The Inflation Reduction Act Sparks Trade Disputes: What Next?
For hundreds of years, friendly nations have agreed among each other to use tariffs, and not domestic income or sales taxes, to favor domestically made products over imported versions. Unfortunately, American tariffs have atrophied to almost zero since 1934, when Congress handed the State Department authority to cut tariffs via international agreements. As producers offshored production away from our domestic market, the demonization of tariffs increased in lockstep to secure access to imports.
So perhaps it was inevitable that, when President Biden signed the Inflation Reduction Act in August, the other shoe dropped. Rather than use tariffs to promote the purchase of domestic goods, the Democrats’ Inflation Reduction Act modified parts of the Internal Revenue Code to favor domestically made cars, solar panels, and other products over imported ones.
By choosing consumer tax credits over tariffs, Democrats violated—in a flagrant manner—a central commitment of U.S. trade agreements going back to our 1778 Treaty of Amity and Commerce with France. That commitment is the principle of National Treatment. In short, the principle says that once an importer has paid the tariff to import a widget, that widget should be subject to the same internal taxes and regulations as if it had been made domestically.
Have you ever gone to a store, anywhere in the world, and discovered that the sales tax on a product differed depending on the product’s country of origin? Why doesn’t Michigan—or Germany, Korea, or Japan for that matter—charge higher registration fees for imported cars versus domestic cars? The reason you don’t see this is because the principle of National Treatment is something every country honors, at least in highly visible areas like taxation.
To be clear: Democrats should be congratulated for taking meaningful action that will lead to more things being made in America. This is wonderful. But using the income tax code instead of tariffs imposes confusion and compliance difficulties on citizens and businesses. And it upsets allies far more than tariffs would. In international relations, tariffs are fair game; every nation uses them. But income or sales taxes are not employed in this way.
And even if you don’t care what other nations think, National Treatment is still a good principle. Internal market taxes tied to a product’s country of origin shifts compliance costs from an importer to everyone. This in turn undermines political support for promoting domestic manufacturing. Tariffs are elegant; income tax credits are not.
Frustration in Asia and Europe is white-hot and will continue to escalate. On September 21, 2022, the president of South Korea was caught on a hot mic referring to the law’s drafters in Congress as “idiots.” “What an embarrassment for Biden,” he said.
This article makes the case for tariffs and respecting National Treatment for friendly nations. My goal is to suggest a proactive response that the United States should take: namely, shifting from the acrimony-inducing tax credits to righting our tariff policy on the grounds that we have the lowest bound tariff average of any nation in the multilateral trading system. A restored tariff schedule would enable us to pivot from idealistic “rules-based” trade to a more realistic “managed trade,” through which we can more pragmatically and straightforwardly pursue the goals that motivated the Inflation Reduction Act.
What Is “National Treatment”?
National Treatment is the principle that once an importer has paid the tariff to lawfully introduce foreign goods into the recipient nation, the importers and their goods will face no further untoward government interference. This principle makes sense, as it has the benefit of keeping the domestic market liquid and dynamic. No domestic auditing is needed. There is no need to police factories to scrutinize where inputs are made. Hardware stores are not worried about separate bins to segregate parts based on their country of origin. Imported goods must pass through our ports; it makes much more sense to tax them there.
Prior to the twentieth century, National Treatment was codified in treaties alongside another, better-known principle of trade, “Most Favored Nation” (MFN) status. MFN is the commitment to grant a trade partner the lowest tariff rates that the nation extends to any other. National Treatment, as a corollary principle to MFN, deals with the treatment of foreign goods after the tariff is paid.
In and of themselves, neither MFN nor National Treatment prevent a country from having high tariffs. From 1816 until 1934, America was committed to MFN and National Treatment, yet maintained high tariffs for both revenue and the protection of multiple industries. In other words, there is no inherent contradiction between MFN, National Treatment, and higher-than-average tariffs. In fact, during this period, we grew the greatest economy in the world and trade was a trivial part of our economy.
Well into the twentieth century, the principles of MFN and National Treatment were codified in international agreements styled as “Treaties of Amity and Commerce” or, later, “Treaties of Friendship, Navigation, and Commerce.” The State Department’s repository of international agreements signed by the United States contains scores of these agreements, some still in force, going back to the early nineteenth century. Importantly, these older commerce treaties were not like modern trade agreements, as they did not commit to specific tariff rates on every product.
In living memory, National Treatment has largely been taken for granted. But in earlier times, when taxing the movement of goods was the main revenue source for sovereigns, it was given more attention. Four months prior to even ratifying the Constitution, the United States agreed to grant National Treatment to France as the law of the land. Even earlier, on February 6, 1778, Benjamin Franklin signed not only the famous military Treaty of Alliance with France but also a separate Treaty of Amity and Commerce. The preamble to that treaty stated that its purpose was to “fix in an equitable and permanent manner, the rules which ought to be followed relative to the correspondence and commerce which the two parties desire to establish . . . by carefully avoiding all those burthensome preferences which are usually sources of debate, embarrassment and discontent.”
Articles III and IV of the U.S.-French treaty guaranteed MFN and National Treatment between the United States and France, so that their merchants would have “all the rights, liberties, privileges, immunities, and exemptions in trade, navigation, and commerce” as they traded in the markets of the other. The treaty commanded that “This liberty of navigation and commerce shall extend to all kinds of merchandizes, excepting those only which are distinguished by the name of contraband.” These treaties of amity and commerce were proper treaties under the U.S. Constitution, meaning the obligations were considered federal law and superseded state law.
America’s Extension of National Treatment through the “Multilateral Trading System”
America’s amity-and-commerce-treaty era began to subside after Congress delegated authority to the president in 1934 to enter binding tariff agreements with other nations. The 1934 law also gave the president the power to cut tariffs as part of those agreements.
Using this power, FDR’s secretary of state, Cordell Hull, an anti-tariff zealot, entered thirty tariff agreements with foreign nations during his tenure. This is when our MFN obligations became problematic, because every time he cut tariffs in a new agreement, it cut our tariff rate for every nation with whom we had an MFN obligation.
For example, Hull signed a free trade agreement with Mexico in 1943. He cut our tariffs on shrimp to 0 percent in that deal. Under the MFN principle, every nation we had a deal with got the 0 percent rate on shrimp. That rate remains today, almost eighty years later, and now most of our shrimp comes from Asia. During his eleven-year tenure, Hull took our average tariff from over 40 percent down to 14 percent.
Following World War II, on October 30, 1947, America’s thirty tariff agreements were collapsed into the General Agreement on Tariffs and Trade (GATT) with twenty-seven other nations. This was the genesis of something called “Normal Trade Relations,” although that name did not appear until decades later. In actual implementation, beginning with the GATT, our tariff schedule was bifurcated into two categories: Column 1 and Column 2. Column 1 included countries’ previously covered by our MFN tariffs, and now Normal Trade Relations tariffs. Column 1 tariffs are all the haphazard result of decades of closed-door dealmaking. Diplomats and economists would assign a dollar value to every proposed tariff cut in a negotiation, and exchange cuts accordingly. That is why Column 1 looks like a dog’s breakfast, with endless tariffs expressed as fractions of percentages (but most now 0 percent), and no seeming pattern. Column 2 is the holdover of the last congressionally written tariff schedule, the Tariff Act of 1930, more commonly known as the Smoot-Hawley tariff. Until the Russian invasion of Ukraine earlier this year, only Cuba and North Korea were in Column 2. Congress added Russia and Belarus to Column 2 shortly after the invasion (“punishment” was the overwhelming driver here; any understanding that tariffs could help us become more resilient did not come through in the legislation).
Bound tariff rates are like a price ceiling: a promise that you won’t charge more for a given product. Of the 164 WTO Members, U.S. tariff rates have the lowest average cap, a paltry 3.4 percent. All of these nations joined the GATT/WTO without the United States ever expecting tariff reciprocity. This is at the center of our deindustrialization. While National Treatment for friendly nations is a good policy, when combined with nonexistent or ultralow tariffs, as is the case in the United States, it becomes an economic suicide pact.
The GATT era led to the phrase “the multilateral trading system.” This phrase now refers not only to the GATT but also to a separate agreement on intellectual property, called trips, as well as several dozen other lesser agreements. These agreements are administered by the WTO in Geneva and constitute a “single undertaking,” meaning the agreements are a package deal: a nation must agree to all the responsibilities of all the agreements to get the benefits (chiefly, ultralow tariffs to developed-nation markets via the GATT).
A quick note about the creation of the WTO in 1995: it wasn’t a big deal. The GATT’s substance—locking in the tariff rates countries committed to under their schedules—operated in the same way before the WTO was created. The creation of the WTO was a superficial change; instead of administrative staff being “borrowed” from the UN, they have their own charter. True, there were some tweaks to dispute settlement under the GATT, along with other trivia, but these should not distract those of us concerned about American deindustrialization.
The real bamboozle of the “Uruguay Round” of GATT negotiations during the late 1980s and early 1990s, which involved the creation of the WTO, was to marry the GATT to a new global intellectual property agreement, trips, or trade-related aspects of intellectual property rights. Here, Western leaders intentionally chose to prioritize income from intellectual property rents over domestic manufacturing. Instead of pushing for something approximating tariff reciprocity in GATT schedules, Western leaders told developing nations that if they wanted to continue to enjoy their high tariffs and our low tariffs, then they had to take on trips commitments. Trips requires all nations to enforce twenty‑year patent terms and fifty-year copyright terms, among many other rules.
The Inflation Reduction Act’s Tax Credits Violate
National Treatment
Before we get to the Inflation Reduction Act tax credits, it is worth taking a moment to look at the text of our GATT obligations. Below, reproduced in full, and with emphasis added, is the first paragraph of the first article of the GATT, the “Most Favored Nation” obligation:
With respect to customs duties and charges of any kind imposed on or in connection with importation or exportation or imposed on the international transfer of payments for imports or exports, and with respect to the method of levying such duties and charges, and with respect to all rules and formalities in connection with importation and exportation, and with respect to all matters referred to in paragraphs 2 and 4 of Article III, any advantage, favour, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties.
The GATT’s Article III, incorporated in the above, is the GATT’s National Treatment obligation and explicitly commands that WTO members’ tax codes “should not be applied to imported or domestic products so as to afford protection to domestic production.” An important distinction that confuses many people here: tax credits to subsidize building a factory (as opposed to buying a domestic product) do not run afoul of National Treatment, because they do not directly prejudice an imported widget versus a similar domestic product. Also, for those curious, “Buy American” laws were always allowed. Procurement is the one notable exception to the GATT’s National Treatment, because in procurement the government acts as a buyer in the market, not a regulator.
Now, looking to the Inflation Reduction Act’s tax credits, we see plainly that they do precisely what the GATT commands shall not be done: use the tax code to afford protection to domestic production. The Act amends existing clean energy tax credits, codified in Section 45 and 48 of the Internal Revenue Code, to include domestic content “bonuses.” An additional two clean energy credits are created with similar domestic content bonuses.
The changes to the Section 48 investment tax credit are instructive: Previously, consumers received a 26 percent tax credit for the installation of a rooftop solar system. Now, consumers receive a 30 percent tax credit for the installation of a rooftop solar system and an additional 10 percent (for a 40 percent total credit) if the solar panels consist of at least 40 percent domestic content.
So if you have $20,000 you want to put toward rooftop solar, the IRS will give you a tax credit of $6,000 if the solar panels are imported, or $8,000 if the solar panels meet domestic content requirements. Put differently, the long-standing Section 48 credit now poses an effective 10 percent tariff on solar module imports, but in a far more complicated and cumbersome manner.
Electric Vehicle Tax Credit
First legislated in 2008, Section 30D of the internal revenue code entitled consumers to a $7,500 tax credit from the IRS after purchasing an electric vehicle. Like all our domestic taxes and tax credits, it didn’t matter where the car was made—until President Biden signed the IRA, that is.
The previous extension of 30D credits to every electric vehicle regardless of origin may well have proved a death blow to our domestic automobile industry. While President Trump’s additional China tariffs mostly held off the invasion of gas cars from China, the 30D credit offset the tariff for made-in-China EVs. And so it was that the made-in-China Polestar 2 electric car, from China’s Geely Group, began deliveries to the United States in 2021. Polestar scaled up rapidly in 2022, enjoying access to the credit while Tesla and GM’s allotments had run out. Polestar cars became a regular sight in many U.S. metros; Polestar even signed a commitment to provide Hertz with 65,000 cars over the next five years. We were subsidizing the displacement of our own auto sector.
To end this madness, the Inflation Reduction Act violates National Treatment. Now, to get the full $7,500 credit, a car has to (1) have final assembly in North America to be at all eligible; (2) meet battery component manufacturing criteria to earn the first $3,750; and (3) source 40 percent of the critical minerals in the battery from the United States, or one of the twenty countries with whom we have an FTA, to earn the second $3,750. This 40 percent increases to 50 percent in 2024, 60 percent in 2025, 70 percent in 2026, and 80 percent in 2027.
The Treasury Department published more details alongside President Biden’s signing of the Act, but as of early October 2022, it is unclear which, if any, cars will qualify come January 2023. The Department of Energy published a guesstimate of 2023 model cars that “may” (emphasis theirs) qualify, not exactly inspiring consumer confidence. Reddit’s electric vehicles subreddit is onto a second “US Inflation Reduction Act Megathread,” each with over a thousand comments, trying to crowdsource an understanding of how this revised credit may work.
With tariffs, it is possible to control the amount of imports without creating compliance costs for the internal market. Filing tax returns is already complicated, and trying to incentivize domestic production with tax credits adds further complexity. For vehicles, it may prove workable, because every single car has a unique Vehicle Identification Number (VIN). Indeed, Treasury is making a VIN lookup tool so that consumers can verify whether a particular car satisfies the requirement. Without this, it would be impossible for consumers to know, as the same model of vehicle is often made here and elsewhere. The Ram pickup truck, for example, is made in both Michigan and Mexico.
The Inflation Reduction Act should be celebrated for ending the economic suicide of handing out $7,500 checks to electric vehicles imported from our chief adversary. But it would have been better policy to phase in a tariff on imported cars, followed by phase-in tariffs on batteries and then minerals. Tariffs are more straightforward and efficient. President Lyndon Johnson, following a dispute with Europe, imposed a 25 percent tariff on light trucks that we enjoy to this day, and which has been instrumental in preserving domestic vehicle assembly.
From a trade lawyer’s perspective, the Inflation Reduction Act’s preservation of National Treatment on vehicle assembly for Canada and Mexico, and the critical minerals requirement for other U.S. free trade agreement nations—but not for WTO Members—is an explicit rejection of the core of the multilateral system. This is most welcome, and will hopefully lead to a reconsideration of our membership in a nonreciprocal tariff agreement with essentially the whole world. Raising our GATT tariffs is far less of a bomb than cavalierly violating National Treatment.
Surprising Support and Expected Retaliation
The Business Roundtable is an association of the biggest corporations in America. Historically, it has staunchly supported strengthening the multilateral system. Thus it was surprising to hear its current chair, Mary Barra, CEO of General Motors, come out in support of the Inflation Reduction Act. Autoblog noted the development with an article titled “Biden Bill Compels Barra to Put GM before Business Roundtable.” Ford also supported the law. It is noteworthy, too, that General Motors has exited Europe. Chinese consumers appear to be ditching Western carmakers in droves, preferring new indigenous car companies focused exclusively on EVs. Between 2020 and so far in 2022, international automakers fell from 61 percent to 49 percent of the total auto market in China. GM and Ford are now far less invested in the multilateral trading system than at any time this century.
It was also noteworthy that the government of Canada expressed enthusiasm for the new domestic content criteria. This may seem unsurprising, given that Canada will continue to have all trade obligations honored under both the WTO and usmca, but it nonetheless marks a major shift in Canadian federal policy, which for decades has been a staunch defender of the multilateral trade system. Simply remaining silent on the new credit would have been the traditionally expected response. Instead, Canada offered active celebration.
In contrast, European Commission spokesperson Miriam Garcia Ferrer protested as the bill advanced this summer: “We continue to urge the United States to remove these discriminatory elements from the bill and ensure that it is fully compliant with the WTO.” South Korea’s trade minister Ahn Duk-geun immediately joined in the criticism, as did Japanese officials. South Korea called the law a “betrayal.” Surprisingly, Politco reported that USTR “shrugged off” criticism, and Ambassador Tai celebrated the legislation that her office will now be defending from our allies.
In the near future, expect a WTO complaint filed by Europe, Korea, and Japan. These countries’ auto companies have undoubtedly been prejudiced. For example, among the top ten electric vehicles by sales in the United States are the Audi e-Tron, Porsche Taycan, and Hyundai Kona EV, all of which are assembled in Europe (for the American market). All of these vehicles will lose their current eligibility for the $7,500 credit on January 1, 2023.
On September 30, 2022, Bloomberg published details of European deliberation, quoting Thierry Breton, EU commissioner for the internal market, as saying that companies are telling him they actively plan to move investment from Europe to the United States if the credits remain. Breton reportedly said a WTO action was needed, or direct retaliation to create “a level playing-field.” Bloomberg also reported that Europe is “wary of a move that could affect mid-term U.S. elections.”
Europe will almost certainly win its WTO lawsuit. Although the WTO appellate body remains defunct as the United States won’t sign off on necessary appointments to establish a quorum, WTO dispute panels are still convening and issuing judgments (“panel reports”). With a victory in hand—assuming Europe waits that long—they will implement retaliatory tariffs. (When a WTO country wins a WTO lawsuit and the respondent country doesn’t comply, the WTO authorizes the complainant country to issue retaliatory tariffs.)
The United States and Europe have previously imposed WTO-authorized retaliatory tariffs against each other as they each won and lost, in part, a long-standing Airbus-Boeing WTO dispute. And in June 2018, in response to President Trump’s national security tariffs on aluminum and steel imports, the EU imposed retaliatory tariffs of 25 percent on U.S. agricultural products, including whiskies, corn, and processed fruits and vegetables.
President Biden had sought to differentiate himself from his predecessor on trade by emphasizing his respect for allies and enthusiasm to work collectively with them on shared problems. So trade policy observers did not expect a fresh trade war with Europe from this administration. Ambassador Tai, in her first year in the role, had resolved both of the abovementioned trade fights with Europe.
America’s Options to Respond to Retaliation
The administration has three “reactive” options and one proactive option to respond to seemingly inevitable retaliation. The first reactive option is to do nothing: the United States could simply accept retaliatory tariffs. But this seems unlikely, as other nations will design their retaliatory tariffs to inflict maximum pain by targeting politically influential U.S. exporters.
The second reactive option would be to just exit the WTO. Even without congressional action, the president has authority to withdraw from the WTO on six months’ notice. But this too seems politically unlikely. And for Korea, we have a separate bilateral trade agreement with them that also requires National Treatment.
The third reactive option is also the politically easiest route: remove the domestic content requirements from the tax credits. Doing so on a multilateral basis, however—honoring GATT National Treatment—would guarantee that China rapidly displaced our domestic auto industry, and would be an unconscionable economic and geopolitical disaster. Unfortunately, it is also precisely the type of policy “correction” traditionally promoted by groups like the Business Roundtable. Democrats may seek to amend the tax credits so that Europe, Japan, Korea, and possibly other allies are no longer excluded. But then we would miss an opportunity to address the fact that the United States only has a 2.5 percent tariff on cars while Europe enjoys a 10 percent tariff.
Thus far, it is encouraging that Senator Warnock of Georgia, whose state is the beneficiary of a new $5.5 billion Hyundai factory only just beginning construction outside of Savannah, has not called for repealing the domestic content requirements. Despite Hyundai being very unhappy, the bill he introduced to accommodate them would only push domestic content requirements out one year.
Assymetric GATT tariffs offer a pivot to a proactive, superior option to fend off retaliatory measures: the president should direct USTR to renegotiate tariffs pursuant to GATT Article xxviii. Invoking an Article xxviii negotiation shifts the conversation from our National Treatment violation to the question of why Europe’s GATT tariffs on cars are four times the rate of ours. The United States should at a minimum raise tariff rates from the current 3.4 percent, perhaps to our historically successful 40–50 percent average, and encourage others to follow.
Many factors make this approach a no-brainer. First, we already have bilateral FTAs with most of our significant trade partners. Europe and China are the big exceptions. FTA countries need not be immediately affected by raising GATT tariff bindings, as our FTAs contain their own independent set of tariff commitments. Moreover, the United States and China have mutually ignored their tariff obligations since 2018. The WTO has held both the United States and China in violation of its tariff commitments ever since President Trump initiated the Section 301 process and China retaliated. So that trade relationship is already outside the WTO orbit.
Second, GATT Article xxviii rules for renegotiation play to our favor. The rules do not force renegotiation with all 163 other WTO members. Rather, for each product, you negotiate chiefly with the country that is currently your largest supplier of that product, and the GATT/WTO country with whom you initially negotiated that tariff concession. Overwhelmingly, then, our counterparties will either be (1) a country with whom we have an FTA, (2) China, or (3) Europe.
Countries with whom we have an FTA should not complain in Geneva during this renegotiation: the value of their FTA with the United States will increase exponentially. They should accept or even celebrate it, much as Canada has done with the Inflation Reduction Act’s modification of the EV tax credit, making it an effective $7,500 tariff on Asian and European cars. As for Europe, we could negotiate a parallel tariff agreement (essentially an FTA, but we need not seek to reduce tariffs further; it could even be a status quo tariff agreement).
If a counterparty nation isn’t Europe, China, or an existing FTA country, then it’s likely a beneficiary of one of our trade preference programs that cover 120+ developing nations. In these programs (primarily, the Generalized System of Preferences), we unilaterally waive tariffs, ostensibly to help the other country develop. Powerhouse nations like Brazil, Indonesia, and Thailand are current beneficiaries. These nations are thus not well positioned to complain in Geneva against raising our bound tariff rates, as we are free to terminate their tariff preference beneficiary status at any time. Most importantly, having the negotiation in Geneva to raise bound rates does not automatically change our Column 1 tariffs domestically; it merely signals to business that such a change is likely. This gives the market time to prepare.
Understanding that free trade should not be a goal in itself is liberating, because we need not badger other countries to match our low tariffs or inflame relations by calling them cheaters. The GATT negotiation should be easy: encourage our allies to raise their own tariffs along with ours.
Freed from GATT Shackles, Pivot to Managed Trade
In an October 2021 interview, Ambassador Tai succinctly described why America is increasingly looking to “managed” trade:
I think that when you talk about managed trade, just to break it down, it is a different model for managing a trade relationship than the model that we’ve pursued before, which has been . . . let’s seek market access and then, you know, let the chips fall where they may.
“Market access” is how trade lawyers refer to tariff commitments. Tai’s phrase “letting the chips fall where they may” is exactly correct: we’d lower tariffs, and then accept the results of subsequent shifts in production under some ideological notion that we can or should “compete” with countries where workers make one-tenth or less of the wages of workers here.
“Rules-based” trade, while sounding nice in theory, actually creates and exacerbates international tension. As America inevitably lost jobs and factories, our leaders would accuse other nations of “cheating.” Undoubtedly, “cheating” occurs, but rules-based trade both inhibits practical solutions and encourages ongoing acrimony.
Rules-based trade has produced antagonism even among allied, developed democracies. When we signed the U.S.-Korea Free Trade Agreement (“KorUS”) in 2007, the perception was that U.S.-made cars, which had bigger engines than Korean cars, did not sell well in Korea due to that country’s taxes on engine size. So in KorUS’s National Treatment chapter, we wrote in a unilateral obligation on Korea to relax their engine displacement taxes (Article 2.12). That didn’t work, however. Korea continued to send us more than ten cars for every one car we sent them.
Dissatisfied, the Trump administration acted to preserve our 25 percent tariff on trucks until 2041 to limit further damage to domestic production capacity. Korea also promised that at least fifty thousand U.S.-made vehicles annually could skip Korean safety standards and use American standards instead. The 2018 KorUS renegotiation additionally included a further loosening of Korean environmental regulations in the hopes of accommodating more U.S. exports. (After all these concessions, Korea is surely owed some understanding when their leadership says they’ve been betrayed by the IRA.)
Yet none of these adjustments worked. Korea still sends us more than ten times the number of cars we send them. In 2021, the United States imported 831,090 passenger vehicles from Korea, which in turn imported only 77,515 passenger vehicles from the United States.
In light of this history, it’s not rules standing in the way of a balanced trade relationship. But even if you’re convinced that Korea surreptitiously implemented other maneuvers to offset their concessions and to thwart U.S. exports, what then? Are we going to keep calling them cheaters while we lose domestic market share year after year? Perhaps Koreans just support their home brands more than Americans do.
With managed trade, we avoid this mess. We set expectations on volumes, like sovereigns that mutually respect each other, and go from there. No name-calling, no insinuations. Here’s an example of how it could work: fifty thousand vehicles tariff-free each way. Both countries’ OEMs could test whether there’s a viable market for a particular vehicle. If so, they could then make the investments necessary to supply the other country’s market from within. We get all the benefits of competition, without the downsides of hollowing out our domestic base. These agreements set clear expectations on volumes and balance without purporting to rewrite signatories’ domestic laws.
Hopefully, Ambassador Tai can get the support she needs from the Biden administration to fully embrace the switch to managed trade: renegotiating WTO Article xxviii and signing new, managed trade agreements with Europe, Korea, and Japan. This approach would more straightforwardly—and less controversially—achieve the goals sought by the Inflation Reduction Act.