U.S. Proposes EV Tax Credit Rules, Restricting Materials from China

The electric vehicle (EV) tax credit rules proposed by the United States explicitly restrict materials sourced from China, aiming to reduce the U.S. EV industry's reliance on China and shift more production to the United States. Here are the details:

Core Content of the Rules:

• The latest proposals from the U.S. Treasury stipulate that starting in 2024, eligible clean vehicles cannot contain battery components manufactured or assembled by a "Foreign Entity of Concern" (FEOC) .
• From 2025, eligible vehicles also cannot contain critical minerals extracted, processed, or recycled by these entities.

Definition of "Foreign Entity of Concern":

• This refers to companies owned or controlled by countries such as China, Russia, North Korea, and Iran.
• A company is identified as an FEOC if it is established in these countries or if it reaches a 25% ownership threshold. The Energy Department specifies that a company is an FEOC if owned or controlled by a named foreign government or if an entity of concern holds 25% of the entity's board seats, voting rights, or equity. The rules also appear to consider companies operating in China as FEOCs.

Purpose of the Rules:

• To diminish the dependence of the American electric vehicle industry on China and promote the localization of the supply chain.
• To support the Biden administration's climate action plan (Inflation Reduction Act or IRA) by incentivizing the production of American-made electric vehicles and batteries through tax credits. The IRA includes approximately $370 billion in subsidies for the U.S. energy transition, including tax breaks for U.S.-made EVs and batteries.

Potential Impact:

• For automakers: It may reduce the number of cars eligible for tax credits and increase pressure to adjust supply chains, forcing companies to re-evaluate their material procurement strategies.
• For Chinese companies: It restricts the role of Chinese companies in the U.S. electric vehicle supply chain, impacting related material exports and market layout.
• For the U.S. market: In the short term, it may lead to a reduction in the number of subsidized models available, affecting consumer choice. In the long term, it may promote the development of the domestic battery and critical mineral industries.

Controversy and Criticism:

• Democratic Senator Joe Manchin has criticized the rule, arguing it "doesn't go far enough in shifting supply chains" and that the government is trying to leave room for China to benefit. He has been a vocal critic of the Biden administration's EV tax credit rules, suggesting they are being "watered down" and allow China to remain in the market for the entire extent of the IRA. Manchin believes the administration is breaking the law to flood the market with EVs and is more concerned about getting EVs on the road than energy security and competition with China.
• Republican Chairman of the House Select Committee on China, Mike Gallagher, believes the proposal may increase dependence on China, citing exemptions in the rules.

Background Information:

• The Inflation Reduction Act (IRA) plans to invest approximately $370 billion in subsidies for the American energy transition, including tax breaks for electric vehicles and batteries, and has attracted billions of dollars in investment into the North American supply chain. The Act modifies the $7,500 tax credit for new electric vehicles, dividing it into two $3,750 credits based on whether the vehicle's critical mineral and battery component supply chains are located in countries with a free trade agreement with the United States and North America, respectively.
• Currently, China dominates the key electric vehicle industry, and this U.S. move aims to break this pattern.

Subsequent Process:

• The proposed rules will be open for a public comment period before being finalized, and the final terms may be adjusted based on feedback.