US and Japan Sign Trade Deal for Battery Minerals

The United States and Japan signed a trade deal on Wednesday, paving the way for Japanese electric cars to potentially gain greater access to US electric vehicle (EV) tax credits under the Inflation Reduction Act. The deal is solely for battery critical minerals and could potentially add Japan to the list of free trade countries that can extract or process critical minerals in EV batteries.

The Impact of the Inflation Reduction Act on International Trade of Critical Minerals for EVs

The Inflation Reduction Act includes big changes to how the federal EV tax credit works, including restricting credit availability to vehicles assembled in North America and sourcing requirements for battery components and critical minerals. It requires a minimum amount of domestic sourcing and processing to be eligible for the $7,500 EV tax credit, spurring investment in the US battery supply chain. The US cannot produce all the critical minerals needed for EVs, so the law includes a loophole qualifying minerals from countries with which the US has a free trade agreement.

Since the act was passed, the global landscape for critical minerals and battery manufacturing has changed rapidly, and new free trade agreements promise to keep things fluid, injecting uncertainty for founders and investors. The EU is in talks with the US regarding the IRA while Japan is the only country to successfully negotiate a new agreement in its wake.

Moving EV Supply Chains Away from China

The US and Japan are taking steps towards moving EV supply chains away from China as they cooperate on critical minerals necessary for batteries. Japan will be a mineral supplier eligible to participate in projects that have won financing under the Inflation Reduction Act. Japan’s role is significant since it has a developed industry for processing and refining critical minerals.

Carmakers need to provide evidence that at least half of the metals and minerals used in their car’s battery were sourced from the US or a country with a free trade agreement with the US. Car makers have been trying to find ways around these requirements to comply with the law and keep their costs low. Deals such as the one with Japan help the US build its new supply chain for the energy transition.

Aligning Labor Standards

Japan and the US will remove export levies on the EV minerals they trade, and they will also align their labor standards in the mining department. The Inflation Reduction Act is the most ambitious federal government funding program for the energy transition, with $369 billion available. A “Made in the U.S.” provision for such projects includes EVs and the minerals that make up their batteries.

The implementation of these requirements was pushed back until March after complaints from foreign automakers and governments about the sudden implementation. The US Government should have given more lead time for other countries to plan and build battery and car factories, but agreements like this could help repair the wounded relationships with US allies.

Panasonic’s Deep Sea Deposits

Japan does not have a lot of battery vehicles to offer, but it has made strides toward building better EV batteries recently. Panasonic is a major battery supplier, and they have discovered deep-sea deposits within Japanese territory that could potentially be exploited. As part of this deal, Japan agreed to support US efforts to develop reliable domestic rare earth supply chains.

All agreements are contingent on the Treasury’s interpretation of the bill and whether it counts under its interpretation of what a “free trade agreement” is. Nevertheless, this trade deal between Japan and the US is a positive step toward building stronger global supply chains for critical minerals in EV batteries while reducing dependence on China.

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