Despite being one of US President Joe Biden’s biggest domestic victories, the Inflation Reduction Law (IRA) is causing unexpected discord in relations between South Korea and the United States.
Designed to save part of the Biden administration Build Back Better Initiative, the IRA was the result of Senator Joe Manchin’s insistence that any new legislation be crafted to reduce domestic inflation. Although the law uses new taxes and bargaining powers to put pressure on some of the sources of inflation, it also provides significant funds to address climate change. One of the key components to that end is tax credits to support the adoption of electric vehicles (EVs) in the United States, but these provisions have also become a source of friction with South Korea.
The EV provisions of the Inflation Reduction Law are viewed by South Korea as both a violation of business rules and contrary to deepening the economic partnership between the two countries. A South Korean official called the legislation “treason” and suggested that it could harm cooperation in other areas of the relationship. Speaker of the National Assembly Kim Jin-pyo it suggested the legislation, along with CHIPS and the Science Act, could make it more difficult for South Korean companies to meet their investment commitments in the United States, while a Korean columnist argued that Biden’s trade policy is no better than former President Donald Trump’s “Make America Great Again” policies.
United States so far responded positively to the call from Seoul to further discuss IRA-related issues. Under Secretary of State for Economic Growth, Energy and the Environment José W. Fernández, for example, said, “We take the ROK’s concerns seriously and stand ready for serious consultations.” However, US officials have yet to suggest what they can do to ease South Korea’s concerns.
What does the Inflation Reduction Law do?
The Inflation Reduction Act is the most important climate change legislation in the history of the United States. It is expected to reduce US greenhouse gas emissions. 37-41 percent from 2005 levels by 2030. If successful, the legislation would be a major step by the United States toward the global goal of reducing emissions enough by 2050 to prevent global temperatures from rising more than 1.5 degrees Celsius.
However, it is the provisions related to electric vehicles and electric vehicle batteries that South Korea is most concerned about.
The Inflation Reduction Act provides a $7,500 tax credit for electric vehicles assembled in the United States. Currently, 26 of the 32 EVs models sold in the United States are assembled in the country. Of those, only the Nissan Leaf and a handful of European models are made in the United States. All electric vehicles sold by Kia and Hyundai are currently manufactured overseas, making them ineligible for the tax credit.
Beginning in 2023, additional restrictions are added to the tax credit. The vehicles will still need to be made in the United States, but new requirements are added for the mineral content and components of EV batteries. To be eligible for $3,750 of the tax credit, 40 percent of an EV’s battery minerals must come from the United States or US NAFTA partners. Similarly, 50 percent of the components will need to come from the United States or US FTA partners to be eligible for the remaining $3,750 of the general tax credit. This requirement increases to 80 percent for minerals by 2027 and 100 percent for components by 2029. However, by 2025 vehicles with minerals or components from foreign entities of interest will no longer be eligible for the EV tax credit.
The electric vehicle battery provisions are designed to help boost supply chains in the United States and among US NAFTA partners, as China is currently the key miner or processor of many of the minerals needed to produce EV batteries. For example, while Australia mines about 50 percent of the world’s lithium, more than 60 percent is processed in China.
As the lithium example suggests, meeting these requirements will be a challenge for any electric vehicle battery manufacturer. In the south korea caseMore than 80 percent of its imported lithium, cobalt and graphite, the three critical minerals in EV batteries, come from China. According to the International Energy Agency, China produces 85 percent of the world’s battery anodes and 70 percent of the world’s cathodes. South Korea imports nearly 85 percent of the anodes its EV batteries use and 73 percent of its cathodes from China.
Why the IRA is causing tensions with South Korea
South Korea’s concerns go beyond the details of the Inflation Reduction Law. Seoul has worked with the Biden administration to deepen the economic relationship between the United States and South Korea, specifically on supply chain resilience, semiconductors, and climate change. As a result, South Korean companies have made a number of significant investment commitments in the United States.
During the South Korea-US Summit. USA from 2021, samsung announced his intention to invest $17 billion in a new foundry in the United States to address US concerns about semiconductors, while SK Hynix announced this year that it would invest $15 billion in R&D and a materials and packaging facility.
Investments in electric vehicles have also been an area of growing collaboration between US and South Korean companies. South Korean companies are responsible for much of the investment in the production of EV batteries in the United States and will provide EV batteries not only for Korean automakers, but also for American, Japanese and European producers. In total, South Korean companies will invest more than $13 billion in the United States by 2025 to boost EV battery production.
In addition to investments in batteries for electric vehicles, earlier this year Hyundai and Kia announced that they would invest $5.5 billion in a joint EV and EV battery production facility in Georgia. The new plant is expected to be able to produce 300,000 electric vehicles a year once it comes online in 2025.
These investments related to electric vehicles are expected to create 35,400 jobsmore than investments in the EV sector by any other country.
While there are concerns that the IRA’s requirement that electric vehicles be assembled in the United States has put Korean companies at a disadvantage, these concerns have been magnified by Seoul’s efforts to deepen economic cooperation with Washington. They are also contrary to national treatment provisions in the KORUS FTA.
The Inflation Reduction Act was designed primarily to focus on domestic US concerns related to inflation and climate change, but it has had the unintended consequence of creating friction in relations between South Korea and the United States. In the medium term, the IRA could benefit South Korean companies by blocking the US electric vehicle battery market as they develop new supply chains to meet requirements against components and minerals from foreign entities of interest. But in the short term, it has damaged the prospects for South Korean electric vehicles in the US market and, more importantly, damaged relations with a key partner for the United States.