KITA analyzes, 

“Even U.S.-made EVs may be unqualified to reap full benefits of IRA subsidies”

With the implementation of the Inflation Reduction Act (IRA), concerns are mounting over an issue of effectively discriminating Korean-made EVs by excluding them from being eligible for subsidies. Amid this situation, a report was published, which points out the possibility that the IRA may even work against U.S.-made EVs by limiting benefits for consumers. The report specifically pinpointed the price cap and buyers’ income level requirements - among multiple requirements to be eligible for subsidies - can be obstacles in offering full benefits for American consumers.

This report was published by the Institute for International Trade under KITA on October 28th, which carries the title “The strategies on the reorganization of supply chains by the U.S. and rules on subsidies for EVs: An unconventional rule in trade, Part 3.” The report mentions that “EVs only with final assembly in North America” will qualify for a tax credit of up to $7,500 in accordance with the provision in the IRA that specifies rules on offering subsidies for EVs. This rule is presumed to be designed with an aim to focus on nurturing EV and battery industries in the U.S. along with making an attempt to set up its own supply chains led by the U.S.

The U.S. has been investing far-reaching efforts for a considerable period of time to establish U.S-led EV and battery supply chains. This resulted in the Biden administration to come up an objective to expand the EV market in the U.S. and reinforce its battery industry ecosystem, which eventually resulted in the passage of the Infrastructure Investment and Jobs Act (IIJA) and the Inflation Reduction Act (IRA) in August this year by the Democrat-led Congress. Such a move is a blow for Korean automakers, which have been scaling up their EV exports in the U.S. They are now facing an unfavorable situation as U.S. consumers will not qualify for receiving subsidies when purchasing Korean-made EVs.

Korea sold approximately 160 million dollars’ worth of EVs to the U.S. in 2017. Korea significantly boosted EV exports to the U.S. ever since for the next five years to sell 1.14 billion dollars’ worth of EVs ？ a nearly ten-fold increase. U.S.-bound exports of Korean EVs between January and August this year already reached 2.38 billion dollars, which is more than twice the size of aggregate annual sales posted last year. However, one sobering fact worth paying notice is that, as of August this year, German and Japanese automakers produce 27.3% and 26.7% of EVs sold in the U.S. within the North American region respectively, whereas Korean-made EVs that are exported and sold in the U.S. are solely produced in Korea.

The report stated that it is inevitable that Korean automakers will be negatively affected with the implementation of the IRA as American consumers will immediately be ineligible for enjoying tax credits when making a purchase of Korean-made EVs, once the provisions in the IRA affecting Korean-made EVs go into effect. However, the report also pointed out that meeting IRA requirements will be a challenge even for U.S. automakers as well, which means these requirements will limit tax credits for American consumers purchasing EVs made in their own country. This brings the need to conduct an analysis on mid-to-long term effects of the implementation of the IRA and devising measures in response to the findings of the analysis.

The report points out, among multiple requirements for American EV buyers to qualify for tax credits when purchasing an EV, the following three requirements can even hamper U.S.-made EVs from being eligible for harnessing the benefits from subsidies. This will result in only a handful of U.S.-made EVs from being beneficiaries of the IRA, the report said. EVs sold in the U.S. must a) be produced by using critical minerals and components that are sourced domestically or from the country’s free-trade-agreement partners, b) not exceed the price cap set for different types of EVs and c) be sold to consumers, who meet income level requirements as specified in the IRA. To be eligible for a credit, new EVs that are vans, SUVs or pickup trucks cannot exceed 80,000 dollars, while other types of vehicles cannot cost more than 55,000 dollars. Details on making decisions on categorizing EV types are to be announced later in specific guidelines.

Tesla, which produces 70.3% of EVs sold in the U.S. market, does offer an affordable model, such as its flagship EV “Model 3”, which is offered at a price as low as 48,000 dollars. However, the price tag for newer models is typically set at around 60,000 dollars or above. Moreover, the price of a majority of EVs offered by European automakers, which focus on producing high-end EV passenger cars and SUVs, far exceeds the price cap specified in the IRA.

The report also highlighted that the U.S. cannot rely on its own to secure essential materials needed to produce EV batteries, including core minerals and core battery parts. The U.S. has to resort to imports from elsewhere to secure the supply of these materials to a sufficient level. Based on such findings, the report analyzed that the requirement of a) producing and processing batteries in North America and b) producing EVs by using critical minerals and components that are sourced domestically or from the country’s free-trade-agreement partners will likely be extremely challenging to achieve. Meanwhile, the report additionally presented the feasibility of a completely different outlook as well. It forecasted the possibility that the foundation of the U.S. battery industry may be dramatically expanded in a short period of time. This rosy prediction may be materialized if the interests of enterprises intending to make an aggressive move to enter the U.S. battery market and the incentives offered by the U.S. government are combined to produce synergy, the report said.

The report once again emphasized that the measure favoring products made in their own country, which requires the use of locally produced materials and parts, were confirmed over multiple occasions that they go against World Trade Organization (WTO) principles of trade. The report specifically cited 14 trade disputes that were brought to the WTO. These disputes were cases officially recognized as an infringement of the national treatment principle, which involved the implementation of measures to require the use of locally produced parts ？ eventually leading to discriminating imported goods, the report explained.

Sang-hyun Cho, the Head of the Institute for International Trade mentioned, “We plan to submit KITA’s stance on the implementation of the IRA to the U.S. Department of the Treasury after engaging in consultation with relevant industrial sectors.” He added, “We should be making a long-term commitment to ensure Korea is included as a partner in the U.S. supply chain by bolstering efforts to take advantage of platforms for international cooperation, including the Indo-Pacific Economic Framework (IPEF) and the Minerals Security Partnership (MSP).”

[This news is provided by Newsis]