Eakinomics readers already know that the Inflation Reduction Act (IRA) does not. They may also be aware that the so-called climate provisions of the IRA are part of a sectoral approach which includes an all-or-nothing bet on a renewable electricity sector which remains more a dream than a reality, an exclusive focus on electric vehicles (electric vehicles), and a heavy dose of fuel shame that left the United States at the mercy of the oil and natural gas markets.
These provisions are also bad trade policy, which a quick glance at Tori Smith’s “Comments on Credits for Clean Vehicles in the Inflation Reduction Act” makes abundantly clear. Remember that the IRA provides a refundable tax credit of up to $7,500 if the vehicle is eligible for such a credit. As Smith notes: “Specifically, there are requirements for final assembly to take place in North America, as well as for batteries and critical minerals to be sourced from certain countries and regions, which discriminates against many automobiles produced. abroad and vehicles with foreign components. Clean vehicle tax credits, as currently proposed, could violate U.S. trade commitments under the World Trade Organization and the U.S. Free Trade Agreement and Korea. »
You can hear progressives argue, “Is that a bad thing? We should want climate policy to benefit American (unionized) workers. Endearing. But hyper myopic. These provisions are the moral equivalent of a tariff barrier aimed at reducing competition for domestic automakers. (Subsidizing domestic production and taxing foreign production have the same economic consequences.) Insufficient competition will result in higher prices and reduced quality for Americans who (because of politics) have no choice but to buy electric vehicles. Glad these workers are happy!
Worse: “Violations of commitments made under these agreements would likely expose the United States to disputes, which could subject Americans to retaliation from trading partners. Retaliation could target the automotive sector, but historically, such retaliation has hit politically sensitive sectors, quintessential American goods, and agricultural products. It could also prompt other countries to add similar restrictions to their clean vehicle tax credits that discriminate against U.S.-produced vehicles. Wait, that hurts American workers! Who, exactly, benefits from these requirements?
No one, and that’s the most important point. It is well established that there are gains to be made from trade; both parties voluntarily participate in an exchange because they are both better off afterwards. Provisions that deliberately cut off beneficial exchanges are strictly harmful.