On June 14, 2023, the European Commission proposed negotiating directives for a critical minerals agreement with the United States, intending to promote a partnership between the US and the European Union as allies in the global race to net zero and to strengthen their respective critical mineral supply chains. Back in early March, US President Biden met with European Commission President Ursula von der Leyen, and they issued a joint statement announcing that they would commence discussions about an EU-US Critical Minerals Agreement (the “Critical Minerals Agreement”).1
The Inflation Reduction Act (the “IRA”) enacted by the US last August includes substantial 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. Certain features of the IRA, however, created tension between the US and the EU. Despite the US and EU having the largest bilateral trade and investment relationship in the world, the EU currently does not have a “free trade agreement” with the US that would be deemed eligible under the IRA.2 This Critical Minerals Agreement is important because, in order to benefit from the tax incentives granted under the IRA, a certain percentage of critical minerals in the electric battery must be produced in the US or sourced from a country that has a “free trade agreement” with the US. The proponents of the Critical Minerals Agreement argue that its adoption would mean that the EU would have a status equivalent to having a “free trade agreement” with the US.
If adopted by the Council of the European Union ("Council"), the negotiating directives will allow the European Commission to commence negotiations for an agreement that contains the following provisions:
- Trade facilitation so that critical raw materials extracted or processed in the EU can be used in vehicles eligible for the US' Clean Vehicle Credit subsidies;
- Cooperation to make the critical raw material sector more sustainable by encouraging high environmental protection, international technical standards and circular economy approaches;
- Promotion of labor rights in the critical raw materials sector; and
- Strengthening sustainable and equitable supply chains through common standards, working together with allies and partners.3
The next step in the process is that the Council would adopt the proposed negotiating directives, following which formal negotiations with the US can begin.4 While it remains to be seen how quickly the EU can act on these directives, they are consistent with the EU’s Critical Raw Material Act passed in March 2023 and the EU’s proposed Net Zero Industry Act. The Critical Minerals Agreement would follow the trade agreement entered into by the US and Japan this past March, which resulted in Japan being included as a country that had a “free trade agreement” with the US.5 This Critical Minerals Agreement may also set precedent for other US allies that currently lack a “free trade agreement” but that are looking to partner with the US in the race to build more sustainable supply chains and move towards global net-zero goals.
We would be remiss not to mention that the critical minerals trade agreement negotiated by the Biden Administration with Japan has faced some bipartisan criticism from the US Congress, as the Biden Administration did not submit the agreement to Congress for approval. “Free trade agreements” generally are subject to approval by Congress prior to being deemed in effect. This criticism has led Congress to take action to curtail the ability of the Biden Administration to designate agreements that have not been submitted to Congress for approval as qualifying as “free trade agreements” for purposes of the IRA eligibility. For example, earlier this week, the US House of Representatives unanimously passed legislation that would prohibit the Biden Administration from designating the recently negotiated US-Taiwan Agreement as a “free trade agreement” for purposes of the IRA tax credits, as the agreement was not submitted to Congress for approval.
1 See Joint Statement by President Biden and President von der Leyen, The White House, Briefing Room, Statements and Releases, March 10, 2023.
2 See EU trade relations with the United States, Facts, figures and latest developments, https://policy.trade.ec.europa.eu/eu-trade-relationships-country-and-region/countries-and-regions/united-states_en, June 16, 2023.
3 See EU Moves forward with Critical Minerals Agreement negotiations with the US, https://ec.europa.eu/commission/presscorner/detail/en/ip_23_3214, June 14, 2023.
5 Japan was deemed a country that had a “free trade agreement” in the Notice of Proposed Rulemaking, 2023-06822.