Inflation Reduction Act upends South Korea-US relations – The Diplomat

Despite being one of U.S. President Joe Biden’s biggest domestic victories, the Inflation Reduction Act (IRA) is causing an unexpected divisiveness in relations between South Korea and the United States. United.

Designed to salvage part of the Biden administration’s “Build Back Better” initiative, the IRA is the result of Senator Joe Manchin’s insistence that any new legislation be designed to reduce domestic inflation. Although the legislation uses new taxes and bargaining powers to put pressure on some of the sources of inflation, it also provides significant funds to fight climate change. One of the key elements to this end are 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 Act are seen by South Korea as both a violation of trade rules and contrary to deepening the economic partnership between the two countries. A South Korean official called the legislation a “treason” and suggested it could hurt cooperation in other areas of the relationship. National Assembly Speaker Kim Jin-pyo suggested that the legislation, along with the CHIPS and Science Act, could make it difficult for South Korean companies to fulfill their investment promises 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.

Several senior Korean officials have traveled to the United States to raise this issue with Congress and their American counterparts. The issue also risks being raised to the presidential level.

The United States has so far responded positively to Seoul’s call to further discuss IRA-related issues. Under Secretary of State for Economic Growth, Energy, and the Environment, Jose W. Fernandez, for example, said, “We take the ROK’s concerns seriously and we stand ready to serious consultation. However, US officials have yet to suggest what they could do to assuage South Korean concerns.

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What the Inflation Reduction Act does

The Inflation Reduction Act is the most significant climate change law in US history. It is expected to reduce U.S. greenhouse gas emissions between 37 and 41 percent below 2005 levels by 2030. If successful, the legislation would be a major U.S. step toward the goal reduction in emissions sufficient by 2050 to prevent the rise in global temperatures. more than 1.5 degrees Celsius.

However, it is the provisions for electric vehicles and electric vehicle batteries that most concern South Korea.

The Inflation Reduction Act provides a tax credit of $7,500 for electric vehicles assembled in the United States. Currently, 26 of the 32 electric vehicle models sold in the United States are assembled domestically. Of these, only the Nissan Leaf and a handful of European models are built in the United States. All electric vehicles sold by Kia and Hyundai are currently built overseas, making them ineligible for the tax credit.

From 2023, additional restrictions are added to the tax credit. Vehicles will still have to be produced in the United States, but new requirements are added for mineral content and EV battery components. To qualify for the $3,750 tax credit, 40% of the minerals in an EV battery must come from the United States or from US FTA partners. Similarly, 50% of the components will need to come from the US or US FTA partners to be eligible for the remaining $3,750 of the overall tax credit. This requirement increases to 80% for minerals by 2027 and 100% for components by 2029. However, by 2025, vehicles containing minerals or components from relevant foreign entities will no longer be eligible for the tax credit for electric vehicles.

The EV battery provisions are designed to help boost supply chains in the US and among US FTA partners, as China is currently the main miner or processor of many minerals needed to produce batteries EV. For example, while Australia extracts around 50% of the world’s lithium, more than 60% is processed in China.

As the lithium example suggests, meeting these requirements will be a challenge for any EV battery manufacturer. In the case of South Korea, more than 80% of its imports of lithium, cobalt and graphite – the three critical minerals in electric vehicle batteries – come from China. According to the International Energy Agency, China produces 85% of the world’s battery anodes and 70% of the world’s cathodes. South Korea imports nearly 85% of the anodes used by its electric vehicle batteries and 73% 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 Act. Seoul has worked with the Biden administration to deepen economic relations between the United States and South Korea, particularly on supply chain resilience, semiconductors and climate change. As a result, South Korean companies have made a series of major investment commitments in the United States.

At the 2021 South Korea-US summit, Samsung announced plans to invest $17 billion in a new foundry in the US to address US semiconductor concerns, while SK Hynix announced this year it would invest $15 billion in R&D and a materials and packaging facility.

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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 EV battery production in the United States and will supply EV batteries not only to Korean automakers, but also to American, Japanese and European producers. In total, South Korean companies will invest more than $13 billion in the United States by 2025 to boost production of electric vehicle batteries.

In addition to investments in EV batteries, earlier this year Hyundai and Kia announced they would invest $5.5 billion in a joint EV and EV battery production plant in Georgia. The new plant is expected to be able to produce 300,000 electric vehicles per year once commissioned in 2025.

These EV investments are expected to create 35,400 jobs, more than any other country’s EV sector investment.

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 amplified by Seoul’s efforts to deepen economic cooperation with Washington. . They are also contrary to the national treatment provisions of the KORUS FTA.

The Inflation Reduction Act was primarily designed to focus on US domestic concerns related to inflation and combating climate change, but had the unintended consequence of creating friction in the relationship between the South Korea and the United States. In the medium term, the IRA could actually benefit South Korean companies by foreclosing the U.S. EV battery market as they develop new supply chains to meet requirements against components and minerals from foreign entities. worrying. But in the short term, it hurt the prospects for South Korean electric vehicles in the US market and, more importantly, damaged relations with a key US partner.