Are the ‘Baptists’ or ‘bootleggers’ calling the shots in electric vehicle tax credit debate?

It’s a car wreck — an electric vehicle (EV) wreck, to be more precise, and it’s of Congress’s doing. But there’s still time to avoid it. If the United States is at all serious about securing supply chains in critical minerals and materials, the EV tax credits proposed in House and Senate bills should be purged of their protectionist ambitions, not least with respect to Canada.   

Last week, Canada’s trade minister, Mary Ng, sent a letter to leaders in the House and Senate, urging them to “pass legislation that does not discriminate against Canada, your most trusted and reliable partner.”

Ng worries that the Build Back Better bill includes “protectionist elements” that would cripple the automotive industry in Canada and, by extension, America’s. The letter warns, moreover, that these proposals “are inconsistent with U.S. obligations” under the United States-Mexico-Canada Agreement (USMCA) and the World Trade Organization (WTO). Ng and others have hinted that Canada might thus pursue litigation. 

If Canada filed at USMCA or the WTO, it would probably win for all the reasons the U.S. thought it could successfully challenge Japan’s “cash for clunkers” policy: tax credits based on purchasing domestic versus foreign smacks of subsidy.

What’s the issue?

EV tax credits clock in at $12,500 per vehicle, but there are a few catches. The House is proposing that $4,500 of this be contingent on the car being produced by unionized labor, and that another $500 go to those EVs with at least 50 percent U.S. content by value and powered by a U.S. battery. Moreover, the full $12,500 tax credit would require checking these boxes by 2027. 

For its part, the Senate is talking about $2,500 hinging on final assembly by unionized labor, as well as $2,500 if the manufacturing facility is located in the U.S. By 2026, however, the full tax credit would require that both boxes be checked. 

The tax credits are popular with the United Auto Workers (UAW), which has lobbied hard to get them, and backed by 100 Democrats in the House, including all of Michigan’s representatives. It should come as little surprise, however, that Tesla, which is not unionized, and foreign vendors from Honda to Volkswagen, which either employ non-unionized workers in the U.S. or ship from abroad, are against them. These companies, too, wrote a letter to House Speaker Nancy Pelosi (D-Calif.), pleading with her to see the bigger picture.

What’s the bigger picture?

First, this is short-sighted protectionism that won’t work. The big three U.S. auto vendors all have plans to make EVs in Ontario. These investments are being made now, so it makes little sense to create legislative uncertainty at this critical moment.

Second, scaling up EV production will greatly strain U.S. supply chains in critical minerals and materials. Canada is the key to securing these supply chains. Cobalt, for example, is one of the minerals needed to make an EV battery, and Canada has it. Canada also has rare-earth elements that will make or break the future of EVs. Instead of pushing Canada away with petty protectionism, the House and Senate should be bringing Canada in on any effort to build back better.

Third, proponents of green technologies such as EVs should be at pains to avoid triggering trade litigation, since this can only result in accusations of a “Baptist-bootlegger coalition.” The term comes from America’s bout with prohibition. Who was for prohibition? Baptists on moral grounds, and bootleggers on economic ones. The question with respect to EV tax credits is this: Are the Baptists calling the shots or the bootleggers?

Marc L. Busch is the Karl F. Landegger Professor of International Business Diplomacy at the Walsh School of Foreign Service at Georgetown University. Follow him on Twitter @marclbusch.