The standoff, described to POLITICO by a dozen officials on both sides of the Atlantic, risks prolonging negotiations until the summer, leaving European automakers at a disadvantage in the U.S. auto market in the meantime. And it threatens to exacerbate disagreement over US efforts to promote domestic manufacturing of electric vehicles at a time when longtime allies aim to present a united front against climate change, China’s market power and war. from Russia to Ukraine.
US President Joe Biden and EU President Ursula von der Leyen kicked off critical mineral talks at the White House on March 10. But hopes have largely faded that a deal will be finalized before a summit of senior US and European officials at the end of the month.
The EU’s top trade official, Sabine Weyand, said earlier this month that the EU was “in intensive talks with the US to secure this deal, but we are also having intensive discussions with our Member States, because it is not something you can do overnight. So we try to do it as quickly as possible.
Biden’s landmark Inflation Reduction Act was designed to boost American manufacturing in its competition with Beijing and, simultaneously, wean the United States from its reliance on Chinese minerals to the green transition. China, for example, processes 85% of the world’s rare earth minerals, which are crucial components in everything from electric cars to smartphones to wind turbines.
To achieve this goal, US law, passed in August 2022, created a tax credit for electric vehicles equipped with batteries made with critical minerals harvested or processed in the United States or countries with which the United States have a free trade agreement. Countries like Australia, Canada, and South Korea all have formal free trade agreements with the United States, making them eligible for credits, but major auto-producing nations like the Japan, Germany, France and other EU members.
In March, the United States concluded a truce with Japan in the form of an agreement which prevents both sides from imposing tariffs on five critical minerals used in electric car batteries. EU trade chief Valdis Dombrovskis went on to describe the Japan deal as a “good basis” for talks between the US and the EU, and several people who saw the initial proposal from the United States says it is similar.
But so far, the EU and the US have been unable to reach a comparable agreement.
A major sticking point: the way the Cut Inflation Act is drafted creates a semantic imperative for Brussels and Washington to call any minerals deal a “free trade agreement,” even if such pacts have traditionally required the approval of the US Congress and, in the European Union, the member countries of the bloc as well as the European Parliament.
To avoid this long ratification process, Brussels is pushing Washington to opt for a “non-binding instrument” instead, according to four EU diplomats, speaking on condition of anonymity because they were not authorized to speak freely on the issue. Others have suggested calling it an “executive” agreement. “In this case, substance follows form,” an EU diplomat explained. “The more binding the instrument, the more closely it will be scrutinized by EU countries.”
But any non-binding deal appears to be a non-starter in the U.S. A senior administration official, who spoke on condition of anonymity to discuss ongoing negotiations, told POLITICO “there needs to be have binding commitments on trade” for the pact to qualify as a “free trade agreement” under the Inflation Reduction Act, a definition established by the Treasury Department.
Japan’s Critical Minerals Agreement met this requirement because it was seen as an addition to a 2019 trade pact, which was not a traditional congressional-approved free trade agreement. However, it contained commitments for both countries to reduce tariffs on agricultural and industrial products, the US official noted. There is no existing comparable agreement with the EU or any other country.
But the issue is also politically sensitive for the Biden administration after members of Congress strongly opposed Japan’s critical minerals deal and accused the administration of undermining the authority of Congress by allowing the Treasury Department to designate free trade agreements without submitting those agreements to lawmakers for a vote.
“Leaving aside the question of whether the Treasury’s guidance on the definition of ‘free trade agreement’ is appropriate, it would be troubling to repeat either the substance or the process associated with Japan’s Critical Minerals Agreement. “said a Democratic congressional aide, who was not authorized to speak publicly. said POLITICO.
A second congressman added that lawmakers took their frustrations directly to the White House and the U.S. Trade Representative’s office with a clear message that Japan’s deal should not be repeated with the EU.
“Many members will tell you that if the deal they are negotiating is a free trade agreement used to provide incentives included in the Cut Inflation Act that is due to come to Congress for a vote,” said the second staff member, who was also not authorized to speak to reporters. “You certainly can’t hand out tax credits without congressional approval. This is the position of many members of Congress.
The Biden administration has heard the frustration, the senior administration official said, although there are no plans “at this time” to put the final EU deal to a vote. “It sheds a lot of light, with our legal constraints, on the path we choose and we will consult (legislators) on an ongoing basis throughout the negotiations with the EU,” the official said.
Political dynamics in the US and disagreement between US and EU officials over the legal structure of the deal make it increasingly unlikely that a deal can be reached before top EU and state trade officials States do meet for the biannual Business and Technology Council in Sweden. May 30 and 31. The four European diplomats and an American official dismissed the chances of obtaining an agreement in time.
US negotiators “didn’t really think about that as a deadline,” the administration official said, but the EU was optimistic that a deal could be done in time. Still, no one wants to rule out the possibility of a last-minute political nudge to seal the deal. THE Trade and Tech Council Draft Statementas POLITICO sees it, has a placeholder for the deal.
If the talks continue beyond the TTC meeting, another potential deadline could be the next EU-US summitwhich is scheduled for the fall.
But behind closed doors, some European diplomats are even wondering if the deal is still worth it. After all, the political debate over the effects of the Inflation Reduction Act has died down in recent months. “If the scope proposed by the United States is not sufficient, then it makes no sense for us to negotiate anything,” said one of the European diplomats mentioned above, s speaking on condition of anonymity as they were not authorized to speak freely on the issue.
Nonetheless, Dombrovskis and his counterpart, U.S. Trade Representative Katherine Tai, meet monthly to advance progress on critical minerals and other transatlantic issues.
According to a US readout of their latest virtual meeting, the two sides stressed that “an ambitious CMA between the US and the EU would further our shared goals of boosting our mineral production and processing and expanding access to sources of critical minerals that are sustainable, reliable and free from labor abuse.
Moens and Aarup reported from Brussels. Reported too much from Washington. Camille Gijs and Mark Scott contributed to this report.
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