Asian and European automakers, which make up a large part of America’s auto economy, see flaws in how the US has designed its subsidies for electric vehicles and say alliances could escalate into trade wars if left unfixed.
South Korea, Japan, the European Union and their automakers have expressed concern that provisions in the Inflation Reduction Act to build America’s electric vehicle manufacturing base may have gone too far. The regulations create an unrealistic roadmap that could dampen Americans’ desire to buy electric vehicles, they say.
Nations have previously expressed their views through diplomatic channels and broadly. However, their fears and suggestions were fleshed out late last week in comments to the US Internal Revenue Service, which is responsible for clarifying the vague parts of the law.
Without changes to the EV rules, “US allies and partners will lose faith in a government that values multilateralism and partnership,” the Korea International Trade Association wrote, adding that the provisions could “trigger protectionist globally.”
The challenge for the Biden administration is that its package of EV rules – aimed at harnessing momentum from China and turning the US into a 21st-century automotive powerhouse – will allow foreign brands like Honda, Kia and BMW could make it harder to qualify for tax credits that make electric vehicles more affordable for Americans.
The administration’s stance toward allies has been forgiving, but it’s not clear if there’s much the administration can do to change the rules set by Congress. “The legislation is what it is,” Treasury Secretary Janet Yellen told reporters last month. The Treasury Department oversees the IRS.
The pleas of the nations come at a time when they have great influence.
Japan and South Korea are important partners in Asia as the United States takes an aggressive trade stance with China. The European Union is working closely with the Biden administration to supply Ukraine against an invading Russia. At the same time, foreign automakers are pouring billions of dollars into the US economy to build future EV plants.
The wrath of nations and automakers is centered on the Inflation Reduction Act’s stringent procurement requirements, which must be met to qualify for a $7,500 per vehicle federal tax credit.
The restrictions affect automakers in three ways: they require vehicle assembly to take place in North America; they require the materials for the battery to come from either the United States or its free trade partners; and the supply chain must dodge America’s geopolitical enemies, particularly China.
The approach dismayed the European Union, which expressed its displeasure in comments from the IRS, setting out what it described as negative consequences.
“Financial stimulus used to meet United States climate goals unfairly tilts the playing field in favor of United States manufacturing and investment at the expense of the European Union and other United States trading partners, potentially creating a significant distraction leads to future investment and production that threaten jobs and economic growth in Europe and elsewhere,” the European Union wrote.
Some groups justified future challenges to the United States’ EV rules as violations of trade agreements. For example, the Korea International Trade Association said the provisions of the Inflation Reduction Act run counter to the rules of the World Trade Association and a free trade agreement between South Korea and the United States.
In their comments, nations and their automakers requested that each of these parts be loosened and offered specific suggestions on how to fix them. The comment period on the EV rules ended on Friday. The IRS hasn’t said when it will release the final rules.
Some automakers sought a diplomatic end to one of the law’s simplest claims: that assembly of electric vehicles must occur in North America.
The Inflation Reduction Act is clear: A car gets half its tax credit – $3,750 – if it’s assembled in either the United States, Canada or Mexico. Unlike other parts of the law, which don’t start for a year or two and will be phased in over time, the assembly rule comes into effect in early 2023.
This aggressive schedule angers Korean and Japanese automakers, who are spending billions building EV factories in the United States. Just last month, Hyundai last month broke ground on a $5.5 billion factory in Georgia, while Honda unveiled plans for a $3.5 billion factory in Ohio. Both will not produce vehicles until 2025. Meanwhile, their electric cars will be more expensive than those made by domestic automakers like General Motors Co., Ford Motor Co., and Tesla Inc.
The groups took different approaches to finding exemptions from the Treasury Department. For example, the Japanese government asked the agency to find a way to significantly expand its definitions.
“Appropriate measures should be taken, including flexible interpretation of the definitions of both ‘final assembly’ and ‘North America’, to ensure that electric vehicles manufactured by allies such as Japan are treated no less favorably than countries in the region North America,” the Japanese government wrote.
Meanwhile, Korea asked for more time.
The Korean government asked for the option of a “three-year grace period” for the provisions of the draft law to go into effect. And the Korea Automobile Manufacturers Association, which represents sister automakers Hyundai Motor Co. and Kia Motors, has asked the IRS to push back the vehicle assembly deadline by two years to 2025, when Hyundai’s factory opens.
Foreign nations are also pressing for U.S. tax authorities to relax rules on a related provision: the sourcing of critical minerals for batteries.
Like their U.S. counterparts, they are not sure what the United States means when they talk about critical minerals because the law that Congress drafted left key terms vague (energy wire7 Nov).
“Battery manufacturers need to understand which process or processes constitute ‘extraction and processing,'” wrote the Korea International Trade Association.
Some allies are in a better position than others.
To receive the other half of the $3,750 tax credit, a vehicle must contain critical minerals from the United States or a country with which the United States has a free trade agreement. The United States has free trade agreements with Japan and South Korea, but not with the European Union or any of its members.
The European Automobile Manufacturers’ Association, which represents automakers such as the BMW Group and Stellantis NV, is opposed because it believes it will not be able to meet procurement targets.
“The requirements for local content of battery minerals and components are overly ambitious and do not reflect reasonable expectations of what can be achieved in such a short time by building a localized battery supply chain,” wrote Sigrid de Vries, General Group Director.
But even Japan and Korea fear their free-trade statuses can’t overcome the fact the US factories they’re building won’t come online in time to offer car buyers a tax credit.
Korea and Japan play a fundamental role in the US battery market. Panasonic Corp., Tesla’s longtime battery partner, broke ground on a battery factory in Kansas this month. Two Korean companies, SK On and LG Energy Solution Ltd., are key partners of US automakers Ford and GM.
Some of these factories are in the position of Posco Chemical Co., a Korean company that is part of the supply chain. It makes materials for the cathode, a critical component of lithium-ion batteries, and plans to open a factory in Canada to supply General Motors.
However, since the North American factory is not scheduled to start producing material until 2025, it “must be manufactured and exported from South Korea in the meantime,” Posco wrote in his comment.
What is a “foreign company”?
Another point of contention is exactly what the Biden administration means when it says automakers should keep their supply chains away from China.
The climate law says that by 2025 electric vehicles must contain materials not sourced from “foreign companies of concern” which include China, Russia, North Korea and Iran. The primary target of this provision is China, which today handles most of the processing of critical minerals that end up as batteries for electric vehicles.
Some of the confusion stems from the fact that in the age of international conglomerates, it’s not clear exactly what “unity” is or what level of Chinese ownership the Biden administration considers acceptable.
The law states that no-go companies are “owned, controlled, or under the jurisdiction or direction of any government” by a Chinese government. But Posco, the Korean chemical company, said, “This language is subject to broad interpretation and should be more clearly defined.”
The German Automobile Industry Association, a German trading group, wanted to set limits on how purely non-Chinese the supply chain must be. In its comments to the IRS, it said it was targeting “a 10% de minimis provision” of the battery’s value to be Chinese.