Southeast Asian trade partners push for EV tax perks

Southeast Asian nations are trying to get in on U.S. tax perks for electric vehicles.

The Philippines, Malaysia and Indonesia are among the countries calling on U.S. trade officials to broker a critical minerals pact as part of ongoing negotiations over the Indo-Pacific Economic Framework, a trade initiative that the Biden administration launched last year with 13 other countries.

That, in turn, could enable electric vehicle batteries made with critical minerals harvested or processed within their countries to qualify for tax credits created by the U.S. Inflation Reduction Act, Democrats’ signature climate legislation that Congress passed last year. The law requires foreign countries to have a “free trade agreement” with the United States to be eligible for the tax perks, but the Treasury Department has broadly interpreted what kind of deals can qualify.

“We are bringing it up that perhaps the IPEF can be considered the equivalent of an FTA, for purposes of incentives under the Inflation Reduction Act [being] available to our companies,” Alfredo Pascual, the Philippines’ secretary of trade and industry, said in an interview.

The campaign by the Southeast Asian nations could complicate the Biden administration’s efforts to deepen economic ties in the Indo-Pacific, a critical region in the U.S. effort to counterbalance China, economically and politically. U.S. trade officials are already hustling to complete IPEF negotiations by November, and crafting a critical minerals pact would add to the list of thorny topics, such as labor standards and digital trade, still to be resolved.

Expanding the list of tax credit-eligible countries would also further inflame tensions between the White House and Congress over the Inflation Reduction Act. The tax credits were designed to both incentivize the adoption of electric vehicles and promote domestic manufacturing, but the Philippines, Malaysia and Indonesia want to boost their own production of electric vehicle batteries and other in-demand technology.

The Biden administration has already signed a critical minerals agreement with Japan and is locked in negotiations over another with the European Union. Democrats and Republicans on Capitol Hill have criticized the administration for its critical minerals agreement with Japan, with some lawmakers insisting that the administration is deliberately misinterpreting the stipulations in the Inflation Reduction Act and undermining their authority over trade agreements.

The Commerce Department and Office of the U.S. Trade Representative, the two agencies leading the IPEF negotiations, have not officially said whether a critical minerals agreement will be part of the talks. The Treasury Department ultimately determines whether agreements qualify for the tax credits.

Commerce officials recently concluded negotiations over one of the deal’s four pillars, reaching a tentative agreement with the other 13 nations that are party to the pact on ways to to prevent supply chain disruptions. The text of that deal does not single out specific sectors, Raimondo told reporters last week, and countries will determine at a later time what should be covered.

Asked if it would include critical minerals, Raimondo said "there have not been any specific discussions about that.” She continued, “And as you know, Treasury is leading on implementation here of the tax credits within IRA, so I think I'll just leave it at that for now."

But the topic of critical minerals could still arise during the negotiations over the remaining three pillars. Pascual has raised the issue directly with Raimondo and suggested it be considered in the pillar focused on clean energy, he said.

Indonesia’s coordinating minister for economic affairs, Airlangga Hartarto, proposed adding it to the trade pillar during an IPEF ministerial meeting in Detroit on Saturday, according to Indonesiannews service Bizlaw.id. The report said Airlangga had the support of other Southeast Asian countries at the meeting.

A critical minerals arrangement would be an economic boon for the Philippines, Malaysia and Indonesia, which have a natural store of critical minerals like nickel, and aspire to become leading producers of clean energy products and technology. It would also give them a tangible economic outcome from IPEF to tout in their home countries, trade ministers said.

“I will say that for many of the Southeast Asian states, we do not just want to export raw material. We would like to strengthen our manufacturing sector,” Malaysia’s deputy trade minister, Liew Chin Tong, said in an interview in Detroit. “We are pleased to enter into discussions about supply chains, but we do not want to be just seen as an exporter of raw material.”

The Biden administration will have to balance the economic ambitions of mineral-producing countries like Malaysia and the Philippines with its own promise at home that the transition to clean energy will help to revitalize American manufacturing.

“We want production to be done in the Philippines,” Pascual said, also during an interview in Detroit. He said increased economic engagement with the U.S., including through a critical minerals deal, would help the country’s manufacturing sector to produce more finished products, which have more export value than raw minerals.

“There are reliable allies elsewhere. And given the kind of role that [the] U.S. sees for itself in the world, it's good to maintain close and strong relationships with historically proven allies in our part of the world,” Pascual said. “Unless, [the] U.S. now wants to become an isolationist country.”