Free-trade deals lite
The American Prospect | 3 March 2023
Free-trade deals lite
BY LEE HARRIS
The White House is brokering trade deals with Europe that could loosen sourcing rules in the Inflation Reduction Act (IRA), President Biden’s plan for green domestic manufacturing.
At a G20 meeting in India last week, Treasury Secretary Janet Yellen said that she had discussed agreements on critical minerals “that would enable Europe to qualify as a free-trade partner.”
Normally, Congress would have a say in ratifying free-trade agreements. But the Biden administration is trying to sidestep that process.
“It would be an agreement that would not require the agreement of Congress,” Yellen told The New York Times. Responding to complaints that the IRA could spark a subsidy war, she added, “We’re not trying to steal jobs. This is our climate plan.”
But the IRA was not only a climate plan—it was a plan for jobs, taxes, supply chain resiliency, and domestic manufacturing, lashing groups with competing interests to the same mast. If Treasury now broadens key provisions to soothe disgruntled trade partners, it could unravel the delicate domestic political coalition that backed the law.
If Congress wanted to write Europe into the IRA, it would have done so, according to Rep. Ro Khanna (D-CA), an industrial-policy advocate who has put forward legislation to reshore manufacturing. “We have a trade deficit with Europe,” he told the Prospect, and “they have tons of subsidies for their stuff.”
Unilateral action by the executive branch would also have broader implications for future trade deals. The move chips away at the separation of powers, with the executive co-opting the legislative function to amend a major law.
“I am committed to effective implementation of the clean-energy provisions of the Inflation Reduction Act, and I want to work with the administration,” Sen, Ron Wyden (D-OR) told the Prospect on Wednesday. “However, I am increasingly concerned about the administration’s decision to ignore Congress and go it alone when it comes to trade deals.”
Geopolitically, developing countries and others excluded from the deal see any special exemption as the worst of both worlds: American favoritism for industrialized allies, under the guise of a free-trade agreement.
Battery Metals Sourcing
At issue in current negotiations are IRA rules encouraging the domestic production of critical minerals and other battery components. By next year, in order to qualify for the full consumer tax credit, at least half the value of the critical minerals in a car battery must be extracted or processed in the U.S., or in a country with which the U.S. has a free-trade agreement (FTA).
The U.S. has bilateral investment treaties with countries like Lithuania and Poland, and in general European countries are close allies with America. However, Europe has long resisted entering an FTA with the U.S., since the deals are loaded with non-trade regulations like limiting privacy rules and raising chemical and pesticide levels in food imports.
Nevertheless, last week European Trade Commissioner Valdis Dombrovskis told reporters that the U.S. has “indicated openness to find ways how to treat us as a free trade agreement-equivalent partner.”
“I think the word ‘free trade’ was meant to mean reliable friends and partners with whom we can feel we have secure supply chains,” Yellen told The New York Times.
But the trade language in the IRA was painstakingly crafted, excluding all but a few strategic partners. Language around final assembly for vehicles, for example, was constrained to “North America,” limiting cooperation to Mexico and Canada. In contrast, by including free-trade partners in mining supply chains, the U.S. stands to benefit from its partnerships with Chile and Australia, major lithium producers.
“The word ‘free trade agreement’ actually has a particular meaning,” said Lori Wallach, a trade expert at the American Economic Liberties Project. It refers to a bevy of statutory and regulatory treatments, she said, far beyond what Treasury is actually seeking to grant Europe.
“They’re not calling it what it is, which would be something like a memorandum of understanding, because that doesn’t fix the problem that Treasury wants to fix, which is cutting into the domestic content rules,” Wallach said.
Even if the administration has the statutory authority to strike these kinds of agreements with the EU, said Tim Meyer, a trade expert at Duke Law School, “Secretary Yellen’s suggestion that the definition of a free-trade agreement could be stretched to include essentially any trade agreement is definitely an expansion.”
Several critics emphasized concerns that Yellen’s move could set new precedent for making trade policy ad hoc, with little transparency or public review.
“Congress must be involved in these negotiations. I have urged robust consultation throughout the discussion of trade agreements proposed by the Administration, and I expect to receive such consultation. The Administration cannot repeat the mistakes of past failed trade negotiations that too often have been conducted in secret,” Rep. Rosa DeLauro (D-CT), ranking member of the Appropriations Committee, told the Prospect in a statement.
Roy Houseman, legislative director for the United Steelworkers, which represents tens of thousands of mine workers, struck a more conciliatory tone. He pointed to complementary critical mineral deposits and suggested that Europe and the U.S. could pool resources.
“Vanadium is important for steelmaking and EV vehicles of the future, and we should try and encourage the long-term viability of these existing facilities first, before resources are spent through international trade discussions,” Houseman said, adding, “Tungsten is one where we don’t have as much domestic capacity, but the Europeans have some more.”
Labor groups may be holding their punches, given recent wins from the Biden administration, and since they see the EV manufacturing credit as more significant than the consumer one.
It’s not the first time Yellen has been the target of criticism on IRA tax credits. In late December, Treasury issued guidance saying that consumers can dodge the domestic-content rule by leasing, rather than buying, an electric car. Last month, Sen. Joe Manchin, who as the swing vote designed key provisions, accused her of cherry-picking tax credit rules and “not following the law.”
Manchin has also said he did not realize that Europe is not a free-trade partner.
With Global Resentment of IRA, Europe’s Special Pleading
Late last year, a delayed spat broke out between Europe and the U.S. over domestic subsidies in the IRA. On a state visit, French President Emmanuel Macron declared that the law risked “fragmenting the West.”
In response, Biden pledged to “tweak” industrial policy to make it more friendly to European allies. He apparently made that commitment spontaneously, even as other parts of the administration have continued to push back at European criticism. (“We hope that the European industrial base will succeed, but it’s up to Europe to do some of the work,” clean-energy adviser John Podesta told the Financial Times last month.)
With Europe crying foul on the IRA, Yellen has emphasized a new regime of “friendshoring,” or deepening economic ties with allies. Developing countries argue that the stance carries forward all the capriciousness and political favoritism of the neoliberal trade era, while abandoning the fig leaf of “free trade,” which at least gave them an opening when they sought access to U.S. markets.
“You have to give it to Biden Administration, pushing FTAs as preferential treatment in domestic industrial strategy is just exquisite empire muscle flexing,” economist Daniela Gabor wrote on Twitter. “FTA were always Trojan Horses for suppressing industrial upgrade … but at least handwaved about level playing field.”
The battery metals arrangement is not the only looming trade deal on which the Biden administration has snubbed Congress. The administration may not seek congressional approval for the Indo-Pacific Economic Framework (IPEF), a security deal that has been led by Commerce Secretary Gina Raimondo.
In a December letter, a bipartisan group of senators including Wyden, Debbie Stabenow (D-MI), Tom Carper (D-DE), and Rob Portman (R-OH) argued that an agreement like IPEF, which would “regulate foreign commerce and reshape international trade flows,” should go through Congress.
The IPEF negotiations are being conducted with a near-total lack of scrutiny. A meeting of government officials in Palm Springs last month for the upcoming Asia-Pacific Economic Cooperation conference, at which IPEF was discussed, attracted only a smattering of trade justice groups to protest. “It’s coincidentally got the same countries that TPP had,” said Will Wiltschko of the California Trade Justice Coalition, referring to the Obama administration’s failed Trans-Pacific Partnership, which did need and never received congressional ratification.
Congress has historically enjoyed constitutional power over trade activity. But during Cold War trade liberalization, Congress ceded much of that power to the executive branch, according to a 2019 paper by Meyer and Vanderbilt law professor Ganesh Sitaraman.
Access to U.S. markets was a key part of American soft-power strategy after World War II. Congress delegated negotiating authorities to the president, as well as various powers to respond to emergencies in international economic affairs.
“As trade drifted further away from the balance struck by our separation of powers and became increasingly rooted in the presidency,” Meyer and Sitaraman write, “agreements liberalizing trade rules became more viable—but at the cost of the political sustainability that comes with greater congressional involvement.”