A new free trade agreement between the US and Japan regarding key minerals used in electric vehicle batteries may qualify more EVs in the US for the $7,500 federal tax credit and hasten the shift away from gas-powered vehicles.
In order to qualify for the full $7,500, the Clean Vehicle Credit (CVC) stipulates that 40% of the minerals inside an EV's battery must come from one of the following three sources. That percentage increases each year, up to 80% by 2027.
- Extracted and processed in the US
- Extracted and processed from a US free trade partner
- Recycled in North America
The new deal puts Japan in bucket number two: a US free trade-partner. Both countries have agreed to not enact export restrictions on the most important minerals inside the batteries, Reuters reports. This includes lithium, nickel, cobalt, graphite, and manganese.
These battery-sourcing requirements are arguably the most restrictive on the long list of terms laid out in the Inflation Reduction Act, as China currently produces the vast majority of battery minerals. But if an automaker uses too high of a percentage of Chinese materials, then their vehicles will not qualify, potentially hurting customer purchases.
In the US, the minerals extraction and recycling industries are too small to meet demand, though they are set to grow in the coming years thanks to $2.8 billion of federal funding.
In the meantime, minerals-focused trade deals are one way to provide US automakers with the materials they need from trusted allies. "As the demand for electric vehicle batteries is expected to grow significantly, securing important minerals essential for their production is an urgent issue," says Japanese Trade Minister Yasutoshi Nishimura.
The deal's impact on US federal tax credit eligibility will depend on the US Treasury. In the coming days, the Treasury plans to issue new guidance on the battery-sourcing requirements. In particular, the percentage of minerals in the battery that must be sourced from particular places, and what those sources are.
In a sense, agreements like the one with Japan seem to move away from the Biden administration's push to develop domestic EV manufacturing infrastructure, though they may be a necessary loophole given the limited domestic supply of battery minerals. The Treasury was originally set to provide updated guidance in December 2022 before punting to March. Democratic Sen. Joe Manchin of West Virginia criticized the decision, saying it "created an opportunity to circumvent stringent supply chain requirements."
But US and Japanese officials say the agreement has value no matter what updated guidance the Treasury provides. It contains provisions to promote labor rights as well as battery minerals recycling, which would help both countries.
"Japan is one of our most valued trading partners and this agreement will enable us to deepen our existing bilateral relationship," US Trade Representative Katherine Tai said in a statement. "This is a welcome moment as the United States continues to work with our allies and partners to strengthen supply chains for critical minerals, including through the Inflation Reduction Act."
The two countries agreed to review the minerals agreement every two years, revising as needed.