The United States has limited the tax credits for electric vehicles to domestically manufactured cars, flying in the face of opposition from Japan, Europe and other trade partners.

If other countries also take similar measures, trade rows could proliferate, delivering a blow to the efficiency of the international division of labor. Japan should team with major trade partners to pressure the United States to withdraw the new tax break that runs counter to global trade rules.

The U.S. Congress last year passed a measure to promote EVs with a tax credit of up to $7,500 (1 million yen). The new tax break measure comes with new restrictions that are being phased in related to assembly, batteries and supply chains.

To qualify for the full tax credits, electric cars must be assembled in the United States with a certain percentage of critical battery minerals and battery components sourced from the United States or any country that has a free-trade agreement with the United States. 

As Japan and Europe took exception to the measure, the U.S. government has agreed to treat EV battery materials made in Japan equally as those produced in the United States. But Washington has refused to change the other restrictions including the requirement of the final assembly of eligible vehicles that must occur in the United States.

As a result, only 11 vehicles offered by U.S. manufacturers are on the list of eligible models announced recently by the Treasury Department.

The World Trade Organization’s rules ban all government measures other than tariffs that discriminate against imports in favor of their domestic competitors. But trade barriers for national security are exempted from this principle.

So there could be a reasonable case for exempting U.S. EV tax credit rules from the principle if the restrictions are really aimed at cutting China out of the supply chain of EVs and batteries.

Even so, however, it does not make sense to design the rules so that they also exclude products from Japan and Europe, allies of the United States, from the list of eligibility.

It is difficult to draw a clear line between such restrictions on imports for security purposes and protectionist measures.

Countries have been cautious about resorting to this exception to avoid gutting free trade principles. Washington’s latest move has clearly overstepped the line of what is acceptable.

The concern is that the U.S. abuse of the national security exemption could spread protectionism around the world.

This is occurring at a time when the COVID-19 pandemic and Russia’s invasion of Ukraine have disrupted supplies of various important products and materials, creating a fresh wave of interest in this exemption provision among many trading powers.

The European Union is considering easing the restrictions on state subsidies to domestic companies in member countries.

Also troubling is the U.S. tendency to disregard the importance of the roles performed by the WTO. The world trade governing body’s appeals mechanism has not been functioning because the United States has blocked appointments to the WTO's appellate body.

Meanwhile, the increasingly acrimonious confrontation between the United States and China has led to a series of tit-for-tat actions to restrict trade in such strategic products as computer chips. Now, the postwar global trade regime is in a serious crisis.

With its population shrinking, Japan is growing increasingly more dependent on exports for ensuring the viability of its industries. Japan will suffer greater damage than the United States or Europe from any serious disruption of free trade.

In recent years, however, the Japanese government has been taking policy measures to protect and promote domestic industries, such as providing massive subsidies for the construction of plants in Japan to manufacture cutting-edge computer chips and batteries and supporting moves to shift production from abroad back home.

These actions undermine the credibility of Tokyo’s calls for compliance with international trade rules.

Japan needs to ask itself important questions about its industry policy, such as whether it has introduced unreasonable non-tariff trade barriers or provided excessive support to domestic industries under the pretext of enhancing the resilience of supply chains.

The government should re-examine the trade policy measures it has taken and rectify unfair ones that are at odds with the trade rules.

--The Asahi Shimbun, April 20