US Accepts China’s Request for Consultation Regarding Certain Measures of the Inflation Reduction Act

On April 8, 2024, the United States accepted China’s request “to enter into consultations” regarding measures that were passed as part of the Inflation Reduction Act. China is challenging five tax credits that were part of or modified by the Inflation Reduction Act:

• the Clean Vehicle Credit;
• the Investment Tax Credit for Energy Property;
• the Clean Electricity Investment Tax Credit;
• the Production Tax Credit for Electricity from Renewables; and
• the Clean Electricity Production Tax Credit (and, with Investment Tax Credit for Energy Property, the Clean Electricity Investment Tax Credit, and the Production Tax Credit for Electricity from Renewables, the “Renewable Energy Tax Credits”).

China’s request for consultation states that the measures at issue include, inter alia, the Inflation Reduction Act, the US Internal Revenue Service’s (“IRS”) New Clean Vehicle Credit Proposed Rule, the IRS’s Excluded Entities Proposed Rule, the US Department of Energy’s Interpretation of Foreign Entity of Concern Proposed Rule, the IRS’s Definition of Energy Property and Rules Applicable to the Energy Credit, and the IRS’s Domestic Content Bonus Credit Guidance.

China argues that while “{n}on-prohibited, non-discriminatory subsidies have a role to play in {the} transition” to clear energy, the five credits it identified are subsidies that violate the World Trade Organization (“WTO”) Agreement, “including subsidies that are contingent upon the use of domestic over imported goods or that otherwise discriminate against imported goods.” China argues that such subsidies “remain prohibited and threaten to undermine international cooperation on reducing and mitigating the effects of climate change,” and describes these measures as “protectionist.”

In its consultation request, China makes the following arguments regarding the five tax credits:

• The Clean Vehicle Credit. China asserts that this credit is inconsistent with several provisions of international agreements, including:
• Article I:1 of the General Agreement on Tariffs and Trade 1994 (“GATT 1994”), because it alleges that the United States has “condition{ed} eligibility” for this credit on requirements (i) that final assembly must take place in North America; (ii) that the extraction and processing of critical minerals take place in the US or by a country with which the US has a free trade agreement, or recycled in North America; and (iii) that a certain percentage of value of the battery components’ must be manufactured or assembled in North America.
• Article III:4 of the GATT 1994, because the credit “restrict{s} eligibility for the Clean Vehicle Credit in the case of vehicles incorporating critical minerals and battery components produced by so-called ‘foreign entities of concern’,” which means that the US “does not accord products of Chinese origin immediately and unconditionally the same advantages, favours, privileges, or immunities” as it “accords to like products originating in the territory of other countries,” as required by Article III:4.
• Articles 2.1 and 2.2 of the Agreement on Trade-Related Investment Measures (“TRIMs”), because (i) the credit “appears to be investment measures related to trade in goods that are inconsistent with Article III:4 of the GATT 1994” and (ii) these investment measures require compliance in order to “obtain an advantage” under the measure, “and which require the purchase or use by an enterprise of products of US origin or from any US source,” which is consistent with the example that TRIMs presents of measures are “inconsistent with the obligation of national treatment provided for in paragraph 4 of Article III of GATT 1994.”
• Articles 3.1(b) and 3.2 of the WTO Agreement on Subsidies and Countervailing Measures (“SCM”), because it alleges this credit “is a subsidy continent . . . upon the use of domestic over imported goods.”
• Renewable Energy Tax Credits. China asserts that this credit is inconsistent with several provisions of international agreements:
• Article III:4 of the GATT 1994, because, similar to the Clean Energy Credit, the credits “condition{} eligibility for bonus subsidy amounts on the use of U.S.-origin goods,” and as such the US “does not accord to products of Chinese origin treatment no less favourable than the treatment accorded to like products of national origin” of other countries.
• Articles 2.1 and 2.2 of TRIMS, because, as with the Clean Energy Credit, these measures (i) “appear{} to be investment measures related to trade in goods that are inconsistent with Article III:4 of the GATT 1994” and (ii) require compliance in order to “obtain an advantage” under the measure, “and which require the purchase or use by an enterprise of products of U.S. origin or from any U.S. source,” which is consistent with the example that TRIMs presents of measures “inconsistent with the obligation of national treatment provided for in paragraph 4 of Article III of GATT 1994.”
• Articles 3.1(b) and 3.2 of the SCM, because, as with the Clean Energy Credit, China alleges these credits are “subsidies continent . . . upon the use of domestic over imported goods.”

China further argues that, as a result of the above, the Clean Energy Credit and Renewable Energy Tax Credits “appear to nullify or impair benefits accruing to China, directly or indirectly, under the cited agreements.” In the Annex to its request for consultation, China presents the specific laws, rules, and regulations that it asserts are evidence “regarding the existence and nature of the subsidies subject to” its consultation request.

While accepting China’s request for consultation, the United States asserted that the Inflation Reduction Act “is a groundbreaking tool for the United States to seriously address the global climate crisis, cutting the pollution that drives climate change and environmental injustice while pursuing major new investments in clean energy technology.” This language echoed the statement made by US Trade Representative Katherine Tai on March 26, 2024, when she responded to China’s request for consultation. In that statement, Ambassador Tai said the Inflation Reduction Act is the United States’ “contribution to a clean energy future that we are collectively seeking with our allies and partners.” She asserted that the United States will “continue to pursue major new investments in clean energy technology” while also continuing to “work with allies and partners to address the PRC’s unfair, non-market policies and practices.” The United States also states that its acceptance of China’s request is “{w}ithout prejudice to whether each of the items in China’s letter constitutes a ‘measure’ within the meaning of Article 4 of the” WTO’s Dispute Settlement Understanding (“DSU”), which may be an indication that the US plans to challenge China’s assertion that the credits are even subject to the dispute settlement body’s jurisdiction. The US further states that the acceptance is “{w}ithout prejudice to . . . whether the consultations request raises issues of national security not susceptible to review or capable of resolution” by the DSU. The national security exception provided under Article XXI of the GATT ensures that a party to the agreement can “tak{e} actions which it considers necessary for the protection of its essential security interests” relating to certain goods and materials and “taken in time of war or other emergency in international relations.”

The dispute remains under consultation at the WTO. Even though it is very unlikely to have any practical effect on relevant US law and policies, the dispute demonstrates the two countries’ diverging views on what constitutes permissible subsidies in the new energy field. Given the importance of the new energy sector and the fast developing regulatory landscapes in both countries, interested parties should continue to monitor the status of the case to keep up with both countries’ latest views on key issues.