The Biden Administration in the United States is set to announce detailed guidelines as early as the first of next month. This will declare Foreign Entities of Concern (FEOC) ineligible for electric vehicle (EV) subsidy benefits under the Inflation Reduction Act (IRA). The move aims to prevent Chinese EV and battery companies from circumventing the IRA to receive U.S. subsidy benefits.
The Wall Street Journal (WSJ) reported on the 29th (local time) that the U.S. Treasury Department is expected to release detailed guidelines related to FEOCs included in the IRA on the first day of next month.
Last year’s IRA, passed by the US Congress, introduced Overseas Concern Entities (OCE) regulations to reduce reliance on the Chinese supply chain. Starting next year, the regulations will entirely prohibit the use of products manufactured by OCEs for components and minerals from 2025 onward. Using products or minerals from foreign companies included in the OCE list will disqualify electric vehicle subsidies in the U.S. up to $7,500.
Although this regulation is vague, the Treasury Department’s detailed guidelines are expected to specify particular FEOCs. The WSJ reports that there is a high possibility of these guidelines blocking subsidies for EVs containing batteries, parts, and minerals made by Chinese state-owned companies.
The market is closely monitoring to see if companies with a partial stake in Chinese private companies or those headquartered in the U.S. or third countries can be designated FEOCs. Chinese battery companies have been circumventing the IRA regulations to exclude China from the supply chain through ‘tricks’ such as technology transfer, joint venture establishment, and production in third countries.
U.S. automaker Ford had also planned to establish a battery joint venture factory in Michigan with Chinese EV battery company CATL but suddenly decided to halt the project last September due to criticism from Congress and regulatory uncertainties. In particular, competitor General Motors (GM) warned that without strict guidelines, other automakers would exploit loopholes to sign technology licenses with Chinese battery companies and circumvent the IRA.
However, while expanding the scope of FEOCs can exclude China from the supply chain, it complicates the Biden administration’s calculations due to the potential negative impact on the speed of EV distribution. China’s monopolistic position in the EV battery parts and minerals market could cause supply chain instability in the U.S. EV industry. As President Biden is promoting the achievements of the IRA, including visiting a South Korean wind power company, CS Wind, in Pueblo, Colorado, ahead of next year’s presidential election, slowing down the speed of EV distribution due to extensive restrictions could burden the administration.
Eric Scheriff, Senior Managing Director at consulting firm Capstone, commented on the Biden administration’s goal of achieving zero carbon in the power sector by 2035, stating that they are beginning to realize that it will not be easy.
A policy research firm, Beacon Policy Advisors, conducted an analysis, expressing that in light of the situation where automakers use parts from Chinese companies in the supply chain, there are many questions about how accurately the Treasury Department will define this rule.
Attention also focuses on the impact on Korean-Chinese battery joint ventures where China holds a stake. Critics have accused Chinese battery companies of ‘origin laundering’ by establishing joint ventures with Korean companies and setting up production bases in Korea to circumvent the IRA. Anticipating damage to Korean companies, the Korean government submitted an opinion to the U.S. government last June, requesting clear regulations on FEOCs.
A Korean government official stated, “The FEOC regulation is not a new problem, so it is not a major variable,” and added, “The announcement of the detailed criteria will also resolve some uncertainties.”
By. Kwon Hae Young
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