Global Trade Rules and the Inflation Reduction Act

August 31, 2022

Some of the climate provisions of the Inflation Reduction Act (IRA) are very specifically aimed at boosting the U.S. economy while fighting climate change. The clearest example of this is the electric vehicle tax credit, which only applies to vehicles that are assembled in North America with battery components coming primarily from North America.

This is likely a violation of rules under the World Trade Organization (WTO) and various bilateral and regional free trade agreements. South Korea and the European Union are already considering challenging these IRA provisions under these rules. This case, rather than being an argument against the industrial policy in the IRA, is a clear argument for the reform of global trade rules.

These so-called “free trade” rules have proven to be both anti-development and anti-environment. The U.S. famously won a case against India in 2016 to stop an Indian policy meant to kickstart domestic production of solar panels. The entire global trade regime is rigged against developing countries implementing industrial policy to support their domestic economy. And, as Public Citizen demonstrates in a report from earlier this year, defenses using the supposed WTO exceptions clauses (meant to allow policies protecting the public interest to be exempted from WTO rules) almost never work.

Civil society groups are calling for a “Climate Peace Clause” in which countries pledge to exempt climate policies from trade disputes. Rather than using trade policy to dismantle climate policies and pit countries against each other in a race to the bottom, we need it to incentivize a cooperative framework that builds domestic economies and speeds up the revolution towards a just and sustainable future.