The United States is mulling to ease some regulations in its Inflation Reduction Act (IRA) that would allow the European Union and Japan to be included in the EV subsidies bill, according to an AFP report published on Friday.

The IRA, which was signed into law by US President Joe Biden in August 2022, commits $300 billion to deficit reduction, as well as approximately $370 billion in funding for energy security, including tax credits for US-made electric vehicles (EVs), batteries, and consumer subsidies, and $80 billion to increase Internal Revenue Service tax enforcement and operations.

New guidelines announced by the US Treasury Department on Friday state that EV batteries for vehicles must meet certain requirements to be qualified for a $7,500 consumer tax credit - the highest amount offered under the legislation.

Read more: EU should improve competitiveness against US IRA: EU Chief

The bill also specifies that a percentage of critical minerals used in the battery must be acquired from the US or countries that it has free trade agreements with, which originally excluded the EU and Japan.

However, the proposed guidelines settled down some of their concerns after the Treasury announced that the rule "could include newly negotiated critical minerals agreements," noting that it will include 21 countries, and Japan is among them.

The statement comes just days after Washington and Tokyo revealed that they have reached an agreement on the trade of critical minerals with aims to strengthen and broaden supply chains as competition between the United States and China in the sector has reached an all-time high.

The US is also currently holding negotiations with the EU to reach a similar deal and end the tensions with their transatlantic allies who are accusing Washington of practicing unfair competition by giving US companies leverage over the EU rivals.

Read more: EU prepares subsidy program to shield vital industries from US' IRA

Earlier this week, European Commission Executive Vice-President Margrethe Vestager said during a visit to Washington that while the world was "behind the curve" when it came to net-zero sectors, it is important that the United States does not stand in the way of Europe's "acceleration".

"What we're trying to solve now is that the acceleration that we were about to have in Europe is not potentially stopped while you have an acceleration in the US," she told reporters.

But following Friday's Treasury proposal, US Senator Joe Manchin said that the guidelines "completely ignore the intent" of the IRA, which is to bring back manufacturing to the US.

"American tax dollars should not be used to support manufacturing jobs overseas," he said.

Eyes on China

"Given China's currently dominant position in the clean energy supply chain, we need to work with our allies and partners to build a resilient alternate supply chain that can meet the demand among American consumers," said a senior official from the Treasury Department on condition of anonymity, AFP reported.

The new legislation will make the US or its partners a site for other countries' production needs rather than going through China, a US official told reporters.

Despite the importance of rare earth metals and critical minerals such as lithium in the transformation toward green technologies, the US is not yet able to meet projected production demands for EVs due to a shortage in supplies.

Read more: EU Net Zero Industry Act to combat US, China green energy initiatives

Starting in 2024, to qualify as a green vehicle eligible for a tax credit under the IRA, its battery components cannot be produced by a "foreign entity of concern." By 2025, the law will include critical minerals extracted, processed, or recycled by the foreign entity.

The Treasury also stated that the new guidelines stipulate that the retail price for a van, pickup truck, or sports car should not be over $80,000 and $55,000 for other vehicles.

EU considers WTO complaint

In recent months, relations between the EU and the US have been tense. The EU has condemned the subsidies offered by the IRA and called on Washington to revise the bill that harms the European market.

Unlike trading partners with the EU, the IRA has exemptions set for products from its NAFTA partners, and the EU has been calling for these exemptions to be extended to the EU. 

In October 2022, German Chancellor Olaf Scholz and French President Emmanuel Macron agreed that American subsidy plans will end up distorting the market, as they intend to sway companies to shift production to the US.  The UK also announced it joined the EU in opposing the Act.

In December, Bernd Lange, the chair of the European Parliament's Committee on International Trade, stated that the EU should lodge a complaint with the World Trade Organization (WTO) against the US on that matter.