Inflation Reduction Act Comes into Focus at UNGA
On September 20, 2022, South Korean president Yoon Suk Yeol made his first official visit to the United States to attend the United Nations General Assembly (UNGA) in New York. On the sidelines of the UNGA, President Yoon briefly met with Japanese prime minister Fumio Kishida—for the first time since both leaders took office this year—and U.S. president Joe Biden. Among various agenda for those meetings, much attention has been paid to whether Yoon and Biden will be able to address the latter’s flagship Inflation Reduction Act (IRA), which has become a thorny issue in U.S.-Republic of Korea (ROK) relations.
Q1: What is the IRA?
A1: On August 16, 2022, President Biden signed the IRA into law. The new legislation seeks to tackle the rising inflation at home in the United States by reducing the fiscal deficit and the costs of prescription drugs, health care, and energy bills. The IRA is also considered a major milestone in U.S. efforts to address climate change, with a potential to decrease carbon emission by roughly 32–42 percent by 2030. Amid U.S.-China competition and in the lead up to the midterm elections, the Biden administration also aims to revitalize domestic manufacturing base and create more clean-energy jobs in the United States. Overall, the IRA is a largely domestically driven agenda to help average Americans and strengthen and revive the economy.
Q2: Why does the IRA raise concern in South Korea?
A2: The IRA poses some complications for the Yoon government. Under the IRA, the country’s two major automakers, Hyundai and Kia, will no longer be eligible to receive U.S. federal tax credits of up to $7,500, as the new law stipulates that those subsidies be limited to cars classified as domestic in terms of manufacturing and parts. At the political level, the IRA caught Koreans off guard, especially after the Biden and Yoon administrations agreed to enhance economic security cooperation. For instance, during Biden’s visit to South Korea in May this year, Hyundai announced that it will invest $5.54 billion to build factories in Georgia for electric vehicles and battery manufacturing. Two months later in July, Samsung Electronics indicated its plan to invest nearly $200 billion over the next 20 years to build 11 semiconductor manufacturing facilities in Texas. In the same month, SK Group unveiled its decision to invest additional $22 billion in the United States in the areas of semiconductors, clean energy solutions, and life sciences after the company already committed $30 billion investment by 2025.
Q3: What are the implications for the alliance?
A3: There are several. First, critics view the IRA in violation of the United States-Korea Free Trade Agreement (KORUS FTA) and WTO trade rules. Second, the IRA is an embarrassment for the Yoon government, which has distanced from its largest economic partner, China, and enhanced cooperation with the United States through various economic initiatives—ranging from the Indo-Pacific Economic Framework (IPEF) and Minerals Security Partnership to the prospective Chip 4 Alliance—to establish a stable and secure supply chain network of critical minerals and essential technologies. Critics will attack the Yoon government, arguing that economic security cooperation with the United States has become economically costly for South Korean companies.
Q4: What is the road ahead?
A4: There will be no easy or quick solution to this matter given that the IRA has already been enacted into law in the United States and the Biden administration has limited ability to make changes. Ultimately, the IRA is a legislative and trade issue that needs to be resolved by U.S. Congress in consultation with the White House. The solution would most likely relate to some type of exemptions for Korea, but this naturally raises questions about others (such as European countries) seeking similar exemptions, thus making this far from a bilateral issue. Korean manufacturing plans alleviate some of the problem in the near future, making this a short-term rather than long-term issue, which may be resolved after the November midterm elections in the United States.
Ellen Kim is deputy director and senior fellow with the Korea Chair at the Center for Strategic and International Studies (CSIS) in Washington, D.C.
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