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This column is a bit overtaken by events, as it concerns the reconciliation bill, which the Senate passed over the weekend. However, the issue the bill raises—electric vehicle (EV) tax credits—is not going to go away, and it presents another interesting trade dilemma where opposing policy goals once again butt heads.
In brief, the bill continues the existing $7,500 tax credit for EVs but makes a number of changes regarding which vehicles can qualify for it. Final assembly would have to occur in the United States. Half the credit ($3,750) would be available if a percentage of the critical minerals contained in the car’s battery were extracted or processed in a country with which the United States has a free trade agreement or is recycled in North America. That percentage starts at 40 in 2023 and works its way up to 80 by 2027. The other half of the credit would be available if the value of components in the battery manufactured or assembled in North America exceeds a required percentage, starting at 50 percent in 2023 and rising to 100 percent by 2029. In addition, there would be no credit for a vehicle whose battery inputs are sourced or made in China, Russia, Iran, or North Korea.
The intent of these conditions is clearly to promote North American production and assembly, preferably in the United States, and to eliminate reliance on Chinese critical minerals and components. These are laudable goals. They are consistent with the administration’s preference for re- or near-shoring and play into manufacturers’ concerns about supply chain security and resiliency. We are seeing an ongoing reevaluation of the political and economic risk of doing business in China and Russia that is leading companies to either move their supply chains out of China or to develop redundant sources of supply in other locations.
The restrictions on the EV tax credit are intended to accelerate that process, and therein lies the problem. It appears that at present there is no auto company whose vehicles meet the standard. The two main obstacles are the prohibition on using critical minerals from China and the battery component requirements. The proponents’ response to the question—why propose a standard no one can meet—is that companies will simply have to move faster to alter their supply chains.
My experience over many years has been that companies usually do nothing until a deadline looms and then whine that they need more time, when, if they had started planning when the deadline was put in place, they would not be having problems. Even better is the smart CEO who can see these things coming and gets ready even before there is a requirement.
On the whole, however, I have some sympathy for the companies on this one. There are serious constraints on rapid adjustments in supply chains, particularly for critical minerals. In the case of batteries, key minerals are lithium, nickel, cobalt, manganese, and graphite. In order to meet Paris Agreement goals, the U.S. Energy Information Administration (EIA) estimates overall need for these minerals and others will quadruple by 2040. Demand for battery minerals would be even greater. While lithium and cobalt are in surplus at the moment, the EIA study concludes “in a scenario consistent with climate goals, expected supply from existing mines and projects under construction is estimated to meet only half of projected lithium and cobalt requirements . . . by 2030.” When you add in the fact that the average length of time from discovery to production of a new mine is 16.5 years, you can see that developing new sources of supply is going to take a long time.
Another significant constraint is processing these minerals. In 2019, for example, China’s global share of processing was 35 percent for nickel, 50–70 percent for lithium and cobalt, and nearly 90 percent for rare earths. Processing, which mainly involves going through massive amounts of dirt to extract a relatively small amount of the desired minerals, is a dirty business that many developed countries have chosen to avoid. Starting up new processing facilities in the United States, even with the demand stimulated by the EV tax credit, will take time.
This is another case, like solar panels, where good policies butt heads. Do you relax the rules in order to accelerate the transition to green, or do you impose tough rules to force domestic manufacturing even though that will slow down the transition? In the solar panels case, I voted with the rules because the issue was unfair trade practices, and I think it’s important to uphold rule of law. In this case, however, rules and unfair practices are not at issue, and I’m inclined to vote for the industry, at least to give them time to make the adjustment—not as much as they demand, but as much as they need. A standard no one can meet does not advance either our environmental or domestic production goals.
William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.
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