Japan Issues Warning, Asks U.S. for Flexible EV Tax Credit Scheme

Over the weekend, the Japanese government issued a formal complaint suggesting that the United States’ updated tax credit scheme for electric vehicles could prohibit future investments from the Land of the Rising Sun. Complaints were reportedly directed to the Treasury Department and revolved around the Biden administration’s Inflation Reduction Act and how it seemed at odds with previous efforts to build trade between America and Japan. But things are always a bit more complicated than that and we cannot overstate the relevance of Japanese auto lobbying groups that want the most favorable regulatory terms they can negotiate.

Eastern automakers have been pretty vocal on the matter in general. Last week, South Korea's foreign ministry said it was seeking a three-year grace period on the law to enable its automakers to keep receiving American EV incentives. European brands have also been complaining a little. But they arguably have less to lose than Asian brands due to the fact that the United States seems keen on distancing itself from Eastern (mainly Chinese) suppliers that presently dominate global battery production.

Last month, Japanese Industry Minister Yasutoshi Nishimura noted concerns about the law to U.S. Commerce Secretary Gina Raimondo while visiting California. This was followed by reports that Nishimura told his U.S. counterpart at the meeting the legislation may violate international laws. Now, the rest of the island nation’s leadership seems to be gearing up for some pushback.

"It would be possible that Japanese automakers hesitate to make further investments towards electrification of vehicles," the government was quoted by Reuters as saying. "This could cause negative impacts on the expansion of investment and employment in the U.S."

Japan even suggested that the Biden administration may fail to meet its climate and electrification goals if it doesn’t soften the standards. But that may happen anyway, as we’ve already seen the new rules make a lot of preexisting plug-in vehicles ineligible to receive new subsidies. That’s been unwelcome news for manufacturers, though it doesn’t necessarily equate to bad news for everyone.

Keep in mind the tax incentive scheme came into existence roughly a decade ago as a way to help spur the early adoption of electric vehicles. In his 2011 State of the Union address, President Barack Obama even said the arrangement would be essential in making the United States the first country in the world to have over a million EVs on the road. But it was always framed as a temporary measure that would end once individual manufacturers met their respective vehicle quotas.

That changed once the Biden administration came into office, which had stressed a desire to move the country away from fossil fuels and double down on all-electric vehicles. We quickly began seeing massive EV subsidies tied to infrastructure bills and planned to reset the preexisting tax credit scheme so that automakers could continue benefiting indefinitely. Now called the “Clean Vehicle Credit,” vehicle quotas have been done away with, replaced by new monetary incentives going beyond the base $7,500 in tax credits for buying a battery electric vehicle (and certain plug-in hybrids). Though there’s also a new qualification process for both the consumer (based on income) and manufacturer (based on price and where the vehicle was built). This has made things more complicated for everyone involved and could cause further confusion as the bar for qualifying vehicles will continue to rise in the coming years – especially in regard to battery content requirements.

EVs that go to market before 2024 must have at least 40 percent of their battery component assembled in North America to take advantage of any government incentives. But that number goes up by 10 percent every single year.

While your author has been overwhelmingly critical of the plan since its inception, the one aspect he did like was the fact that there would be content requirements that would presumably spur investments in domestic production. Without it, there are few tangible benefits for the American people and the government would effectively be funneling taxpayer money back into the industry under the assumption that EVs (including those assembled thousands of miles away and shipped to the U.S.) would somehow solve a myriad of deep-seated societal problems. Those content requirements seem to be the only items with the potential to do some real good and Japan doesn’t like it because any betterment would be localized to factories operating inside North America.

But even domestic nameplates have cried foul in recent months. Ford also told the Treasury Department that it would like to see more EVs qualifying for the $7,500 in consumer tax credits and reportedly suggested changing the definition of a “foreign entity of concern” in the legislation to make that possible. The bottom line is that just about every company under the sun wants favorable regulatory treatment. As the only American brand that openly opposed every facet of the updated tax credit plan, Tesla is the only outlier. However, it could be argued that the company believed that such widespread incentivizing would gradually undermine its dominant role in the electric vehicle market.

The Japanese government issued a formal appeal to the Department of Treasury and the Internal Revenue Service on November 4th, saying it held "serious concerns" regarding the current EV tax credit plan. Leadership sees itself as a longtime ally of the United States and thereby worthy of better treatment, alleging that the current scheme “precludes” Japanese businesses from benefiting.

"Taking into consideration the objective to work with allies and like-minded partners to establish resilient supply chains, allies including Japan should be accorded treatment no less favorable than countries in the North America region,” read the letter.

Considering the United States' long-and-complicated history with Japan, there’s certainly an argument to be made there. But it also seems unlikely that the country would cut ties with the only nation it exports more goods to than China.

[Image: S.Jettar/Shutterstock]

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