The administration is well aware of the high stakes in how it opts to interpret that prohibition, both for the success of Biden’s climate ambitions a
The administration is well aware of the high stakes in how it opts to interpret that prohibition, both for the success of Biden’s climate ambitions and for his ability to persuade voters that his policies will bring jobs and prosperity.
Setting a super strict bar against Chinese content could mean that virtually no electric cars and trucks qualify for the tax break, advocates for the auto industry say. But other industries, including domestic miners, have warned the administration that their own prospects would wither if Treasury leaves a wide-open door to battery ingredients from China.
No matter what the department decides, Republicans including former President Donald Trump are already wielding the soft-on-China hammer against Biden, especially in must-win Michigan.
Meanwhile, uncertainty over Treasury’s decision is freezing private investment in electric vehicle manufacturing in the United States, automakers say — at a time when the growth of EV sales is also slowing below what some manufacturers had expected.
“There’s companies that are holding on to billions of dollars of investment until they know what’s going to be included in the guidance,” said Dan Bowerson, senior director for energy and environment at the Alliance for Automotive Innovation, a trade group whose members include most of the major automakers and suppliers in the U.S. market. “So it’s critically important.”
The IRA’s rules on where battery components and minerals can come from have already limited eligibility for the tax credit to just 22 vehicle models, from manufacturers such as Tesla, Ford, General Motors, Nissan and Volkswagen.
In a statement, the department said national security is a high priority in how it’s carrying out the climate law.
“The Inflation Reduction Act is increasing our energy security by encouraging investments in America and building secure supply chains,” said Treasury spokesperson Ashley Schapitl. “As the market continues to shift in response to the Inflation Reduction Act and U.S. companies attract additional investment, we will continue to assess and respond to any national security concerns associated with both international and domestic supply chains.”
The law already prohibits giving the tax credit to vehicles that aren’t assembled in the U.S., Canada or Mexico. And it restricts the credit based on the percentage of battery components and critical minerals that are sourced domestically.
The administration is under heavy political pressure to look tough on China heading into an election year, especially when it comes to electric vehicles. Trump, other GOP White House hopefuls and Republicans in Congress have painted Biden’s EV goals as a boon to Beijing. And Sen. Joe Manchin (D-W.Va.) has threatened legal action over Treasury’s existing interpretation of the electric vehicle tax credit, contending it gives too much leeway to automakers to rely on China.
But a strict interpretation of the law’s prohibition on what it calls “foreign entities of concern” would run into the reality that much of the world’s supply chains for electric vehicle batteries and critical minerals still flow through China. Reducing the number of vehicles that qualify for the credit could undermine Biden’s goal of making half of vehicle sales electric by the end of the decade.
“If it wasn’t an election year, policymakers would be behaving a lot more rationally about the reality of global supply chains and China’s role in it,” said Tom Moerenhout, a research scholar at Columbia University’s Center on Global Energy Policy.
Interests pressing the administration for a strict anti-China interpretation include the domestic energy production advocacy group SAFE, which is pushing a definition that would bar nearly any partnership with Chinese suppliers, including joint ventures and technology licensing agreements.
The domestic mining industry is also promoting a stringent interpretation that would drive up the incentive to buy domestically sourced lithium, nickel and other critical minerals.
“Further deepening our reliance on China and other geopolitical rivals or nations of concern for our mineral supply chains is a mistake we must not make,” said Conor Bernstein, vice president of communications at the National Mining Association. “Congress was clear in its intent with this tax credit, and it is past time we have rules with the required guardrails to reflect it.”
The department has said it will issue the guidance by the end of the year.
How much is too much?
The Treasury guidance will answer two big questions.
First, automakers want to know if the rule will allow tiny traces of battery content from otherwise prohibited countries as long as they don’t exceed some minimal threshold.
“These manufacturers now are looking deeper and deeper into their supply chains,” Bowerson said. “Typically, manufacturers or OEMs would know their tier one, tier two, maybe even tier three supplier in terms of supply chain. But now they’re digging all the way back into that tier three. Where are they getting their materials from?”
But as deep as they look, he said, many fear there could still be trace amounts that they either can’t detect or can’t prevent, and they don’t want Treasury to ding them for the smallest slips.
The second question is what makes a company a “foreign entity of concern” — the specific term that the climate law uses in describing companies barred from involvement in the supply chain for vehicles that get the tax credit.
The climate law doesn’t explicitly single out Chinese manufacturers or suppliers, but it points to language from 2021’s bipartisan infrastructure law that says these “foreign entities” include companies owned by, controlled by or based in China, Russia, North Korea or Iran.
Treasury adopted language from the Commerce Department last spring when it interpreted another “foreign entities of concern” provision in Biden’s CHIPS and Science Act, a law aimed at lessening Chinese dominance of the semiconductor industry. The Commerce language said a company could trigger the CHIPS law’s restrictions if as little as 25 percent of its stock, voting shares or board seats are held by people or businesses based in a country like China.
For the electric vehicle credit, industry watchers were initially expecting a threshold of 50 percent, in line with other parts of the Internal Revenue Code. They contend that Commerce’s CHIPS definition, if applied to the EV tax credit, would slash the number of qualifying electric vehicle models.
“Commerce’s definition would substantially curtail the near-term availability of battery components and applicable critical minerals that could be used in credit-eligible vehicles,” lawyers at the firm Covington & Burling wrote in a blog post in October. “In so doing, it would likely limit the availability of credit-eligible vehicles and undermine [the EV tax credit’s] policy goal of incentivizing EV adoption.”
For example, Columbia University’s Moerenhout said, the 25 percent voting threshold could disqualify much of the nickel flowing from Indonesia, where Ford has made a big bet on sourcing battery minerals but where Chinese companies dominate the sector. It could also knock out battery powders that are processed in South Korea but originate in China.
The electric vehicle industry contends that Treasury shouldn’t apply the CHIPS definition, because the two laws have different objectives. While the electric vehicle tax credit is intended to create a U.S.-based alternative to a supply chain that China now dominates, the CHIPS Act is meant to prevent U.S. semiconductor technology from leaking into China, said Alex Laska, deputy director for the climate and energy program at the think tank Third Way.
Any definition less stringent than the CHIPS guidance would probably inflame opponents, however. Sen. Marco Rubio (R-Fla.) introduced a bill in March, S. 756 (118), to mandate that “foreign entities of concern” be interpreted to include companies with at least a 20 percent Chinese ownership stake and those that rely on technology licensed from a Chinese firm.
That definition would go even further than the CHIPS guidance, and could ensnare Ford’s agreement in February to license Chinese battery technology for a planned plant in Michigan. The carmaker, which is facing widespread Republican criticism of the deal, has since paused construction on the plant.
Doing the math
For automakers, Treasury’s decision on how to measure and enforce the requirements could be even more important.
The companies have pushed for a “de minimis” threshold that would allow small amounts of parts or minerals from Chinese suppliers, given the difficulty of tracing those that go into a vehicle. The North American Free Trade Agreement and its Trump-era successor, the United States-Mexico-Canada Agreement, used a similar threshold for goods of minimal value that aren’t subject to customs duties.
“What we’re looking for is — and there’s precedent in our trade policy all over — a safe harbor, just a very de minimis for trivial or trace amounts that are otherwise undiscoverable despite good faith efforts,” said Genevieve Cullen, president of the Electric Drive Transportation Association. “There are just scenarios in which it would be impossible to comply.”
At least one automaker, Volkswagen, is also pushing Treasury to apply a so-called value-added test to the way it evaluates the involvement of foreign entities of concern in the supply chain.
Treasury is already using that test for another aspect of the electric vehicle tax credit, allowing a car or truck to qualify for the incentive if at least half the value added by either the extraction or processing of its critical minerals occurs in the U.S. or a trade partner. Volkswagen argued in comments to the department in June that it should similarly enforce the “foreign entity of concern” requirement only if a hostile country contributed at least half the value.
But any measurement mechanism that offers automakers more flexibility could draw the ire of Congress’ China hawks.
“Treasury guidance should make clear in the most comprehensive way possible that taxpayer subsidies cannot flow to foreign entities of concern through any structuring mechanism conceivable,” House Ways and Means Chair Jason Smith (R-Mo.) wrote to the Treasury Department in September. “Guidance on this topic should be as strict and prompt as possible so there is no ambiguity that the benefit of taxpayer subsidies cannot end up in the hands of our adversaries.”
Manchin also blasted the value-added test in a hearing in September.
“They’re trying to administer a piece of legislation they never passed,” Manchin said. “The administration appears to care more about getting EVs on the road than our energy security and competition with China.”
In the end, automakers and electric vehicle advocates are just eager for the guidance — whatever it says — to come as quickly as possible. Biden signed the climate law in August 2022, and the ban on battery components from hostile countries takes effect Jan. 1. (The ban on critical minerals from those countries takes effect a year later.) Electric vehicle boosters worry that companies will have too little time to implement the rules.
“Investment decisions are being made today for vehicles that will come to market two years from now,” Cullen said. “The sooner the better — these are very complex, multi-tiered supply chains.”
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