Will the United States’ New Critical Minerals Agreements Shape Electric Vehicle Investments?

On June 8, 2023, the United States and United Kingdom announced they would negotiate a new critical minerals trade agreement as part of a shared clean energy development agenda. The US-UK agreement is the latest in a series of these novel trade agreements to have emerged in recent months, which seek to include the United States' trade partners in its new electric vehicle subsidies program.

Overview of the Agreements

The goal of these arrangements is for companies in the participating countries to access some of the electric vehicle battery subsidies in Section 30D of the Inflation Reduction Act (IRA). Narrower in scope than traditional trade arrangements, the critical minerals agreements commit parties to free trade in a small set of minerals that are important to the supply chain for electric vehicle batteries (cobalt, graphite, lithium, manganese, and nickel). They will also contain general commitments to environmental sustainability and labor rights, though these provisions may not require any changes to current law in the participating countries.

The IRA subsidies would make qualifying vehicles more affordable for buyers, creating new demand and improving their competitiveness relative to unsubsidized competitors. This should encourage more investment in critical mineral processing and perhaps battery manufacturing in covered countries. Some of this will be new investment that would not have occurred without the subsidies and some would be investment diverted from countries that do not benefit from the subsidies, prompting complaints of protectionism from excluded countries. Key to the plan's success in expanding electric vehicle investment will be the extent to which the governments can convince prospective manufacturers that the critical mineral agreements will be politically sustainable in the United States.

Currently the United States has a critical minerals agreement in place with Japan and is negotiating such agreements with the EU and UK. Based on the ongoing negotiations, these agreements appear to cover similar content, with commitments on free trade in critical minerals and labor and environmental standards. Other countries, including participants in the Indo-Pacific Economic Framework for Prosperity (IPEF), have requested agreements, but USTR has given no public indication that more agreements are forthcoming.

The US-Japan Critical Minerals Agreement

The US and Japan signed the Agreement between the Government of the United States of America and the Government of Japan on Strengthening Critical Minerals Supply Chains on March 28, 2023.¹ It was structured as an executive agreement between the two governments, and it entered force upon its signing. When the US Treasury issued its proposed regulations for IRA Section 30D a few days after the agreement was signed, Japan appeared on its list of countries that have free trade agreements with the United States. The proposed regulations cited the critical minerals agreement as the reason for Japan's inclusion.

This was the first critical minerals agreement signed by USTR and it appeared then that it would be the template for future agreements. That said, although the broad outlines of the proposed EU and UK agreements reflect the content of the Japan agreement, USTR may now be seeking stronger labor commitments and legal ratification from the foreign partners in the future agreements.

The Japan agreement establishes a set of basic commitments for cooperation on electric vehicle battery critical mineral supply chains, but does not provide for any new market access. It defines the critical minerals covered as cobalt, graphite, lithium, manganese, and nickel, as future agreements will. The main provisions are contained in Articles 3, 4, and 5:

• Article 3: Facilitating Trade in Critical Minerals

Under this article, the parties commit to not restricting the import or export of critical minerals or impose export duties on critical minerals. They further commit to promoting market-oriented conditions and competition in the critical minerals sector by discussing potential responses to the policies of non-market economies. 

• Article 4: Facilitating Sustainable Supply Chains for Critical Minerals

The parties commit to developing sustainable critical mineral supply chains through their ongoing work on international standards on labeling and recycling, improving domestic environmental protection regulations for critical minerals, ensuring responsible sourcing, assessing the environmental impact of critical minerals projects, and promoting circular economy measures, among others.

• Article 5: Building Equitable Supply Chains for Critical Minerals

The parties confirm their intention to adopt, maintain, and enforce international labor rights standards. It also includes a commitment to "discourage, through initiatives it considers appropriate" the importation of critical mineral products produced with forced labor.

The US-EU Critical Minerals Agreement

The United States and the EU announced their intentions to negotiate a critical minerals agreement at a meeting between Presidents Biden and von der Leyen on March 10, 2023.² Negotiations have been ongoing ever since, with USTR Katherine Tai and European Commission Executive Vice-President Valdis Dombrovskis promising a quick resolution.

On June 14, 2023, the Commission released its recommendation for a European Council ("Council") decision authorizing the start of negotiations for a critical minerals agreement with the United States,³ in which it proposes negotiation directives and the expected content of the agreement ("Proposed Mandate").⁴ The Council will now consider the Proposed Mandate and, if approved, the Commission will be able to start formal negotiations with the United States in the aim of quickly finalizing a critical minerals agreement that would grant the EU status equivalent to US free trade agreement partners pursuant to the IRA. Expectations for a swift conclusion of negotiations may nevertheless face challenges from political controversy in Washington and the EU's complicated FTA ratification process.

According to the wording of the Proposed Mandate, the objective of the agreement from an EU perspective is to "strengthen the trade in and diversification of international supply chains of critical minerals" and "promote the adoption of electric vehicle battery technologies" through the shared commitment between the EU and the United States to:

• facilitate trade; 
• promote fair competition and market-oriented conditions for trade;
• ensure trade-related labor and environmental standards in supply chains; and
• join efforts to ensure secure, sustainable, and equitable supply chains.

The content of the agreement should provide for reciprocal commitments on trade, labor, and sustainability. The nature of the competence to conclude the agreement will depend essentially on the aim and content of the trade-related and labour and sustainability provisions. In this regard, the EU is hoping to keep the agreement under its exclusive competence, and the Proposed Mandate explains "the likely substantive basis of the agreement […] is the common commercial policy, which is listed among areas of exclusive competence⁵ of the Union in Article 3 TFEU". This would avoid a lengthy process for negotiation and ratification of the agreement, in keeping with the goal of concluding the agreement as soon as possible.

The wording of the negotiation directives echoes this expectation. While the Proposed Mandate includes an explicit commitment to "facilitate trade and expand market access," the wording in relation to labor and sustainability aspects is much softer. Related commitments would involve provisions to: "encourage cooperation in ongoing work on international standards", "promote high levels of environmental protection", "encourage measures that promote circular economy", "confirm the intention on both sides to adopt and maintain labor rights" in accordance with the International Labor Organization's principles, "cooperate […] regarding efforts to ensure secure, sustainable and equitable critical minerals supply chains", etc.

In contrast, the United States had been pushing for more binding commitments to be included in the agreement with the EU⁶ following US lawmakers criticizing the lack of "meaningful" labor and environment provisions in the critical minerals agreement closed with Japan.⁷ If the United States insists on commitments that fall outside the competence of the EU in topics such as labor and sustainability, the agreement could be subject to the approval and ratification procedures of each EU Member State, which is likely to be lengthy and frustrate expectations for rapid conclusion of negotiations.

The US-UK Critical Minerals Agreement

Plans for a US-UK critical minerals trade agreement, the latest prospective critical minerals deal, were unveiled during Prime Minister Rishi Sunak's visit to Washington on June 8, 2023.⁸ The joint Atlantic Declaration lays out broad principles for the agreement, which resembles the deal the United States is already negotiating with the EU. Like the other agreements, it would cover cobalt, graphite, lithium, manganese, and nickel and allow UK companies to qualify for the relevant sections of the Section 30D tax credit. It will also include commitments to shared approaches on supply chain diversification and "robust labor and environmental standards to support the creation of well-paying jobs with a free and fair choice to join a labor union on both sides of the Atlantic."

The UK and the US should be able to move forward with such an agreement relatively quickly. Assuming the agreement is drafted as a binding treaty it would be subject to the UK's ratification procedures under Part 2 of the Constitutional Reform and Governance Act 2010 ("CRaG"). Generally speaking, this requires that a copy of the agreement be published and laid before Parliament, and that 21 sitting days pass without either House having resolved that the agreement should not be ratified. Neither House has objected to the ratification of a treaty since CRaG was passed and it appears unlikely that a critical minerals agreement with the US in this context would alter this practice.

If any new domestic legislative powers are required to give effect to the agreement the UK will have to ensure that these powers are in place before the agreement comes into force, which could stretch out the timeline further.

Political Durability of the Agreements

The unusual approach embodied by these agreements emerged from the unclear national origin restrictions on electric vehicle subsidy recipients in the IRA, part of which requires that the critical minerals in an electric vehicle's battery be "extracted or processed in the United States, or in any country with which the United States has a free trade agreement in effect" or be "recycled in North America" to qualify. "Free trade agreement" is not defined in the IRA or anywhere else in US law, leaving the executive branch with discretion to decide what countries should be included. Attempting to balance conflicting goals from domestic interests, Congress, climate change mitigation, and concerned trade partners, the Biden administration has chosen to define free trade agreement in a way that would allow itself to include more countries in the system through small and easy to negotiate critical mineral trade agreements. Key members of Congress responded to the proposed regulations with outrage, challenging both the free trade agreement flexibilities and other aspects of the proposed local content metrics that made it easier for foreign manufacturers to receive the subsidies (see White & Case's April 18 update on the Section 30D tax credit for more detail on these policies).⁹

Given the political controversies, companies planning investments on the expectation of receiving IRA subsidies will have to judge how much risk their projects may face from changes to US policy. The critical mineral trade agreements and the Treasury's interpretation of free trade agreement will not be implemented into law by Congress, making them vulnerable to change. A new president with different priorities than the Biden administration could change these measures. Members of Congress may also pressure the president to change policy, challenge the regulations in court, or pass new laws overturning the president's actions.

Business Decisions and Critical Mineral Agreements

In-depth analysis linking the development and implementation of the IRA in the United States with these trade negotiations and the conclusion and implementation of trade agreements in each of Japan, the EU, and the UK will be vital for business decisions ranging from choosing suppliers to capital investments. White & Case is following the implementation of the IRA very closely. Each of these agreements has its own dynamics and the prospects for effective and reliable conclusion and implementation require careful consideration of both the detail of the agreements and how they will ultimately affect business decision-making.

_{1 Agreement Between the Government of the United States of America and the Government of Japan on Strengthening Critical Minerals Supply Chains.
2 Joint Statement by President Biden and President von der Leyen.
3 Commission Recommendation for a Council Decision authorizing the opening of negotiations of an agreement with the United States of America on strengthening international supply chains of critical minerals.
4 Annex to the Proposal with negotiation directives. 
5 Article 218 of the Treaty on the Functioning of the European Union.
6 US Pumps The Brakes On EU Clean Car Deal.
7 See US Congress Member Richard Neal and Senate Finance Committee Chair Ron Wyden statement of 28 March 2023.
8 The Atlantic Declaration: A Framework for a Twenty-First Century US-UK Economic Partnership.
9 Manchin Submits Comments to US Treasury on 30D New Clean Vehicle Tax Credits.}

_{White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.}

_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

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