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A deal to allow EU carmakers to benefit from US subsidies under the Inflation Reduction Act is under threat 24 hours before it was expected to be agreed at a summit on Friday.
US and EU teams are in intensive talks to rescue the accord over Washington’s demands on environmental and labour conditions. The biggest hurdle is the US’s insistence for countries where European carmakers are sourcing their electric battery materials from to allow inspections of mines and processing centres, according to EU diplomats.
Brussels says it has similar environmental and labour standards through its own regulations and the inspection idea is impractical, said officials.
The proposed deal — scheduled to be clinched on Friday when US president Joe Biden hosts EU leaders Charles Michel and Ursula von der Leyen — is supposed to reduce tensions over the IRA, which dispenses $390bn of tax credits and subsidies to companies producing green technology in the US.
The IRA gives $7,500 in consumer tax credits to electric vehicles provided, among other things, its battery has had at least some of its critical mineral content either recycled or extracted and processed in the US or a country with which the US has a free trade or a critical minerals agreement (CMA).
The raw materials covered are lithium, cobalt, manganese, nickel and graphite, the main components of vehicle batteries.
Although the EU has little production or processing of critical materials, it has said that such a CMA with the US would increase investment in the sectors.
Washington struck a CMA with Japan in May but its terms for the EU are more onerous. The US has had a trade agreement with Japan since 2020 covering some agricultural and industrial goods and digital trade, making the minerals agreement simpler, according to people familiar with the talks.
Any EU pact must adhere to the Biden administration’s new definition of a trade agreement, which includes strict provisions on workers’ rights and the environment, said officials.
France and Germany had lobbied hard for the inclusion of their large car industries in the IRA and the proposed deal had quieted EU complaints about unfair subsidies incentivising companies to relocate to the US.
But those tensions could flare up again, according to diplomats. A meeting of member state ambassadors on Wednesday urged the European Commission, which is negotiating, to stand firm.
Any deal must be ratified by the member states and European parliament.
“It does not look like it will be possible to find an agreement now but we hope it is concluded soon, whether [Friday] or later,” said an EU diplomat.
Talks were also continuing over steel and aluminium tariffs. The two sides have yet to agree over the terms of a green steel and aluminium club, which would put levies on imports from China.
Officials believe the negotiations will continue after the summit ahead of a deadline of December 31, after which US section 232 tariffs levied on national security grounds would be reimposed on imports from the EU.
The US could postpone the move provided the talks are progressing, they said.
The commission said that Biden and von der Leyen on Friday will “aim to deliver important progress in our negotiations” both on steel and on critical materials, on the Global Steel Arrangement and a CMA.
“Negotiations are ongoing,” the commission said. “Our objective with the CMA is to address EU concerns over key aspects of the US Inflation Reduction Act and support the development of EU-US critical minerals supply chains.”
The US trade representative’s office did not respond to a request to comment.
