IRA and the EV Tax Credits: Disruption or Expansion of Trade Alliance?

By So Jung Ha

In America, the Inflation Reduction Act (IRA) was praised as President Biden’s biggest legislative achievement, delivering on his pledge to lower costs for families, create good jobs, and grow the economy. However, to America’s biggest trading partners, it was perceived as another element of the Biden administration’s polite protectionism: a subtle continuation of the Trump administration’s retreat from multilateral trade liberalization.

Since the passing of the IRA on August 16, South Korea and other trade partners, including Japan and the EU, scrambled to protect their domestic electric vehicle industries with all hands on deck. The problem? Section 45W Credit for Qualified Commercial Clean Vehicles; aka the Electric Vehicle (EV) provision.

What is the EV provision and why is it included in the IRA?

The EV provision’s primary goal is to encourage clean vehicle transition, which America is lagging on. In 2021, the American EV market accounted for slightly less than 10% of new global EV registrations, while China accounted for 50% and Europe accounted for 35%. When asked, many Americans pointed to the cost involved with buying and maintaining an EV as one of the biggest barriers to the green transition. The EV provision aims to provide some financial incentive for purchasing an EV, by offering $4,000 in tax credits for lower-and middle-income individuals to use to buy a used electric vehicle and $7,500 to buy a new electric vehicle. According to a Politico/Morning Consult survey, 53% of registered voters support the EV provision, and industry leaders and energy experts also applauded the positive impact of IRA on a clean energy future.

Further, IRA intends to help the American supply chain and counter China’s dominance in mineral processing for EV battery assembly. Currently, China accounts for over 70% of global EV battery production capacity, while the US only mines some lithium, cobalt, and nickel. Against this backdrop, IRA aims to invite critical minerals processing and EV production to the US.

The EV provision outlines that beginning 2023, 40% of an EV battery’s minerals and 50% of the components will need to come from the US or Free Trade Agreement (FTA) partners to be eligible for the tax credit. In 2027 and 2029, this requirement will increase to 80% for minerals and 100% for components.

Why does this matter to South Korea?

Just three months before the signing of IRA, Hyundai Motor Company announced a $5.5bn investment to build its EV plant and battery manufacturing factory in Savannah, Georgia. The factory, scheduled to begin production around 2025, was projected to produce 300,000 EV units a year and create more than 8,000 new American jobs. When the investment was announced, President Biden met with Chairman Chung in South Korea and personally thanked him, stating “we will not let you down.”

However, South Korean companies are feeling more let down than ever before.

The problem lies in Section 30D (b) (1) (G) which limits the eligibility of tax credits for EVs with “final assembly of which occurs within North America.”

Currently, 26 out of 32 EV models sold in the US are assembled domestically. Vehicles produced by General Motors, Tesla, and Toyota, among many others, will be eligible for the tax credit. However, EVs sold by South Korean companies, including Kia and Hyundai Motors, are currently assembled overseas, making them ineligible.

Exports of green cars contribute to 29.4% of Korea’s entire automobile exports, with 70.1% of outbound shipments destined for North America. According to Huh Chang-soo, the chair of the Federation of Korean Industries (FKI), “the implementation of the IRA is already having a real impact on sales of Korean products in the U.S., and countermeasures seem urgent as public opinion here is worsening.”

What is South Korea doing to resolve this issue?

Since the passing of the IRA, it became clear that South Korea intended to use all tools available to resolve the concerns of Korean electric vehicle manufacturers. Trade Minister Ahn Duk-Geun committed to creating public-private communication channels, using bilateral consultative mechanisms, pursuing international cooperation with other countries, and if necessary, using dispute settlement procedures through the WTO or FTA. Prime Minister Han Duck-soo also reaffirmed that the government will “mobilize all diplomatic and economic channels.”

Domestic Cooperation: Public-Private Task Force

The domestic cooperation underscored the need to work as “one team” to counter the challenge. Since the passing of the bill, the Ministry of Trade, Industry, and Energy (MOTIE) held four Public-Private Joint Task Force meetings on IRA. The Korean government engaged with the relevant organizations and companies, including Hyundai Motor, Samsung SDI, and the Korean Automobile Manufacturers Association (KAMA), to discuss progress and responses. 

South Korea also focused on the pan-ministerial, public-private partnership in coming up with countermeasures to the IRA. The South Korean delegations assigned for diplomatic talks were from not only the Ministry of Trade, Industry, and Energy (MOTIE), but also the Ministry of Economy and Finance (MOEF) and the Ministry of Foreign Affairs (MOFA).

ROK-US Bilateral Diplomacy

The first attempt at bilateral resolution began with Trade, Industry, and Energy Minister Lee Chang-yang’s meeting with Philip S. Goldberg, United States Ambassador to South Korea. Minister Lee expressed concerns over the discriminatory treatment towards foreign carmakers and emphasized that the EV provision may be a violation of international trade and commerce rules, and the negative consequences that may come out amid increasing Korean investment in the US. Since then, the South Korean government has been engaging with US representatives, senators, trade representatives, and Secretary of Commerce Gina Raimondo to relay concerns and seek solutions.

South Korean government also actively engaged with the US administration to resolve the issue. On September 22, President Yoon Suk-yeol and President Biden held an “informal meeting” on the sidelines of the 77th session of the UNGA. President Biden is said to have replied that he is aware of Korea’s concerns and agreed to continue discussions on the matter. In an official letter to President Yoon, President Biden promised to continue consulting with South Korea over the IRA in a “candid and open-minded manner.” VP Harris also vowed to work with South Korea to resolve a trade dispute.

While President Biden and Vice President Harris’ commitment gave a sense of hope, progress stalled. On November 4, South Korea finally sent an official written opinion to the US, highlighting that IRA will hurt foreign EV companies and may interfere with other trade regimes. This week, Minister Ahn made his third trip to Washington D.C. in the past four months to discuss the EV provision with the key members of the Biden administration and the US Congress.

ROK-EU-Japan Multilateral Diplomacy

Industry Minister Lee Chang-yang said earlier that South Korea will strive to resolve the matter through bilateral talks with the U.S. while reviewing bringing the case to the WTO or FTA mechanisms as "the last resort." However, the timeline of key events* shows that South Korean officials have been encouraging a multilateral response to the IRA, in case the issue could not be resolved bilaterally with the US.  South Korean Ministers raised concern over the EV provision and suggested cooperation at numerous joint events, including the Trade, Investment, and Industry Ministerial G20 Meeting and ROK-EU Conference on Industrial and Energy Cooperation. South Korean officials also took every opportunity in their bilateral talks with their European counterparts to come up with a joint response.

What are the options for South Korea?

Currently, the most viable options for a bilateral resolution of the issue are:
  1. An early commencement of the Georgia manufacturing plant construction to move up the production timeline.
  2. Three-year grace period in implementing the EV provision for Korean companies. On September 29, Sen. Raphael Warnock of Georgia announced that he proposed a bill to give the three-year grace period.
However, as ROK-US talks diverted, South Korea is said to have hired a domestic law firm and has been working to select a foreign one to file a complaint against the US with the WTO or FTA. According to a Seoul-based law firm Suryun Asia, the IRA is a “clear violation of Article 2.2 under Chapter 2 Section A in the KORUS FTA.” The article stipulates that the two parties to FTA “shall accord national treatment” to the goods of each other.

Is it all that bad?

The trade partners’ rush to act against IRA has shifted focus to the disruptive impact of the EV provision on trade partnerships. However, industry analysts argue that despite the short-term setbacks, South Korea may be the greatest beneficiary of American friend-shoring and protectionism.

In Q4 of 2021, China made up 80% of li-ion battery imports to the US and South Korea only accounted for approximately 9%. However, China’s battery giant and the world’s largest battery maker CATL halted its investment plans for battery plants in North America due to concerns over material sourcing costs. On the other hand, South Korean companies have increased their active investment in battery and EV production plants in the US, and it has placed them in good standing to qualify under both Section 45X and 45W.

According to UBS analyst Tim Bush, South Korean battery makers would collect an annual subsidy of approximately $8 billion from the advanced manufacturing production credit alone. SK On, the fifth largest supplier of EV batteries in the world, already has a plant in Georgia. In September 2021, SK On and Ford announced their plan to invest $11.4 billion to build two mega manufacturing campuses with three battery plants in the US. In May 2022, Stellantis and Samsung SDI announced their plan to invest over $2.5 billion in a battery production company in Indiana. In November, Hyundai Motor Group and SK On announced their plan to invest $1.9 billion to build a new EV battery plant in Georgia. South Korea is not alone, as Toyota Motor is said to invest in battery production in the US and Volkswagen is also looking to build a new EV and battery plant in the US.

The clash over IRA’s EV provision comes during a strategically important time period, as the US is striving to expand its economic alliances. With Indo-Pacific Economic Framework (IPEF), CHIP4, and Minerals Security Partnership (MSP) on the table, the inability to address issues over President Biden’s polite protectionism may jeopardize other cooperations on the table. At the same time, it may be beneficial for the South Korean counterparts to balance the losses and benefits coming from the EV tax provision.

So Jung Ha is a research intern for the Office of the Korea Chair at the Center for Strategic and International Studies (CSIS) in Washington, D.C.

*Annex - Timeline of Key Events
Date Event
5/22 President Biden and Hyundai Chairman Chung Eui-an’s speech in Seoul honoring the $5.5bn investment for an EV factory in Georgia
8/16 President Biden’s signing of the IRA into law
8/25 First Semiconductors, Cars, and Batteries Industry Conference held to seek public-private joint countermeasures in response to the IRA
8/30 Emergency Korea Trade Committee meeting to discuss responses to IRA
9/1 Trade, Industry and Energy Minister Lee Chang-yang’s meeting with Philip S. Goldberg, US Ambassador to South Korea to discuss concern over the EV provision
9/5-7 Minister Lee’s visit to D.C. to talk with the team of U.S. Representatives (Andy Barr, Darrell Issa, Claudia Tenney, Stephanie Murphy, Scott Franklin, Kaiali’I Kahele, Joe Wilson, Michael Waltz and Kat Cammack) to raise concerns over the IRA
9/7 Meeting between the working-level staff from Korea, Japan, Germany, the UK and Sweden’s embassies to the US to confirm each other’s positions on this issue and to explore the possibility of cooperation
9/20-21 Minister Lee’s visit to Washington D.C. to meet with U.S. Secretary of Commerce Gina Raimondo and several other U.S. Congress members to raise concerns over the IRA
9/22 President Yoon Suk-yeol’s meeting with President Biden at the 77th UNGA informal meeting to raise concerns over the IRA
9/23 The Trade, Investment, and Industry Ministerial G20 Meeting
9/27 Vice President Kamala Harris’ visit to South Korea, where she vowed to collaborate to resolve trade dispute stemming from the IRA
9/29 ROK-EU conference on industrial and energy cooperation
9/29 Sen. Warnock, Raphael G. [D-GA]’s “Affordable Electric Vehicles for America Act of 2022” was introduced at the 117th Congress, proposing to provide extension until after 2025 for the requirement that final assembly of vehicles occur within North America for the EV tax credit.
9/30 2nd ROK-Germany Meeting of the Industry Working Group of MOTIE and BWMK
10/5 President Biden sent a letter to President Yoon, promising Washington’s continued consultation with South Korea about the concerns over the IRA.
10/11 2nd Public-Private Joint Task Force meeting on IRA
10/12 ROK-Australia Critical Minerals Business Roundtable to counter IRA impact
10/12 Christopher Koo, chairman of the Korea International Trade Association’s meeting with U.S. Sen. Jon Ossoff of Georgia and Pat Wilson, the commissioner of the Georgia Department of Economic Development in the southeastern U.S. state calling for a three-year grace period
10/19 Prime Minister Han Duck-soo’s visit to Hyundai Motors to assure that South Korea is determined to find solutions
10/19 Trade Minister Ahn Duk-geun’s meeting with European officials (British Ambassador to South Korea Colin Crooks, Swedish top envoy in Seoul Daniel Wolven, and Christophe Bess, Charge' d'affaires of the European Union) to discuss ways to jointly respond to IRA
10/25 3rd Public-Private Joint Task Force meeting on IRA
11/2 4th Public-Private Joint Task Force meeting on IRA
11/3 South Korea alleged to have hired a domestic law firm and has been working to select a foreign one in preparation for filing complaints against the US with the WTO and FTA
11/4 South Korea sent an official written opinion to the US regarding an act that excludes EVs assembled outside of North America from tax credits.
11/4 Trade Minister Ahn Duk-Geun's virtual talks with John Podesta, a senior adviser to the U.S. president for clean energy, to explain the South Korean government's stance on the act in advance
11/30 Trade, Industry, and Energy Minister Lee Chang-yang held a public-private joint conference to assess the overall situation prior to IRA enforcement beginning January 2023 and to see countermeasures together.
12/2 Trade Minister Ahn Duk-Geun met with European Commissioner for Trade and exchanged views on the IRA and WTO reform. They proposed to join efforts to promptly resolve the matter.
12/5-9 Trade Minister Ahn Duk-Geun visited Washington D.C. as a member of South Korea’s delegation to negotiate the IRA with the Biden administration and Congress.