U.S. Eyes Trade Deals With Allies to Ease Clash Over Electric Car Subsidies

BENGALURU, India — The Biden administration hopes to reach limited free trade agreements with countries in Europe and Asia that would not require congressional approval as it looks to ease allies’ concerns about legislation that President Biden signed into law last year, Treasury Secretary Janet L. Yellen said on Friday.

The law, known as the Inflation Reduction Act, has rankled trans-Atlantic ties in recent months, fueling frustration in Europe and in Japan that the administration’s policies are protectionist actions that will lead to a global subsidy war.

Top European officials expressed their complaints directly to Ms. Yellen and other administration officials during meetings in Washington this month, making clear that the matter was straining relations as the West tries to move in lock step to punish Russia for its war in Ukraine.

The tension has centered on $50 billion in tax credits that the law created to entice Americans to buy electric vehicles assembled in North America. For electric vehicles to be eligible for the full tax credit, a portion of the minerals that are used to make the batteries that power them must come from nations that have free trade agreements with the United States.

Mr. Biden told President Emmanuel Macron of France in December that he was open to making “tweaks” to “glitches” in the climate law that would address European concerns. A possible solution, Ms. Yellen suggested on Friday, could come in the form of new agreements that would allow Europe to meet the requirements.

“We’ve also discussed the possibility of forming critical minerals-free trade agreements that would enable Europe to qualify as a free trade partner,” Ms. Yellen said on the sidelines of Group of 20 finance ministers meetings in India.

Winning congressional approval for those free trade agreements would be difficult with Republicans in control of the House and some Democrats, such as Senator Joe Manchin III of West Virginia, opposed to European companies benefiting from American tax credits. However, the Inflation Reduction Act does not specify how a free trade agreement is defined; Ms. Yellen said she thought it would be possible to devise more limited pacts so that the consent of Congress was not required.

“It would be an agreement that would not require the agreement of Congress,” Ms. Yellen said, adding that she believed such agreements would be aligned with the intent that Congress had when it passed the law. “I think the word ‘free trade’ was meant to mean reliable friends and partners with whom we can feel we have secure supply chains.”

U.S. and European officials have spent many years at the negotiating table in recent decades and tried to reach pacts under the Obama and Trump administrations. But despite the countries’ deep cultural and historical ties, talks have been repeatedly bogged down by certain thorny issues, such as each government’s treatment of its agricultural sector.

Ms. Yellen met on Friday with Bruno Le Maire, France’s finance minister, who has been a vocal critic of the American subsidies. At a news conference after their meeting, Mr. Le Maire said Europe wanted more transparency from the United States about how the tax credits would work. He also made clear that Europe would be ramping up its own subsidies to support its green energy industry.

“The Biden administration has taken very strong steps to build its green industry by providing subsidies and tax credits to the American companies,” Mr. Le Maire said. “In Europe, we are fully determined to do the same.”

The Treasury Department is expected to release guidance next month that will explain in detail how the critical mineral and battery component requirements in the law will work. In the meantime, electric vehicle consumers have had access to the full tax credit without sourcing requirements.

The prospect of the Biden administration’s making trade deals that would benefit other nations could generate backlash in Washington. No Republicans voted for the law, and Mr. Manchin, who is crucial in holding together the slim Democratic majority in the Senate, has been critical of the Biden administration’s handling of the tax credits. Many lawmakers have also repudiated the current and previous administrations for negotiating trade pacts without oversight or approval from Congress, which has constitutional power over trade.

Mr. Manchin said this month that Ms. Yellen was “not following the law” and accused the Treasury Department of deciding arbitrarily what kinds of vehicles could have access to the tax credit. In December, he wrote a letter to the Treasury secretary expressing concern that rental cars, leased vehicles and ride-hailing vehicles would be able to get the full tax credit regardless of sourcing requirements and called on her to release guidance that would prevent vehicles bought for those uses from being eligible for the tax credit.

But on Friday, Ms. Yellen said rules allowing cars from Europe, Japan and South Korea to receive subsidies if they were leased had helped alleviate the concerns of her international counterparts, and she expressed support for that provision. She also acknowledged that European countries were likely to adopt additional subsidies and incentives and said the United States would not try to stand in the way.

Explaining that the law was meant to be part of the Biden administration’s approach to “friendshoring” while improving the environment, Ms. Yellen made the case that the United States was not trying to harm its allies.

“We’ve been very clear with Europe that this is not a subsidy war,” Ms. Yellen said. “We’re not trying to steal jobs. This is our climate plan.”

Ana Swanson contributed reporting from Washington.