The Seeds of Another Trade War over Clean Energy

Nikos Tsafos

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The legislative text for the president’s Build Back Better Act has several provisions to incentivize domestic job creation and reshoring. This is no surprise given that President Biden has, from the start, framed climate action in terms of delivering quality jobs for Americans. But the provisions, as written, treat domestic manufacturers differently than foreign ones: they offer higher credits for renewable energy projects with domestically sourced inputs and for electric vehicles manufactured in the United States. In the past, such measures have been found to violate the rules of the World Trade Organization (WTO), which aims for consistent treatment between domestic and foreign suppliers. It is easy to see the seeds of another trade war over low-carbon energy being sewn in Congress today.

Domestic jobs and manufacturing have been a recurring theme for the Biden administration, as part of an agenda to “rebuild the middle class.” In its review of critical supply chains, the administration floated a proposal to offer higher rebates for electric vehicles produced with high labor standards in the United States (p. 137) and suggested a push for the Department of Energy to boost “domestic manufacturing requirements for grants, cooperative agreements and R&D contracts” (p. 145); it tasked the U.S. Export-Import Bank “to support the establishment and/or expansion of U.S. manufacturing facilities and infrastructure projects in the United States that would support U.S. exports” (p. 14); and it hinted at several other measures to support local jobs and domestic manufacturing.

The proposed Build Back Better Act offers higher credits to electric vehicles assembled in the United States. There is a baseline credit, depending on the battery capacity and the year the vehicle was placed into the service, for up to $7,500. But there are two more credits: a $4,500 credit “if the final assembly of the vehicle is at a facility in the United States which operates under a union-negotiated collective bargaining agreement,” and a $500 credit “if the vehicle model is assembled by a manufacturer which utilizes no less than 50% domestic content in component parts of such vehicles and such vehicles are powered by battery cells which are manufactured within the United States.” So 40 percent of the maximum proposed credit for electric vehicles is linked to the location and labor practices of production.

There is a similar provision for renewable energy projects under the Investment Tax Credit and Production Tax Credit covering wind, solar, geothermal, and several other technologies. All these investments enjoy a baseline and a bonus credit “for projects which meet certain prevailing wage and apprenticeship requirements the facility meets. Both of these credits are raised if the facility meets the thresholds for domestic content (defined as: “if not less than 55% of the total cost of the components of such product is attributable to components which are mined, produced, or manufactured in the United States”). Here too, there is a clear effort to incentivize domestic manufacturing of components for renewable energy.

In the past, such measures have run afoul of WTO rules. One of the first cases, in 2010, that the United States brought against China related to low-carbon energy challenged China’s wind power equipment fund, which offered higher subsidies to projects with domestic components. In 2013, the United States challenged India at the WTO for a similar provision in India’s “National Solar Mission.” Other countries have brought similar cases and generally prevailed. Treating domestic and foreign suppliers evenly is one of the foundations of the WTO, and domestic content provisions have often been found to violate WTO rules.

Adding domestic content provisions to the Build Back Better Act could well spark a new round of trade conflicts. This will happen at a moment when the trade-climate agenda is already under strain. The European Union’s carbon border adjustment mechanism is also likely to be litigated. And the United States is opening a new front in trade tensions with China as it begins to seize solar products tied to forced labor. If anything, we can expect the trade-energy-climate nexus to become thicker and more complicated.

The provisions in the Build Back Better Act expose an inherent and growing tension in climate politics: governments around the world are using the promise of job creation as a basis for upping their ambition. Without measures to ensure that some benefits accrue visibly at home, rather than abroad, how are voters to support policies that might raise costs and lower competitiveness? For the past 15 years, the world has benefited immensely from global supply chains for solar, wind, and batteries, which helped bring down costs. Without global supply chains, costs will not fall as fast; with global supply chains, the domestic push for higher ambition might be tempered as benefits accrue overseas.

The point here is not that the Biden administration and Congress should not advance and favor domestic manufacturing— they should. In this case, they could advance alternate approaches, like subsidizing investment in domestic plant and equipment, to achieve a similar end without sparking a trade dispute. The more important task is for the Biden administration to offer a coherent theory for balancing the need for domestic jobs and manufacturing with a WTO system that is designed to clamp down on such practices. The administration has often said that the trade agenda must align with the imperative of climate change, but so far, it has nothing concrete on how to reconcile the two.