U.S. allies plead with Biden to relax new EV rules

Source: By David Ferris, E&E News • Posted: Wednesday, November 9, 2022

2021 Kia EV6 GT-Line S.

2021 Kia EV6 GT-Line S. Vauxford/Wikipedia

Asian and European automakers who make up a huge slice of America’s automotive economy see flaws in how the U.S. designed its subsidies for electric vehicles and say alliances could devolve into trade wars if they aren’t fixed.

South Korea, Japan, the European Union and their automakers are expressing worry that provisions in the Inflation Reduction Act designed to build America’s EV-production base might have gone too far. The provisions create an unrealistic road map that could wind up dampening Americans’ desire to buy EVs, they say.

The nations have expressed their views before through diplomatic channels and in broad strokes. But their fears and suggestions became concrete late last week in comments to the U.S. Internal Revenue Service, which is responsible for clarifying the vague parts of the law.

Without changes to the EV rules, “U.S. allies and partners will lose confidence in an administration which has highly valued multilateralism and partnership,” wrotethe Korea International Trade Association, adding that the provisions could “trigger protectionism worldwide.”

The challenge for the Biden administration is that its package of EV rules — designed to seize the momentum from China and make the U.S. a 21st-century automotive powerhouse — may make it harder for foreign brands such as Honda, Kia and BMW to qualify for tax credits that make EVs more affordable for Americans.

The administration’s stance toward allies has been conciliatory, but it is not clear that the administration can do much to alter rules set by Congress. “The legislation is what it is,” Treasury Secretary Janet Yellen told journalists last month. The Treasury Department oversees the IRS.

The nations’ pleas come at a time when they have lots of leverage.

Japan and South Korea are key partners in Asia as the United States takes an aggressive trade stance against 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 plowing billions of dollars into the U.S. economy to build future EV plants.

The nations’ and automakers’ ire centers on the Inflation Reduction Act’s strict sourcing requirements that 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 happen in North America; they require that the materials for the battery come from either from the United States or its free-trade partners; and the supply chain must sidestep America’s geopolitical foes, especially China.

The approach dismays the European Union, which made its displeasure clear in IRS comments, outlining what it said would be negative consequences.

“Financial incentives deployed to meet the United States’ climate objectives unfairly tilt the playing field to the advantage of production and investment in the United States at the expense of the European Union and other trading partners of the United States, potentially resulting in a significant diversion of future investment and production, threatening jobs and economic growth in Europe and elsewhere,” the European Union wrote.

Some groups laid out the grounds for future challenges of the United States’ EV rules as violations of trade agreements. The Korea International Trade Association, for example, said the Inflation Reduction Act provisions 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, the nations and their automakers asked for each of those parts to be relaxed and offered specific suggestions for how to fix them. The comment period on the EV rules ended Friday. The IRS has not said when it will release final rules.

Tricky assembly

Some automakers sought diplomatic end runs around one of the law’s most straightforward assertions: that assembly of electric vehicles must happen in North America.

The Inflation Reduction Act is clear: A car gets half of its tax credit — $3,750 — from being 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 phase in over time, the assembly rule takes effect at the beginning of 2023.

That aggressive timeline is vexing Korean and Japanese automakers that are spending billions to build EV factories in the United States. Just last month, Hyundai broke ground last month on a $5.5 billion factory in Georgia, while Honda unveiled plans for a $3.5 billion factory in Ohio. Both won’t produce vehicles until 2025. In the meantime, their electric cars will be more expensive than those made by domestic automakers such as General Motors Co., Ford Motor Co. and Tesla Inc.

Groups took different tacks in seeking exceptions from the Treasury Department. The government of Japan asked the agency to find a way to vastly expand its definitions, for example.

“Appropriate measures should be taken, including flexible interpretation of the definitions of both ‘final assembly’ and ‘North America’ to ensure that EVs produced by allies such as Japan are accorded treatment no less favorable than countries in the North America region,” the Japanese government wrote.

Meanwhile, Korea asked for more time.

The government of Korea asked for an option of “a grace period of three years” for the bill’s provisions to take effect. And the Korea Automobile Manufacturers Association, which represents sister automakers Hyundai Motor Co. and Kia Motors, asked the IRS to delay its vehicle-assembly deadline by two years, to 2025, when Hyundai’s factory comes online.

Mineral criticism

Foreign nations are also pushing for U.S. tax authorities to loosen rules for a related provision: the sourcing of critical minerals for batteries.

Like their U.S. counterparts, they are unclear on what the United States means when it talks about critical minerals, since the law Congress wrote left key terms vague (Energywire, Nov. 7).

“Battery manufacturers need to understand which process or processes constitute ‘extracting and processing,’” the Korea International Trade Association wrote.

Some allies find themselves in a better position than others.

To get the other half of the tax credit, $3,750, 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, are opposed because they don’t think they can meet the sourcing targets.

“The local content requirements for battery minerals and components are excessively ambitious and do not reflect reasonable expectations in terms of what can be achieved in building a localized battery supply chain in such a short space of time,” wrote Sigrid de Vries, the group’s director general.

But even Japan and Korea worry that their free-trade status can’t overcome the fact that the U.S. factories they are building won’t come online in time to offer a tax credit to auto buyers.

Korea and Japan play a foundational role in the U.S. battery market. Panasonic Corp., the longtime battery partner of Tesla, is breaking ground this month on a battery factory in Kansas. Two Korean companies, SK On and LG Energy Solution Ltd., are key partners to U.S. automakers Ford and GM.

Some of these factories find themselves in the position of Posco Chemical Co., a Korean company that is part of the supply chain. It makes materials for the cathode, a crucial component of lithium-ion batteries, and is planning to open a factory in Canada to supply General Motors.

But since its North American factory isn’t due to start producing material until 2025, it will “have to be manufactured and exported from South Korea in between,” Posco wrote in its comment.

What is a ‘foreign entity’?

Another point of contention is exactly what the Biden administration means when it says automakers should keep their supply chains out of China.

The climate law says that by 2025, electric vehicles have to have materials that don’t originate from “foreign entities of concern,” which include China, Russia, North Korea and Iran. The main target of that provision is China, which today does most of the processing of critical minerals that end up as EV batteries.

Part of the confusion springs from the fact that in an age of international conglomerates, it’s not exactly clear what the ‘entity’ is or what extent of Chinese ownership the Biden Administration considers acceptable.

The law says it means that no-go companies are “owned by, controlled by, or subject to the jurisdiction or direction of a government” of China. But Posco, the Korean chemical company, said “this language is subject to broad interpretation and should be more clearly defined.”

The German Association of the Automotive Industry, a German trade group, sought to set limits on how purely non-Chinese the supply chain must be. In its comments to the IRS, it said it seeks “a de minimis provision of 10%” of the value of the battery to be Chinese.

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