The United States is poised to unveil comprehensive guidelines, likely at the beginning of next month, designating Foreign Entities of Concern (FEOC) ineligible for electric vehicle (EV) subsidies granted under the Inflation Reduction Act (IRA). This move aims to thwart Chinese EV and battery companies from bypassing IRA regulations to access U.S. subsidy benefits.
Cracking Down on Evasion
Last year, the U.S. Congress passed the IRA, introducing Overseas Concern Entities (OCE) regulations with the aim of reducing reliance on the Chinese supply chain. Starting in the upcoming year, these regulations will completely bar the use of products originating from OCEs for components and minerals beginning in 2025. The use of products or minerals sourced from foreign firms listed as OCEs will disqualify EVs from receiving U.S. subsidies, which can amount to as much as $7,500 per vehicle.
While the IRA regulations provided a broad framework, the forthcoming guidelines from the U.S. Treasury Department are expected to pinpoint specific FEOCs. There’s a strong likelihood that these guidelines will prevent subsidies for EVs containing batteries, parts, and minerals produced by Chinese state-owned enterprises.
Navigating Complex Terrain
The industry is watching closely to determine whether companies with partial stakes in Chinese private firms or those headquartered in the U.S. or other nations might be designated as FEOCs. Chinese battery manufacturers have been finding ways to sidestep IRA regulations by engaging in activities such as technology transfer, forming joint ventures, and establishing production facilities in third countries.
For instance, U.S. automaker Ford had planned to establish a battery joint venture factory in Michigan with Chinese EV battery company CATL but abandoned the project last September due to Congressional criticism and regulatory uncertainties. General Motors (GM) cautioned that without stringent guidelines, other automakers could exploit loopholes to enter technology licensing agreements with Chinese battery companies and circumvent the IRA.
Balancing Act for the Biden Administration
Expanding the scope of FEOCs to exclude China from the supply chain poses a dilemma for the Biden administration. China holds a dominant position in the market for EV battery components and minerals, making extensive restrictions a potential source of supply chain instability in the U.S. EV industry. As President Biden champions the IRA’s accomplishments, including visits to clean energy companies, any slowdown in EV distribution due to broader restrictions could become a political concern.
Impact on Korean-Chinese Ventures
Attention is also drawn to Korean-Chinese battery joint ventures in which China holds a stake. Critics accuse Chinese battery companies of ‘origin laundering’ by establishing joint ventures with Korean firms and setting up production bases in Korea to bypass the IRA. The Korean government has sought clear regulations on FEOCs, anticipating damage to Korean companies and submitted an opinion to the U.S. government last June.
In conclusion, As the U.S. tightens regulations to prevent the misuse of EV subsidies, the intricate web of global supply chains and the need to balance climate goals with economic stability present formidable challenges for policymakers. The forthcoming Treasury Department guidelines will shed light on the evolving landscape of EV subsidies and their potential implications for both the industry and international trade relationships.