U.S. Electric-Vehicle Tax Breaks Rile Asian, European Al

Source: By Yuka Hayashi, Wall Street Journal • Posted: Wednesday, October 5, 2022

Favoring domestic industries could violate WTO rules, according to foreign officials and trade analysts

Ford employees assemble a battery-powered F-150 Lightning truck in Dearborn, Mich. PHOTO: JEFF KOWALSKY/AGENCE FRANCE-PRESSE/GETTY IMAGES

WASHINGTON–The U.S.’s new tax-break scheme for electric vehicles has drawn angry responses from the country’s key allies in Asia and Europe, highlighting a tension between government support for the domestic automobile industry and courting allies to counter China’s influence.

Foreign officials warn that the change, which they say was introduced with little consultation with the U.S.’s trading partners, undermines Mr. Biden’s effort to improve economic ties with allies by sharing technology and building supply chains to better compete with China’s manufacturing clout.

“Friendly nations are working together to strengthen supply chains as we speak,” Japan Trade and Industry Minister Yasutoshi Nishimura told reporters recently. “This goes against that broad strategy.”

Mr. Nishimura raised Japan’s concern with U.S. Trade Representative Katherine Tai on the sidelines of the first ministerial meeting of the Indo-Pacific Economic Framework, the core of Mr. Biden’s economic security strategy to engage with friendly nations in the region.

Biden administration officials say they continue to speak with the allies to address their concerns, while working on details of the implementation of the new law.

The European Union’s trade chief, Executive Vice President Valdis Dombrovskis, has complained to Ms. Tai that the new tax credit was detrimental to trans-Atlantic trade, contrary to international trade rules and harming European auto makers that have invested in the U.S.

U.S. Trade Representative Katherine Tai addressed an Indo-Pacific economic gathering in Los Angeles in September.Photo: Eric Thayer/Bloomberg News

French Finance Minister Bruno Le Maire said last week that Europe must rethink its electric-vehicle subsidies in response to the new U.S. measure.

Ms. Tai says she will continue to talk to Korea, Japan and the EU about their concerns.

“But the main point is that there is so much space and opportunity for us to collaborate and to cooperate,” she said.

The complex new rules are aimed at promoting EVs to help reduce greenhouse gases and shift EV and battery supply chains to the U.S. and friendly nations and away from China, currently the dominant player.

Sen. Joe Manchin (D., W.Va.), who helped push through the legislation, said the measure aims to “increase energy and national security while also creating more jobs here at home.”

To qualify for up to $7,500 in tax credit, vehicles must go through their final assembly in North America, a requirement that disqualifies most electric vehicles from non-U.S. car makers. That is because they are currently mostly assembled overseas, unlike many of their popular gasoline-powered models built at their North American plants.

The new rules also require EVs to have at least 40% of their critical minerals for batteries sourced in the U.S., or countries that have free-trade agreements with the U.S. starting in 2023. That threshold is set to rise to 80% by 2026.

Vehicles also must have batteries that are least 50% North American content by 2024 and 100% by 2028.

An earlier proposal to award the tax credits only to vehicles built by American union workers was dropped amid outcry from companies with plants in no-union states, as well as countries including Mexico and Canada.

Foreign officials and trade analysts say that the legislation likely violates a WTO rule that prohibits nations from treating imports from some countries worse than domestic products or those manufactured in certain countries (Mexico and Canada in this case). It could also infringe on subsidies rules because the tax benefit is given only to vehicles assembled in North America.

Advertisement – Scroll to Continue

The law also denies tax credits to vehicles and batteries with components or critical minerals sourced from a “foreign entity of concern,” such as China, Russia and Iran.

China is home to more than half of the global processing and refining capacities for lithium, cobalt and graphite, key EV battery minerals. It accounts for about 75% of lithium-ion battery production and 70% of cathode production capacity, according to Jane Nakano, senior fellow in the Energy Security and Climate Change Program at the Center for Strategic and International Studies.

Ms. Nakano said the U.S. disagreements with the allies highlight the difficulties as the U.S. steps up industrial policies to promote domestic manufacturing.

The law’s proponents say its requirements have already prompted auto makers to plan for new facilities in the U.S. and North America, in some cases on an expedited schedule.

The most vocal critic of the tax policy among the allies is South Korea, whose Hyundai Motor Co. is now the distant No. 2 to Tesla in the U.S. EV market. Unless modified, the new rules would take out all EVs made by Korean auto makers from the U.S. since currently they are all imported.

In his meeting with U.S. lawmakers in Seoul on Sep. 5, Lee Chang-yang, South Korea’s trade and industry minister, said the new law violated the free-trade agreement between the two countries, warning that it could hurt bilateral cooperation at a time when the two countries were making significant progress in high-tech supply chains.

Write to Yuka Hayashi at Yuka.Hayashi@wsj.com