The US and Japan have reached a trade deal on critical minerals used in electric car batteries

The United States and Japan will sign a trade deal on Tuesday on critical minerals needed for electric car batteries, as Washington seeks to reduce its supply chain’s dependence on China.

As part of the agreement, the countries will refrain from imposing export duties on lithium, cobalt, manganese, nickel and graphite. They will also share information on potential labor violations in the supply chain related to critical minerals and “identify opportunities to build capacity.”

Japan announced the deal ahead of an expected signing later on Tuesday. The Biden administration is preparing to issue guidance on how electric car makers qualify for the maximum tax credit under the Inflation Reduction Act, a landmark climate change bill passed by the US Congress last year to jump-start clean energy production.

The IRA, which seeks to cut U.S. emissions to half 2005 levels by 2030, provides tax credits to companies that source parts and materials from countries with which Washington has free trade agreements.

This potentially excludes the EU and Japan, which do not have free trade agreements approved by Congress.

The prospect of being excluded from the IRA tax credit has raised tensions between Tokyo and Washington as the governments work to coordinate economic security issues such as export controls aimed at preventing China from acquiring and developing advanced technologies, including semiconductors.

Yasutoshi Nishimura, Japan’s Minister of Economy, Trade and Industry, said on Tuesday that the trade agreement would pave the way for electric vehicles made from metals processed in Japan to qualify for tax breaks under the IRA.

“With the significant expansion in demand for electric vehicle batteries, a pressing question for us was how to secure the minerals essential for their production,” said Nishimura.

U.S. officials declined to confirm whether the deal with Tokyo qualifies critical minerals sourced in Japan for green subsidies. However, they said the deal included “several new clauses that make commercial sense”. It is reviewed every two years.

This month, Washington began negotiations with the EU on trade in critical minerals. EU officials had hoped that the loose deal with Washington could give the critical minerals “free trade-like status” and allow products from Europe to qualify for subsidies.

U.S. officials told reporters Monday that strengthening the supply chain for critical minerals “together with like-minded partners” is “vital to the growth of the clean energy economy” and “advances economic security and stability by ensuring that the United States and its allies and partners they are not dependent on other countries for critical minerals”.

The IRA tax credits were designed, in part, to encourage the revival of domestic supply chains and manufacturing and to bring back jobs lost to Asia in the United States.

In an interview with the Financial Times last month, Biden’s clean energy adviser John Podesta said reliance on Chinese clean technology created a “vulnerability” for the United States and its allies that the administration was trying to address.