US-Japan pact on EV battery materials hints at final Treasury Department tax credit guidelines

The US and Japan announced a pivotal agreement over critical minerals that mutually excludes the important EV battery materials from export taxes and syncs their production labor processes. This way made-in-Japan batteries like the ones Panasonic supplies to Tesla would nominally qualify for the new EV tax credits in the Inflation Reduction Act (IRA) without having to wait for a complex free trade agreement that may take years to negotiate.

The IRA EV subsidy requirements state that only electric cars whose batteries are made with at least 40% raw materials sourced from the US or countries with which it has a free trade agreement would be eligible. Unfortunately, the US doesn't have free trade deals with allies like Japan, EU, or South Korea that are looking to develop their own EV and battery industries. It thus faced backlash over the potentially devastating made-in-US subsidies that would render their vehicles uncompetitive in the American market, and divert battery factory plans away.

The Treasury Department will issue its final EV battery tax credit guidelines over material sourcing and eligibility as soon as this week, and the targeted trade deal with Japan holds clues to their content. The Treasury may deem the new US-Japan agreement over critical minerals as sufficient for granting tax credit to electric vehicles like the Lexus RZ 450e, for instance, and similar deals are being pursued with the European Union and South Korea as well.

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