U.S. Limits China’s Ability to Benefit From Electric Vehicle Subsidies

New Rules to Promote Domestic Production

The new rules proposed by the Biden administration seek to shift more production of electric vehicle batteries and materials to the United States. The goal is to build up a strategic industry that is currently dominated by China. These rules aim to limit the involvement of Chinese firms in supplying materials for electric vehicles that qualify for federal tax credits. Additionally, companies seeking federal funding to build battery factories in the United States will be discouraged from sourcing materials from China or Russia.

The rules have the potential to impact automotive supply chains, which currently heavily rely on China for materials and components of electric vehicles. Automakers are facing cost pressures as they transition their factories to produce electric cars, and China offers advanced battery technology at competitive prices. The Biden administration aims to use new federal funding to establish a domestic supply chain for electric vehicles.

Impact on the Electric Vehicle Market

The climate law signed by President Biden includes tax credits for consumers who purchase electric vehicles made in the United States using domestic materials. The law also includes a ban on certain Chinese products. The new rules clarify the definition of Chinese or Russian companies and prohibit them from providing certain materials to cars that receive tax breaks. However, Chinese companies that operate outside China may still benefit from the rules as long as the Chinese government is not a significant shareholder.

Some conservative lawmakers have challenged partnerships between American automakers and Chinese battery giants, arguing that they should not be eligible for federal tax credits. However, the Treasury Department’s guidance provides exemptions for certain minor Chinese parts in order to ensure that car models can still qualify for tax credits.

The rules will go into effect in 2024 for battery components and in 2025 for critical minerals like lithium, cobalt, and nickel. These rules have the potential to significantly impact the U.S. electric vehicle market, which is experiencing rapid growth. However, car and battery manufacturers are still reviewing the rules to determine how many models will qualify for tax credits.

Encouraging Domestic Investment and Supply Chain Development

The new rules may create challenges for automakers, but they are likely to benefit companies planning to supply batteries from factories in the United States. The rules will encourage investment in U.S.-based refineries and domestic suppliers of essential battery materials like lithium and graphite. This will help advance the administration’s goals of building a clean energy supply chain and reducing emissions in the transportation sector.

While the global electric vehicle industry is currently anchored in China, the Biden administration aims to shift production to the United States. China is the largest producer and exporter of electric vehicles, accounting for about two-thirds of the world’s battery cells. The rules also restrict automakers from sourcing nickel used in their batteries from Russia.

One of the challenges for automakers will be developing systems to track all the components of their batteries through the complex and often opaque supply chain. Vehicles that are reported incorrectly will be subtracted from an automaker’s eligibility for tax credits, and fraud or intentional disregard of the rules could result in ineligibility for future credits.