Minnesota Journal of International Law

A Power Move in the Solar Trade Arena? How the Inflation Reduction Act's Preference for Domestically Produced Solar Products May Conflict with International Trade Rules

Abstract

When the Inflation Reduction Act (“IRA”)—described as “the most important climate action in U.S. history”—was passed in August of 2022, it came as a surprise not only to the citizens of the United States, but also to key Senators who helped pass the legislation. In the past decade, the United States had seemingly abdicated its role as a global leader in addressing climate change. When this law, with a title that has little to do with environmental legislation, burst onto the world stage, it signaled that the United States’ was working to reclaim its role as a global leader in the climate policy arena. Still, the law became the subject of some international controversy because of its implications on international trade. Among these are the IRA’s preference for domestically manufactured solar products.

While the IRA contains the largest investment ever made by the U.S. government toward climate action, it also contains subsidies for clean energy that have been deemed as “green protectionism” by some, because these subsidies reward domestically produced renewable energy products. Specifically, the IRA includes in its provisions a ten percent bonus tax credit for solar products that incorporate domestically produced products. Yet, favoring domestic products at the expense of foreign products is a violation of the General Agreement on Tariffs and Trade (“GATT”). The GATT prohibits nations from implementing policies that favor their own products at the expense of international products, a practice known as the “national treatment principle.” The IRA violates this principle by rewarding a credit for domestic production of solar and renewable energy products. Still, the GATT does allow for exceptions to this principle under Article XX. In order to determine whether a policy can qualify for an Article XX exception, the World Trade Organization (“WTO”) employs a “two-part test.” Part I analyzes whether the policy fits within a listed exception. There are two relevant exceptions that the IRA may qualify for: (1) an exception for policies that are “necessary to protect human, animal or plant life or health” and (2) an exception for policies that are “relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption.” Part II of the “two-part test” analyzes whether the policy complies with the Chapeau of Article XX, specifically analyzing whether the policy is an “arbitrary or unjustifiable discrimination between countries where the same conditions prevail” or if it is “a disguised restriction on international trade.” The question becomes: does the IRA satisfy this two-part test and, therefore, qualify for exceptions to the GATT? If it does not qualify for exceptions, what implications does this have? This note argues that the IRA violates Article III of the GATT and will likely not satisfy Part I of two-part test, and it also may not satisfy Part II of the test. If a challenge to the IRA is brought before the WTO, the implications of a successful challenge could include commensurate tariffs, if approved by the Dispute Settlement Body (“DSB”), and similar trade barriers enacted by other countries in the international arena. The international implications of the IRA are important: global cooperation to ensure the quickest ramp up of renewable energy is crucial to addressing climate change and meeting the goals of the 2015 Paris Climate Agreement.

This note will proceed as follows: Part II will summarize the IRA and provide an overview of the global solar disputes in the years preceding the IRA. Part III will describe the relevant international trade rules, focusing on the WTO and the GATT. Part IV will analyze whether the IRA violates the GATT, and whether the IRA qualifies for an exception under Article XX of the GATT. Part V will discuss the remedies and international legal implications of the IRA. And Part VI will offer a conclusion. The issue of whether the IRA violates international trade laws is important: international trade affects how quickly nations can scale-up their renewable energy resources, which will impact their policy responses to climate change. If domestic preferences for solar panels are found to violate international law, then this could result in more retaliatory trade barriers being implemented in the renewable energy market (and generally, less restrictions on trade results in more economically efficient outcomes). And addressing the climate crisis will require international cooperation, even in the sphere of international trade.

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Recommended Citation

Pfister, Maria (2024) "A Power Move in the Solar Trade Arena? How the Inflation Reduction Act's Preference for Domestically Produced Solar Products May Conflict with International Trade Rules," Minnesota Journal of International Law: Vol. 33: Iss. 2, Article 7.
Available at: https://scholarship.law.umn.edu/minn-jrnl-intl-law/vol33/iss2/7