https://crsreports.congress.gov
October 23, 2023
U.S.-Japan Critical Minerals Agreement
On March 28, 2023, the United States and Japan signed a
critical minerals agreement (CMA) covering five key
minerals related to the production of batteries for clean
vehicles (commonly referred to as electric vehicles or
“EVs”). The U.S.-Japan CMA entered into force
immediately upon signature.
The CMA seeks to address Japan’s concerns regarding
certain content requirements for the consumer tax credit for
new EVs included in P.L. 117-169, known as the Inflation
Reduction Act of 2022 (IRA). The IRA requires a certain
percentage of critical minerals in EV batteries to be sourced
from the United States or U.S. free trade agreement (FTA)
partners. Congress has approved all previous U.S. FTAs via
legislation and typically set FTA procedures and
requirements in Trade Promotion Authority (TPA), which
expired in 2021. The United States and Japan do not have a
congressionally approved FTA, but subsequent to the
signing of the U.S.-Japan CMA, the U.S. Department of the
Treasury issued a proposed rule including Japan as an FTA
partner for the purposes of the IRA EV tax credit.
The U.S.-Japan CMA and its designation as an FTA tie into
a broader discussion about congressional and executive
trade authorities. The CMA also raises issues for Congress
regarding the broader U.S.-Japan trade relationship, CMA
negotiations with other trading partners, and the
implementation of the EV tax credit.
IRA EV Tax Credit
The IRA provides consumers a tax credit of up to $7,500
for new EVs (26 U.S.C. §30D). To qualify for the tax
credit, vehicles must meet certain overall requirements,
including final assembly in North America and retail price
caps. Vehicles can qualify for partial credit if they meet
content requirements related to the components or critical
minerals in the EV battery. Specifically, the $3,750 critical
minerals-related portion of the credit requires a certain
percentage by value of an EV battery’s critical minerals (as
defined in 26 U.S.C. §45X(c)(6)) to be extracted or
processed in the United States or in a U.S. FTA partner
country, or recycled in North America. The percentage
requirement increases annually, starting at 40% as of April
18, 2023, and reaching 80% on January 1, 2027.
In addition, starting in 2024 and 2025, respectively, EVs
cannot qualify for the credit if they contain battery
components or critical minerals from “foreign entities of
concern,” which includes countries such as Russia and the
People’s Republic of China (PRC, or China), a dominant
player in the EV supply chain. Treasury has stated that it
will issue guidance on the foreign entity of concern
provision by the end of 2023. Some analysts have expressed
concerns about a high risk for potential disruptions to
critical mineral supply chains because current mining and
processing is concentrated in a small number of countries,
notably China. Such analysts have commented that this
challenge could become more acute as demand for critical
minerals grows due to the global transition towards clean
technologies. U.S. policymakers crafted IRA EV tax credit
requirements that in part reflect concerns over U.S.
dependence on PRC EV supply chains.
FTA Partner Provision and CMA Negotiations
There is no statutory definition for an FTA, but under
World Trade Organization (WTO) rules, a regional trade
agreement such as an FTA must cover “substantially all
trade” between trading partners. The United States currently
has 14 such “comprehensive” FTAs—authorized and
approved by Congress—with 20 countries. During the
Trump Administration, the United States and Japan signed
the 2020 U.S.-Japan Trade Agreement (USJTA), which is
not a comprehensive FTA. It reduces tariffs on some goods,
but not those in the automotive or critical minerals sectors.
Automotive industry groups and U.S. trading partners have
urged the Biden Administration to broaden the definition of
FTA (e.g., including the WTO Government Procurement
Agreement) to allow more trading partners qualify. They
have argued that it will be difficult to source adequate
supplies of critical minerals from the United States and its
comprehensive FTA partners, and that inadequate sourcing
could negatively affect the “resiliency” of EV supply
chains. The Administration has proposed new trade
agreements focusing on critical minerals in EV batteries as
a method of addressing the FTA partner requirement. The
U.S.-Japan CMA was the first such agreement to be
concluded; to date, the United States has also launched
negotiations with the EU and the United Kingdom (UK).
U.S.-Japan CMA Overview
Japan is the fifth-largest U.S. trading partner, and the
automotive sector plays a major role in the U.S.-Japan
economic relationship. In 2022, the United States imported
$48.2 billion in vehicles and parts from Japan and exported
$2.2 billion to Japan. Since 1982, Japanese automakers
have invested $60.4 billion in U.S. manufacturing facilities,
and have announced various investments in EV and EV
battery production following the passage of the IRA and the
2020 United States-Mexico-Canada Agreement (USMCA),
which has North American content requirements.
The U.S.-Japan CMA changes neither U.S. law nor existing
tariffs, and does not include other market access provisions.
In the CMA text, the United States and Japan stated that the
agreement’s objective is to “strengthen and diversify
critical minerals supply chains” and promote the adoption
of EV battery technologies. The CMA defines covered
critical minerals as cobalt, graphite, lithium, manganese,
and nickel—all key EV battery inputs. Among other
measures, the United States and Japan agreed to (1)
maintain the “current practice” of not imposing export
