Japan petitions U.S. for special consideration with EV tax credits

TOKYO – Back in the 1980s and '90s, when Japanese companies seemed poised to conquer the world, people here liked to say that the U.S. may have won the shooting war, but Japan won the economic one. These days, this island nation is singing a slightly different tune.

In a petition to the U.S. government about America's newly adopted electric vehicle tax credits, Tokyo traded on its longstanding loyalty, since losing World War II, as America's top ally in Asia.

The Japanese government, which sent the appeal Friday to the Department of Treasury and the Internal Revenue Service, said it had "serious concerns" about the EV tax credits because the incentive scheme puts Japanese carmakers and battery makers at a disadvantage.

"They in fact preclude Japanese businesses from enjoying the benefit," the dispatch said.

Tokyo not-so-subtly urged Washington to give Japanese companies special consideration — not because of Japan's trade relations — but because of country's standing as a "like-minded" ally. In fact, Japan used a form of the word "ally" no fewer than 11 times in the three-page communique.

Typical of the language: "Taking into consideration the objective to work with allies and like-minded partners to establish resilient supply chains, allies including Japan should be accorded treatment no less favorable than countries in the North America region."

The recently signed Inflation Reduction Act is designed to incentivize domestic EV production and reduce reliance on foreign supply chains. It gives special allowance to battery production and material sourcing done in North America or countries with which the U.S. has a free-trade accord.

Japan, which doesn't have a free-trade agreement with the U.S., has undoubtedly been a steadfast friend in the Pacific for more than a half-century. The archipelago is studded with U.S. military bases and hosts about 50,000 American soldiers, sailors and flyers.

But the Inflation Reduction Act doesn't afford special allowances for "allies."

Japan takes umbrage at that while seeming to ignore the fact neighboring economic rival South Korea is both an important American military ally and a partner in a U.S. free-trade pact.

Japan asked that rules governing the new U.S. tax credits be "interpreted in a flexible manner so that the EV tax credit can be applicable to a vehicle with battery components manufactured or assembled in allied countries such as Japan."

It requested the same flexible thinking for battery making and material mining.

If not, Japan also issued a warning.

The new incentives, it said, will have a chilling effect on Japanese investment and discourage Japanese carmakers and suppliers from expanding operations in the U.S.

"It would be possible that Japanese automakers hesitate to make further investments towards electrification of vehicles," the Japanese government said. "This could cause negative impacts on the expansion of investment and employment in the U.S."

This threat seems as hollow as it is off base.

Taking a page from the past, Japan may have envisioned the home islands as a massive global export base for the next generation of electric vehicles. And that is a big reason why U.S. incentives like these are proffered, to bring more of that work back to the U.S.

It is also why Japanese carmakers are unlikely to take their ball and go home.

For decades, they have plowed so much money into the U.S. market and become so entangled with its economic fate, that the likes of Toyota, Honda, Nissan, Mazda, Subaru and Mitsubishi can ill-afford not to invest more. The Inflation Reduction Act has them between a rock and a hard place.