After wrestling control of the White House and Congress, the Democratic party is determined to push its climate reform packages. It wants to invest in clean technology and incentivize businesses and customers to adopt renewables. One industry that needs an overhaul is the motoring industry, and Democrats hope that an electric vehicle (EV) tax credit will motivate consumers to buy more of it.

To clean up the auto industry, the US proposed legislation giving a $12 500 tax credit to electric vehicles made in the US. The credit would include $4 500 for union-made electric cars. The legislation also has provisions that prevent using battery components or critical minerals derived from China, part of a more significant trade battle between the two leading economies. The tax credit is part of a vast tax, climate, and health care package from President Joe Biden's administration called the Inflation Reduction Act.

The EV tax credit causes friction

Car manufacturing and trade are significant under USCMA. It is also a politically charged industry in all three nations. Employees of automakers have substantial political clout in the North American countries. Canada and Mexico fear that the tax credit will undermine their auto industries.

Mexico was open to filing an appeal with an international panel over the tax incentives by the US. Mexico says the incentives are discriminatory and go against the principles of free trade, including the United States-Mexico-Canada Agreement (USMCA) trade pact.

Canadian Deputy Prime Minister Chrystia Freeland went as far as writing a letter to US Senate leaders threatening to impose tariffs on US goods and suspend the USMCA if the tax credit went into effect.

Legislation has passed but is still controversial

To quail concerns from its neighboring countries, the US made a slight but significant change to the tax credit. The Biden administration expanded the tax credit to apply to vehicle manufacturing in North America. With that inclusion, Canada and Mexico dropped their objections and embraced it as a critical incentive to secure regional supply chains. But the electric vehicle tax credit continues to draw criticism from other trading partners, such as the EU and South Korea. They believe the tax credits may discriminate against foreign-made vehicles and breach World Trade Organization (WTO) rules.

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