The U.S. struck a trade deal with Japan that aims to allow Japanese cars to qualify for a new electric vehicle tax credit and push China out of their critical mineral supply chains. But it’s not clear if Japanese automakers can shake off China in time to meet its increasingly strict sourcing rules.

And top trade and tax leaders in Congress, who passed the subsidy in last year’s climate spending package with the goal of loosening China’s control of electric vehicle critical minerals while shifting the supply chain to U.S. and friendly countries, argue the agreement has no teeth.

“It’s clear this agreement is one of convenience,” House Ways and Means Committee ranking member Richard E. Neal, D-Mass., and Senate Finance Chair Ron Wyden, D-Ore., said in a statement. “Even among allies, the United States should only enter into agreements that account for the realities of an industry, learn from past agreements, and raise standards.”

Congress has been critical of the Biden administration’s implementation of electric vehicle subsidy sourcing rules, since it can take years to build out aspects of mineral supply chains. Sen. Joe Manchin III, D-W.Va., who reserved support for the package unless it added new sourcing rules to favor the U.S. and its allies, has especially pressed Treasury to adhere to a stricter interpretation of the law that brings more manufacturing jobs stateside.

Manchin was among the lawmakers who decried the Treasury’s March 31 guidance, which he and others said would have U.S. tax dollars supporting manufacturing jobs overseas. The guidance requires a portion of minerals in a battery to be mined or refined in the U.S. or a country with a free trade agreement to qualify for half of the credit. The credit will at first apply to EV batteries in which 40 percent of minerals are sourced domestically or from free-trade partners. The amount will climb to 80 percent after 2026.

Limited agreements

More concerning for trade leaders was the Treasury’s inclusion of a provision allowing the administration to propose additional countries for free-trade status for specific critical minerals. And the guidance didn’t lay out a path for them to get approval from Congress, even though free trade agreements historically require it.

The recent deal with Japan is an example of these so-called Critical Minerals Agreements, and Treasury touted it as containing “robust obligations” to ensure free trade in critical minerals and “detailed undertakings related to the enforcement of labor and environmental laws.” 

But lawmakers such as House Ways and Means Trade Subcommittee ranking member Earl Blumenauer, D-Ore., said the administration is “redefining a Free Trade Agreement” with the guidance, and Rep. Dan Kildee, D-Mich., also a member of the subcommittee, accused the administration of “bypassing Congress’ role in ratifying free trade agreements” with the deal. 

Because the deal was rushed, a Democratic aide said that it doesn’t include enforceable or binding provisions that are a part of other congressionally approved free trade agreements. That, in turn, means the deal lacks specific commitments to kick China out of Japan’s supply chain or binding environmental or labor standards. House Ways and Means Chairman Jason Smith, R-Mo., has also argued that the agreement does “nothing to shift critical mineral supply chains away from China.”

“The Administration has not been transparent with the American people and has ignored major concerns raised by Congress, including failing to provide an analysis of the effects this agreement would have on American workers,” Smith said in a statement.

Since there was no legislative discussion of the trade agreement, lawmakers know few details about how the U.S. and Japan plan to decrease their reliance on China. Japan is a top processor and producer of permanent magnet motors used in EVs made of so-called rare earth minerals, but it still gets much of its raw materials from China, said Mark Seddon, senior metals consulting manager at energy market intelligence group Argus Media. 

‘Words on paper’

Seddon added that incentives like tax credits could help to boot China out of Japanese and American critical mineral supply chains, but it could still take years to build up the mining and processing capacity to do so. Deals like this tend to be “a lot of words on paper and a lot less money behind them,” he said.

“These deals are unlikely to change that significantly to start with because there just isn’t capacity [for rare earth minerals] outside of China,” said Seddon. “A lot of this doesn’t make a blind bit of difference to the situation on the ground unless there’s something really solid,” like an offtake agreement or commitments to build processing plants and other infrastructure. 

Jane Nakano, energy security and climate change senior fellow at the Center for Strategic and International Studies, is more hopeful that U.S. cooperation with Japan can help the countries wean themselves off of China. Japan has been increasing its non-Chinese sources — its recent decision to acquire a stake in an Australian rare earth project at Mount Weld could supply “up to 30 percent of Japan’s rare earth demand,” Nakano estimated. 

Although Japan could meet the sourcing standards to apply for the tax credit initially, it’s not clear if Japanese automakers can meet increasingly stringent standards that call for EV batteries to be made with at least 80 percent of minerals from the U.S. or a trade agreement country by 2026.

With the “rushed” deal, the Democratic aide said that the administration has written a blank check. And as the U.S. continues discussions with the European Union over a critical mineral trade agreement, they’re concerned the Japan deal will be replicated.

Lawmakers are hoping that Treasury rewrites the free trade agreement language as it releases further guidance of the tax credit. It’s not clear if any are seeking legislation to amend the guidance at this time.