Protecting Protectionism in the WTO

Abstract

The Inflation Reduction Act of 2022 (IRA), as part of the largest in-vestment the United States has made to mitigate climate change to date, amended the United States Internal Revenue Code to reduce the cost of shifting toward renewable energy. Specifically, the IRA expands tax credits available to taxpayers who invest in or produce clean energy and provides a new consumer tax credit for electric vehicles. However, the IRA has come under fire from U.S. trading partners because some of these tax credits contain local content requirements (LCRs)— that is, the Act requires beneficiaries to source products or materials domesti-cally in order to receive the full benefit. Several foreign governments have claimed that the IRA’s use of LCRs violates World Trade Organiza-tion (WTO) agreements to which the U.S. is a party. If another member of the WTO lodges a formal complaint with the WTO and the U.S. re-ceives an adverse ruling, the U.S. could be ordered to repeal the IRA or face sanctions, which would severely hamper U.S. and global efforts to meet emissions goals. Moreover, LCRs could be a very useful tool for countries other than the U.S. to use to facilitate the growth of prosper-ous new renewable energy industries, something essential to sustaina-bly avoiding climate catastrophe. This Note reviews the WTO rules which the IRA may violate and finds that the IRA would not pass muster under prevailing interpretations of WTO agreements. However, evi-dence in the relevant WTO agreements support an alternative that would allow the IRA to survive. This Note proposes such an interpreta-tion and argues that it would be prudent for the WTO to adopt it in light of the current climate crisis.