Yellen Heard Bipartisan Disapproval of Flexibility for Critical Minerals in IRA

Democrats and Republicans on the House Ways and Means Committee signaled their displeasure to Treasury Secretary Janet Yellen, as she suggested that critical minerals mined or processed in Japan or Europe may be considered as in-bounds for regional value content if those countries reach a critical-minerals-specific trade agreement. The U.S. and Japan have a free trade agreement reached during the last administration (see 1909260014) which reduced or eliminated some tariffs, but was not a comprehensive FTA that required a vote from Congress.

However, there doesn't seem to be a legislative path to override what Treasury could do in this arena. Still, the bipartisan griping about the intent of the framers of the legislation being ignored could help a potential litigant, if someone sought to overrule a regulation in court.

About four hours after the hearing ended on March 10, the White House and European Commission President Ursula von der Leyen said the EU and the U.S. are negotiating an agreement that will allow critical minerals processed or sourced in the EU to qualify for the content requirements limited to FTA partners (see 2303100073).

Rep. Adrian Smith, R-Neb., the chairman of the Ways and Means Trade Subcommittee, told Yellen: "We know exactly what a free trade agreement is, as do our partners," and asked Yellen to clarify what flexibility she thinks she has to define what an FTA is in order to broaden the sources of critical minerals that would be allowed in electric vehicle batteries if the vehicles are to qualify for consumer tax credits.

Yellen directed him to the white paper Treasury previously issued, which suggested the department could go beyond comprehensive FTAs (see 2212290032). It said the administration could negotiate a new agreement with a partner if it "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."

An FTA definition is important because to qualify for $3,750 of an up-to-$7,500 tax credit for a new electric passenger vehicle, a certain percentage of the critical minerals in the advanced battery has to be either mined, processed or recycled in either the U.S. or a country that has an FTA with the U.S.

Yellen told Smith that these provisions in the Inflation Reduction Act are there "to strengthen supply chains we rely on for energy ... ."

The ranking member of the subcommittee, Rep. Earl Blumenauer, D-Ore., told Yellen he agrees with the objectives, but he doesn't believe that a sector-specific FTA for critical minerals is what the statute calls for. He warned her that when the administration neglects its duty to collaborate with Congress on trade policy, the policy is not durable. He pointed to the failure of the Trans-Pacific Partnership, which would have created a traditional FTA with Japan, as an example, and said the fallout from that fight continues. He said the administration should not just follow the spirit of the law when it comes to FTAs, but the letter of the law as well.

Yellen replied, "Consultation is super important."

Rep. Linda Sanchez, D-Calif., also complained that the administration is not honoring congressional authority to establish trade policy with how it's implementing the IRA's EV regulations, and expressed concern that allowing more countries to qualify in the critical minerals club could discourage development of lithium mining in California.

Yellen noted that the IRA also subsidizes mine operators and processors directly. She said currently "we're highly dependent on China," and that officials are discussing establishing a raw materials agreement with Europe to ameliorate that -- and that demand would be high enough in coming years that there would be a need for both domestic and allied supplies.

Rep. Brian Fitzpatrick, R-Pa., was the most vociferous opponent of the administration's approach, telling Yellen she is redefining free trade agreements, contrary to what he said was the "clear intent" of the law.

He told her that Japan and Germany withheld semiconductors for automobiles from U.S. manufacturers during the chip shortage, so that they could be used by their own automakers. He asked her if she knew about non-tariff barriers Japan imposes on U.S. auto exports, such as safety standards, and reiterated former President Donald Trump's repeated complaint that the EU has a 10% tax on cars, while the U.S. tariff is 2.5%.

Yellen said that while conditions are not yet there for agreements, agreements that could be reached with Japan and the EU would forbid export controls on critical minerals, and they would fulfill Congress' goal of reducing reliance on China for advanced battery inputs.

In a hallway interview outside the hearing, Fitzpatrick noted he did not vote for the bill -- no Republican did -- but said "the congressional intent was clear" in the section regarding advanced battery critical minerals. He said it's a separation of powers issue.

He did not directly answer a question on whether Congress could reverse the administration's IRA implementation decisions. He just said: "If we're going to be engaging with Japan and the EU specifically on autos, to that level of specificity, I think we ought to debate that -- the merits of what's good for our country."