The clause in the recently passed U.S. Inflation Reduction Act ruling out tax breaks for vehicles assembled abroad has sparked immediate and heated response from China and other U.S. trading partners, including the European Union (E.U.), South Korea, and Japan.
The new $437 billion health, climate, and tax law offers U.S. consumers as much as $7,500 in tax credits for new electric vehicles (EVs) as long as their batteries are composed of critical materials—such as lithium, nickel, and cobalt—extracted, processed or recycled in the U.S. or by the nation’s free-trade-agreement partners, reports the Bloomberg.com news service.
Significantly, the law, which the Biden administration considers critical for U.S. economic growth and security, excludes critical battery components from China, Russia, and other “foreign entities of concern.”
The clause in the Inflation Reduction Act ruling out tax breaks for vehicles assembled abroad “discriminates against similar imported goods and is a suspected breach of the World Trade Organization principles,” said Shu Jueting, China’s Ministry of Commerce spokesperson.
“China will continue to assess and evaluate implementation of the legislation and will take measures to safeguard its legal interests when necessary,” she added, without providing details, noted Bloomberg.
Much of the global battery supply chain relies on China, the world’s second-biggest EV producer. The country controls 92% of processed materials, 71% of cell assembly and 65% of battery components used in electric vehicles, according to Bloomberg.
The E.U., South Korea, and Japan have vigorously protested the law’s provision, contending its sourcing requirements disadvantage their car and battery manufacturers, which remain dependent on Chinese inputs.
Following a recent meeting of the G-7 countries, a European Commission spokesperson called the U.S. subsidies contrary to international trade rules and “designed in a way that they would result in new and significant transatlantic trade barriers as they discriminate against E.U. producers,” Bloomberg reported.
“This is detrimental to transatlantic trade and contrary to international trade rules, which have non-discrimination at its core,” the spokesman said. “The E.U. is therefore highly concerned about this unnecessary and damaging new trade barrier and will take the necessary steps to defend its interests.”
South Korean officials have called the new measure a “betrayal” and said they will consider filing a WTO complaint. Officials have met with their U.S. counterparts recently, and South Korean renewable energy research firm SNE Research said the nation’s suppliers hope to be offered some sort of exemption.
According to Bloomberg, some U.S. trade observers say policymakers may need soften the rules, because they also disadvantage domestic car manufacturers like Tesla, General Motors and Ford that still rely on Chinese battery manufacturers and Russian nickel.
“Currently, [the provision] is a standard no one can meet, including the U.S. companies,” said William Reinsch, senior adviser at the Center for Strategic and International Studies in Washington. “While steps are underway to develop non-Chinese sources, that will take time, probably more time than the statute provides. That leads me to think that Congress may decide it needs to reconsider the restrictions.”