A trade pact could make EVs with battery materials sourced from Japan eligible for federal tax credits, the Japan Times reported Tuesday.

The Inflation Reduction Act (IRA) requires major battery components and critical minerals to be sourced from countries with which the U.S. has a free trade agreement, a rule that has drastically cut the number of EVs and plug-in hybrids qualifying for the full $7,500 credit.

The U.S. has no such qualifying agreements with Japan, South Korea, or the EU, all leading producers of electric vehicles, with a related supply chain.

2023 Toyota bZ4X Limited AWD2023 Toyota bZ4X Limited AWD

But a recently negotiated trade agreement between the U.S. and Japan would prohibit the two countries from enacting bilateral export restrictions on battery minerals, according to the report, including lithium, nickel, cobalt, graphite, and manganese. The agreement, due to be signed Tuesday, aims to reduce U.S.-Japanese dependence on China for those minerals, the report said.

This could mean a wider range of vehicles would be eligible for the full $7,500 tax credit, but does so by backing away from the Biden administration’s original emphasis on U.S.-made vehicles and batteries—and what was passed by Congress.

2023 Nissan Leaf2023 Nissan Leaf

The Treasury Department is due to release full EV tax credit guidance within the next day or two, clarifying exactly how much non-U.S. content can be included in EVs to qualify for the full credit. In a white paper released Dec. 29, the Treasury Department hinted that it was planning on casting the net further beyond the U.S. by discussing plans to classify cathode and anode materials as processed critical minerals rather than battery components, effectively expanding the number of countries they can be sourced from, Bloomberg noted.

This has angered Sen. Joe Manchin, the conservative-leaning Democratic senator who demanded many of the IRA’s domestic-sourcing rules to win his vote, and has sought to delay EV tax credits under the IRA over concerns that the Treasury Department isn’t adhering to those rules.

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