On March 28, 2023, the United States and Japan entered into a bilateral agreement, titled the Agreement Between the Government of the United States of America and the Government of Japan on Strengthening Critical Minerals Supply Chains (“U.S.-Japan Critical Minerals Agreement” or “Agreement”). 

Context and Significance of the U.S.-Japan Critical Minerals Agreement

Prompting this agreement were concerns surrounding the Inflation Reduction Act of 2022 (“IRA”) and the applicability of tax credits to electric vehicles (“EVs”) for which battery minerals are processed in Japan.  As discussed, the IRA amended the consumer EV tax credit, which requires that 40 to 80 percent of the value of the critical minerals in a vehicle’s battery be extracted or processed in the United States or in a country with which the United States has a free trade agreement (“FTA”) in effect or be recycled in North America.  A number of U.S. trading partners do not have a free trade agreement with the United States and have expressed concerns about the IRA’s FTA requirement.  The EV industry has similarly expressed concerns that there is an insufficient supply of minerals from FTA partner countries. 

In the recent proposed regulations on the new clean vehicle credit under the IRA, Treasury interprets the term “free trade agreement” broadly to include agreements that meet certain criteria, even where such agreements are more limited in scope compared to traditional, comprehensive free trade agreements.  Those criteria include: 

whether an agreement between the United States and another country, as to the critical minerals contained in electric vehicle batteries or more generally, and in the context of the overall commercial and economic relationship between that country and the United States:

(A) reduces or eliminates trade barriers on a preferential basis;

(B) commits the parties to refrain from imposing new trade barriers;

(C) establishes high-standard disciplines in key areas affecting trade (such as core labor and environmental protections); and/or

(D) reduces or eliminates restrictions on exports or commits the parties to refrain from imposing such restrictions.

In other words, the proposed regulations would define FTA countries to include not only trading partners with which the United States “has comprehensive free trade agreements (that is, agreements covering substantially all trade in goods and services between the parties, including trade in critical minerals),”[1] but also countries that meet the above criteria with respect to “the critical minerals contained in electric vehicle batteries.”

Noting that the term free trade agreement is not defined in the IRA or in the Internal Revenue Code, Treasury explains that the proposed definition, consistent with the goals of the IRA, “expands the incentives for taxpayers to purchase new clean vehicles and for vehicle manufacturers to increase their reliance on supply chains in the United States and in countries with which the United States has reliable and trusted economic relationships.”

The proposed regulations mention the U.S.-Japan Critical Minerals Agreement as “[o]ne example” of trade agreements that fall under the latter category of agreements with a limited scope.  The proposed regulations also note that “[t]he Treasury Department and the IRS have consulted with the U.S. Trade Representative in applying the proposed factors here.”

Overview of the U.S.-Japan Critical Minerals Agreement

The new U.S.-Japan Agreement focuses on five minerals used in EV batteries, consistent with its stated objective, which is:

to strengthen and diversify critical minerals supply chains and promote the adoption of electric vehicle battery technologies by formalizing the shared commitment of the Parties to facilitate trade, promote fair competition and market-oriented conditions for trade in critical minerals, ensure robust labor and environmental standards, and cooperate in efforts to ensure secure, sustainable, and equitable critical minerals supply chains.[2]

Trade in Critical Minerals

The Parties affirm their obligations under the World Trade Organization (“WTO”) not to impose undue prohibitions or restrictions on imports of critical minerals from — or on exports of such minerals to — the other’s territory and to accord national treatment to the critical minerals of the other territory.[3]  The Parties also agree to maintain their “current practice” of not imposing export duties on critical minerals exported to the other’s territory.[4]  The Parties commit to confer on domestic measures to address non-market policies and practices of other countries “affecting trade in critical minerals,” as well as “on issues relating to global critical minerals supply chain.”[5]  The Parties will also confer on “best practices” concerning national security review of investments by foreign entities in the Parties’ critical mineral sector, including through notifications of such investments to the other Party where appropriate.[6]  The Parties also agree to support each other’s efforts to address any supply chain disruptions. [7]

Sustainable and Equitable Supply Chains for Critical Minerals

The Agreement includes non-binding commitments on environmental and labor rights protections with respect to critical minerals supply chains.  For instance, each Party “confirms its intention to ensure that its environmental laws and policies provide for, and encourage, high levels of environmental protection with respect to critical minerals.”[8]  Similarly, each Party “confirms its intention to adopt and maintain labor rights in its statutes and regulations, and practices thereunder” and “to effectively enforce its labor laws.”[9]

Security Exception

The Parties agree that the Agreement shall not be construed to:

  1. require a Party to furnish or allow access to any information the disclosure of which it determines to be contrary to its essential security interests; or
  2. preclude a Party from applying any measure that it considers necessary for the fulfilment of its obligations with respect to the maintenance or restoration of international peace or security or for the protection of its own essential security interests.[10]

Cooperation and Consultations

The Parties commit to “seek to cooperate bilaterally and in plurilateral fora, as appropriate, regarding efforts to ensure secure, sustainable, and equitable critical minerals supply chains.”  The Parties also commit to “endeavor to refrain from adopting or maintaining any measure that would nullify or impair the objective of this Agreement or otherwise impede the cooperation undertaken pursuant to this Article.” [11]

While the Agreement does not provide a dispute resolution clause, the Parties commit to “enter into consultations regarding any matter that might affect the operation or interpretation of this Agreement” upon either Party’s request, “with a view to arriving at a mutually satisfactory resolution of the matter within 60 days of the request.”[12]  The Agreement also mandates that the Parties evaluate their respective capacities for the extraction and processing of critical minerals every two years to determine if an amendment to, or termination of, the Agreement is appropriate.[13]

Key Takeaways and Considerations for Future Developments

  • The U.S.-Japan Critical Minerals Agreement is the first of its kind, but will likely not be the last.  The Agreement may set a precedent for other U.S. trading partners that do not currently have qualifying “free trade agreements” under the IRA, such as the European Union and the United Kingdom.  In a joint statement following a meeting on March 10, 2023 between European Commission President Ursula von der Leyen and U.S. President Joe Biden, for instance, the United States and the EU agreed to begin negotiations for a “targeted critical minerals agreement for the purpose of enabling relevant critical minerals extracted or processed in the European Union to count toward requirements for clean vehicles in the Section 30D clean vehicle tax credit of the Inflation Reduction Act.”  According to the joint statement, that agreement would expand “access to sources of critical minerals that are sustainable, trusted, and free of labor abuses” and “reduce unwanted strategic dependencies in these supply chains, and to ensure that they are diversified and developed with trusted partners.”  It is reported that Indonesia is also set to propose a similar agreement with the United States, which a senior Indonesian official referred to as a “limited FTA.”
  • The U.S.-Japan Critical Minerals Agreement covers only five “critical minerals” — lithium, graphite, manganese, cobalt, and nickel — even though there are 50 critical minerals covered under the IRA.  Undoubtedly, the minerals covered under the Agreement are the most important and most resource-constrained minerals for EV batteries.  However, the critical minerals requirement of the IRA can be met if the United States has an FTA with a foreign country, whatever the scope of that FTA.  As a result, even though this limited Agreement covers only five, all critical minerals extracted or processed in Japan — including aluminum, for example — may qualify as critical minerals under the IRA if the regulations as proposed are finalized.  Concerns may thus be raised that this narrow Agreement on five minerals could operate to convert any of the 50 minerals extracted or processed in Japan into qualifying critical minerals.[14] 
  • The narrowly-tailored agreement with Japan is the latest example of an executive agreement that obviates the need for Congressional approval.  Congress has been critical of the growing reliance of the Biden Administration to pursue trade pacts that need no Congressional approval, including most recently the IPEF.  House Ways & Means trade subcommittee Chair Adrian Smith (R-NE), along with other key trade lawmakers from both parties, has criticized the deal with Japan — as well as a similar arrangement under negotiation with the European Union — because the administration failed to provide sufficient transparency to Congress during the negotiations.  The trade subcommittee’s ranking member, Rep. Earl Blumenauer (D-OR), has also sharply criticized the Agreement, stating “I fear we are crossing the Rubicon.  Today, the Biden Administration set the stage to ignore congressional intent and unilaterally circumvent Congress’ constitutional role on international trade.”

Companies will want to closely follow ongoing and future U.S. negotiations toward similar agreements, including with the EU.  Interested parties should consider submitting comments on the proposed regulations (including the FTA provision), which are due on June 16, 2023.  The regulations will likely be finalized by the end of this year.

*             *             *             *


[1] According to the proposed regulations, those trading partners are:  Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, and Singapore.

[2] U.S.-Japan Trade Agreement, art. 1.

[3] Id. art. 3.

[4] Id.  Notably, Article I, Section 9, Clause 5 of the U.S. Constitution already states:  “No Tax or Duty shall be laid on Articles exported from any State.”

[5] Id.

[6] Id.

[7] Id.

[8] Id. art. 4.

[9] Id. art. 5.

[10] Id. art. 8.

[11] Id. art. 7.

[12] Id. art. 11.

[13] Id. art. 12.

[14]  Out of the 50 critical minerals, the only other significant critical mineral currently used in EV batteries is aluminum, of which there is an abundant supply.  This may explain why the Agreement covered only five minerals.  Still it bears noting that lithium iron phosphate (LFP) batteries do not use cobalt, nickel, and manganese, but rely more heavily on aluminum (and also iron, which is not an “applicable critical mineral” as defined in the IRA). 

Photo of Minwoo Kim Minwoo Kim

As a member of the international arbitration and trade practices, Minwoo Kim counsels U.S. and global firms, industry associations, and foreign governments on complex international and cross-border legal issues.

Minwoo represents sovereign states and global firms in all stages of international treaty-based and…

As a member of the international arbitration and trade practices, Minwoo Kim counsels U.S. and global firms, industry associations, and foreign governments on complex international and cross-border legal issues.

Minwoo represents sovereign states and global firms in all stages of international treaty-based and commercial disputes. He also helps U.S. and global firms, industry associations, and foreign governments interpret and assess foreign regulatory practices under international trade agreements, including the World Trade Organization (WTO) agreements, as well as preferential trade agreements.

Prior to joining the firm, Minwoo was a judicial intern for Hon. Rudolph Contreras, U.S. District Court for the District of Columbia, a legal intern at the Integrity Vice Presidency, the World Bank, and an intern at the National Assembly of Korea, the Foreign Affairs and Unification Committee. Minwoo also maintains an active pro bono practice.

Photo of Jay Smith Jay Smith

Jay Smith is of counsel in the Washington office. He joined the firm after several years as a professor of political science and international affairs, during which he specialized in international trade policy and international dispute settlement. His practice in the International and…

Jay Smith is of counsel in the Washington office. He joined the firm after several years as a professor of political science and international affairs, during which he specialized in international trade policy and international dispute settlement. His practice in the International and Litigation groups draws on this academic and policy experience.

He is currently helping clients develop and implement strategies with regard to the Trump Administration’s recent trade actions, including pursuing country exemptions and product exclusions to the recent steel and aluminum tariffs imposed under Section 232, and product exclusions to the proposed Section 301 tariffs.

Photo of Jamin Koo Jamin Koo

Jamin Koo advises clients across a broad range of tax issues, including international and domestic tax planning and acquisition and financing transactions. He works with numerous U.S. and non-U.S. clients (in particular, several Asia-based clients) on cross-border investments, joint ventures, and restructurings. His…

Jamin Koo advises clients across a broad range of tax issues, including international and domestic tax planning and acquisition and financing transactions. He works with numerous U.S. and non-U.S. clients (in particular, several Asia-based clients) on cross-border investments, joint ventures, and restructurings. His expertise includes taxation of debt instruments, derivatives, and other financial instruments, and he has been providing tax advice related to digital assets to a number of clients.

Most recently, with his background in engineering and environmental science, Jamin has been advising clients in a number of industries on various issues involving tax credits and other tax provisions of the Chips & Science Act and the Inflation Reduction Act and drafting comments to Treasury and the IRS.