The global trade body's dispute panel said that large tax credits granted under Biden's landmark climate law, the Inflation Reduction Act (IRA), were "inconsistent" with several WTO agreements and should be withdrawn.

That law, which was signed by Biden in 2022, was the largest climate investment in US history, but it has been dramatically eroded since President Donald Trump came to power last year.

China launched the dispute in March 2024, accusing Washington of unfair competition over its support to companies in the energy transition sector and to electric cars manufactured on US soil.

The WTO agreed in September that year to set up a panel of experts to examine the case, which focused on US investment tax credits (ITCs) and production tax credits (PTCs) for renewable energy projects, as well as electric vehicle subsidies.

The United States insisted at the time that the act was a tool to address the climate crisis and "invest in US economic competitiveness".

It was also meant to counter Beijing's subsidies for electric vehicles and the wider green industry within China, which has poured vast state funds into domestic firms as well as research and development.

China has denied that its industrial policies are unfair and has repeatedly threatened retaliation to safeguard its companies, and charged that the IRA "distorts fair competition, seriously disrupts global new energy vehicle industrial and supply chains, and violates WTO rules".

The panel ruling Friday upheld all of China's claims on the ITCs and PTCs, finding the measures inconsistent with the 1994 General Agreement on Tariffs and Trade (GATT), the Agreement on Trade-Related Investment Measures, and the Agreement on Subsidies and Countervailing Measures.

"The panel recommends that the United States withdraw the ITC/PTC Domestic Bonus Credits by October 1, 2026 at the latest," it said.

The panel meanwhile did not rule on the issue of the clean vehicle tax credits, as those credits were terminated through Trump's so-called One Big Beautiful Bill last July.

Both China and the United States can appeal the panel decision, but the WTO's Appellate Body has remained paralysed since late 2019, after the United States during Trump's first term blocked the appointment of new judges.