“De-China” is more important than “De-carbonized” in the U.S…Excluding tax credits for electric vehicles that used Chinese minerals.

U.S. Electric Vehicle Companies Still Heavily Rely on China
“Meeting existing requirements is challenging… Expect fewer eligible vehicles”

The U.S. government’s recently announced details of the Inflation Reduction Act (IRA) tax deduction for electric vehicles have sparked criticism that the Biden administration is prioritizing decoupling from China over decarbonization.

Japan’s Nihon Keizai Shimbun (Nikkei) reported on the 3rd, “The U.S. has decided to exclude electric vehicles using Chinese parts and minerals from the tax benefits of the Inflation Reduction Act (IRA),” adding, “This shows a stance that prioritizes economic security over the transition to electric vehicles.”

The U.S. Treasury and Energy Departments announced last week the details of the regulations regarding ‘Foreign Entities of Concern (FEOC)’ that are not eligible for IRA electric vehicle tax deductions. According to the Inflation Reduction Act (IRA), the U.S. grants a maximum tax deduction benefit of $7,500 (approximately 9.74 million won) to electric vehicles that meet the origin requirements for parts and materials and are finally assembled in North America.

The U.S. has defined the FEOC as companies that are owned, controlled, or under the jurisdiction of the governments of China, Russia, North Korea, and Iran, or that follow their directives. It also included companies and organizations that hold more than 25% of their shares in Chinese capital in the FEOC. Furthermore, it decided to exclude electric vehicles that procure battery parts from the FEOC from next year or use core battery minerals supplied by the FEOC from 2025 from tax benefit eligibility.

The U.S. government has consistently expressed its stance to exclude Chinese raw materials. The U.S. government is concerned that dependence on China for rare minerals could pose a significant risk to economic security. Jake Sullivan, the White House National Security Advisor, warned, “It can be weaponized like oil in the 1970s or natural gas in Europe last year.” The industry has requested a review, saying, “We cannot make electric vehicles without China,” but the stance has not changed in this announcement.

The problem is that as the decoupling from China progresses, the transition to electric vehicles and decarbonization may be delayed. This is because the current electric vehicle supply chain still heavily relies on China. In the first half of this year, U.S. imports of Chinese lithium-ion batteries increased by 50% compared to the same period last year.

Moreover, even now, automakers are struggling to meet the existing tax deduction requirements, such as limiting to North American-produced cars. An industry insider said, “The number of vehicles eligible for tax deduction benefits is already limited, and it is expected to decrease even more.”