin (D-WV) suggested that he would be willing to challenge the administration’s actions in court.”
 
But, in fact, this is a problem of Congress’ own making because the IRA does not contain a definition of “free trade agreement.” Congress left the door open for the executive branch to make such a definition – it is contained in the Treasury’s proposed rule – but Treasury is defining the term in a way that seems inconsistent with the history of congressional understanding and intent.
 
Between the two of them, the administration and Congress have made a mess of the EV tax credit on both the domestic and international front. The whole situation is a reminder that Congress has given away far too much of its constitutional authority to “regulate commerce with foreign nations.” It should get busy taking it back.