(Bloomberg Opinion) -- President Joe Biden says his Build Back Better plan aims to confront the “existential threat of climate change.” So it’s unfortunate that in privileging union jobs over just about any other goal, a crucial element of the legislation would do just the opposite.
Included in Section 136401 of the House version of the BBB proposal is what looks like a harmless effort to promote electric vehicles. The bill offers a $7,500 refundable tax credit for most EVs. Consumers can then claim additional credits of up to $5,000 — but there’s a catch. To qualify for the full write-off, an EV must be manufactured by union workers, assembled in the U.S. and made with American batteries. Even the base credit phases out for all but American-made cars in five years.
Where to start with this misguided idea?
For one thing, it fails on its own terms. Non-union plants — including those run by Tesla Inc. — make the vast majority of EVs on U.S. roads. Foreign automakers produce half of the most popular brands. If the goal of this measure is to maximize the use of electric vehicles, then why exclude the most prominent manufacturers? The answer is simple protectionism.
The plan is also economically self-defeating. North American auto production is now highly integrated. Hundreds of suppliers make parts that cross borders seven or eight times before being assembled into a finished car. Last year, 97% of U.S. vehicle imports from Canada and Mexico — and 70% of parts — entered duty-free. Disrupting this productive ecosystem will only reduce growth and impede competitiveness.
America’s trading partners, it’s safe to say, aren’t thrilled. Canada and Mexico have both decried the measure as a straightforward breach of the USMCA trade deal, and have threatened retaliation. Europe has called it “unjustified discrimination.” Even Senator Joe Manchin, hardly an unbridled advocate for free trade, calls it “not American.” They all have a point: Contingent subsidies of this kind are a tariff by another name, and they almost certainly violate World Trade Organization rules that the U.S. has pledged to uphold.
Finally, such restrictions will limit consumer choice to an almost comical degree. Of the 50 or so EV models currently on the road, only one — the Chevy Bolt, in its two iterations — would actually meet the conditions for the full credit. Thanks to chronic battery fires, Bolts aren’t even in production at the moment. That’s a problem, since research suggests the availability of a wide variety of vehicle types will be an important determinant of EV adoption.
The good news is that, slowly but surely, the automotive business is already electrifying. Morgan Stanley estimates that EVs will make up 11.6% of global new car sales by 2025 and 26% by 2030, up from 2.8% today. Battery costs have been declining, while charging stations are proliferating. The conditions for widespread adoption look increasingly feasible.
Additional tax credits could well speed this process. The Senate should include them in its version of the bill while scrapping the protectionist elements entirely. Even better would be a revenue-neutral carbon tax, which would level the playing field between EVs and gas guzzlers, induce more drivers to go electric, boost innovation, encourage long-term investment, and mitigate the regressivity of the tax credits, about 90% of which have historically been claimed by the wealthy. At least a few lawmakers are starting to see the light.
Biden’s goal for an electric revolution is surely sound. But indulging the president’s union backers at the expense of nearly everyone else is the wrong way to get there.
Editorials are written by the Bloomberg Opinion editorial board.
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