On March 28, 2023, in an effort to support their partnership as allies in the race to strengthen their critical mineral supply chains for electric vehicle batteries, the United States and Japan entered into the Agreement Between the Government of the United States of America and the Government of Japan on Strengthening Critical Minerals Supply Chains (the “Trade Agreement”).1 For the United States, this is another step toward ending its reliance on non-ally countries for sourcing the critical minerals needed for electric vehicle batteries. The Trade Agreement builds on the 2019 U.S.-Japan Trade Agreement.
In connection with signing the Trade Agreement on behalf of the United States, US Trade Representative Katherine Tai commented:
Japan is one of our most valued trading partners and this agreement will enable us to deepen our existing bilateral relationship. 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.2
The Inflation Reduction Act (the “IRA”) enacted by the Biden Administration last August, includes approximately $369 billion in green energy tax incentives, including a new, advanced manufacturing production tax credit for taxpayers that produce critical minerals as well as tax credits promoting the sale of electric vehicles.3 It is noteworthy that the definition of “critical minerals” under the Trade Agreement includes a list of only five minerals—cobalt, graphite, lithium, manganese and nickel—whereas, under the IRA, 50 minerals are deemed critical.
Details of the Trade Agreement
Under the terms of the Trade Agreement, the United States and Japan have agreed, among other things, to:
i. Affirm their World Trade Organization (“WTO”) obligations not to impose prohibitions or restrictions on imports or exports of critical minerals to the other’s territory;
ii. Maintain their current practice of not imposing export duties on critical minerals exported to the other’s territory;
iii. Affirm their WTO obligation of according national treatment to the critical minerals of the other territory;
iv. Discuss with the other appropriate domestic measures to address non-market policies and practices of other countries affecting critical minerals trading and the global supply chain;
v. Discuss with the other best practices regarding investments by foreign entities in their territory’s critical minerals and the effect of such investment on its national security (e.g., for the United States, reviews by the Committee on Foreign Investment in the US (“CFIUS”), including, when appropriate, government-to-government notifications of such investments); and
vi. Supporting the other’s efforts to address any supply chain disruptions.4
The Trade Agreement also encourages high levels of environmental protection with respect to critical minerals and includes language confirming their intention to adhere to certain labor rights and enforce labor laws with respect to critical mineral extraction and processing.5 Generally speaking, these commitments do not impose any new obligations on the United States with the potential exception of the commitment not to impose duties or tariffs on US exports—although no such limits or constraints are currently in place. The Trade Agreement mandates that each country evaluate its respective capacities for the extraction and processing of critical minerals every two years to determine if an amendment to, or termination of, the Trade Agreement is appropriate.6
Importance of the Trade Agreement
Under the IRA, taxpayers that purchase an electric vehicle will not receive the full benefit of the tax incentives granted under it if a certain percentage of critical minerals in the electric battery in that vehicle are extracted or processed outside the United States or from a country that does not have a “free trade agreement” with the United States.7 Despite being a US ally, and like many other US allies, prior to the potential impact of this Trade Agreement, Japan does not have a “free trade agreement” with the United States that would be deemed eligible under the IRA. While further details are to be provided by the US Treasury (the “Treasury”) later this week on what exactly qualifies as a “free trade agreement” under the IRA, the terms of the Trade Agreement appear likely to satisfy the criteria suggested by the Treasury in its December 2022 white paper as an eligible agreement.8 Japanese trade officials have publicly stated that they expect the Trade Agreement to enable Japanese producers to qualify for the “free trade agreement” criteria in the IRA.9 Further, the Trade Agreement may set a precedent for other US allies that do not currently have qualifying “free trade agreements” under the IRA but with which the United States would like to partner or cooperate with to source critical minerals and strengthen supply chains, such as the European Union.
1 See United States and Japan Sign Critical Minerals Agreement, Office of the United States Trade Representative, Press Release, March 28, 2023.
3 See the Mayer Brown Legal Update, Strengthening the US Supply Chain for Critical Minerals and the Inflation Reduction Act – Opportunities and Challenges, September 29, 2022, by Meaghan S. Connors, J. Paul Forrester, and Kevin L. Shaw.
7 See the Mayer Brown Legal Update Tax Credits for Electric Vehicles: What's Changed for the US IRA, September 9, 2022, by Daniel T. Kiely.
8 See the Mayer Brown Legal Update, Critical Minerals and Electric Vehicle Battery Sourcing Requirements Under the IRA: Waiting With Bated Breath, March 24, 2023, by Meaghan S. Connors, Ian Coles, J. Paul Forrester, Daniel T. Kiely, Warren S. Payne, and Kevin L. Shaw.
9 See US, Japan Sign Trade Deal on Electric Vehicle Battery Minerals, Reuters, March 28, 2023, by David Lawder.