Inflation cut law upsets South Korea-US relations – diplomat

Despite being one of US President Joe Biden’s biggest domestic gains, the Inflation Reduction Act (IRA) is causing an unexpected rift in South Korea-US relations.

Designed to salvage some of the Biden administration’s “Build Back Better” initiative, this initiative was the result of Senator Joe Manchin’s insistence that any new legislation be drafted to lower domestic inflation. While the legislation uses new taxes and negotiating powers to pressure some sources of inflation, it also provides significant funds to tackle climate change. A key component to this 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 contention with South Korea.

South Korea views the electric car provisions in the inflation-reduction law as a violation of trade rules and a violation of the two countries’ deep economic partnership. A South Korean official called the legislation “betrayal” and suggested it could harm cooperation in other areas of the relationship. National Assembly President Kim Jin-pyo has suggested that the legislation, along with the CHIPS and Science Act, may make it difficult for South Korean companies to fulfill their investment pledges in the United States, while a Korean columnist has argued that Biden’s trade policy is no better. Former President Donald Trump’s “Make America Great Again” policy.

Several senior Korean officials have traveled to the United States to raise the issue with Congress and their American counterparts. It is also likely to raise the issue to the presidential level.

The United States has so far responded positively to Seoul’s call to discuss issues related to the IRA further. “We take the Republic of Korea’s concerns very seriously and stand ready for serious consultations,” said Jose W. Fernandez, the Under Secretary of State for Economic Growth, Energy and the Environment, for example. However, US officials have not yet suggested what they can do to ease South Korea’s concerns.

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What does the Inflation Reduction Act do?

The Inflation Control Act is the most important piece of climate change legislation in US history. It is expected to reduce US greenhouse gas emissions between 37-41 percent of 2005 levels by 2030. If successful, the legislation would be an important step by the US toward the global goal of reducing emissions enough by 2050 to prevent global warming. The global temperature is more than 1.5 degrees Celsius.

However, the provisions regarding electric vehicles and electric vehicle batteries are the most important to South Korea.

The Inflation Control Act provides a $7,500 tax credit for electric vehicles assembled in the United States. Currently, 26 of the EV 32 models sold in the United States are assembled domestically. Of these, only the Nissan Leaf and a few European models were manufactured 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 have been added to the tax credit. The cars will still need to be produced in the United States, but new requirements have been added for the metal content and components of electric vehicles’ batteries. To be eligible for $3,750 of the tax credit, 40 percent of EV battery metals must come from the United States or US FTA partners. Likewise, 50 percent of components must come from the United States or US Free Trade Agreement partners to be eligible for the remaining $3,750 in total tax credit. This requirement rises to 80 percent for metals by 2027 and 100 percent for components by 2029. However, by 2025, vehicles containing metals or components from foreign entities of interest will no longer be eligible for an electric vehicle tax credit.

The EV battery provisions are designed to help stimulate supply chains in the United States and among US Free Trade Agreement partners, as China is currently the dominant miner or processor of many of the minerals needed to produce EV batteries. For example, while Australia extracts 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 EV battery maker. In South Korea’s case, more than 80 percent of its import of lithium, cobalt and graphite — all three important minerals in electric car batteries — comes 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 used by electric car batteries and 73 percent of its cathodes from China.

Why the IRA is causing tensions with South Korea

South Korea’s concerns extend far 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 with regard to supply chain resilience, semiconductors, and climate change. As a result, South Korean companies have made a series of significant investment commitments in the United States.

During the 2021 South Korea-US summit, Samsung announced its intention to invest $17 billion in a new foundry in the United States to address US concerns about semiconductors, while this year SK Hynix announced that it would invest $15 billion in research and development, materials and a packaging facility. and packaging.

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Investments in electric vehicles have also been an area for increased cooperation between US and South Korean companies. South Korean companies are responsible for much of the investment in electric car battery production in the United States and will supply EV batteries not only to Korean automakers, but also to American, Japanese and European producers. Finally, South Korean companies will invest more than $13 billion in the United States by 2025 to boost electric battery production.

In addition to investments in electric vehicle batteries, Hyundai and Kia announced earlier this year that they would invest $5.5 billion in a joint facility to produce electric vehicle batteries and electric vehicles in Georgia. The new plant is expected to be able to produce 300,000 electric vehicles annually once it becomes operational in 2025.

These investments in electric vehicles are expected to create 35,400 jobs, more than investments in the electric vehicle sector by any other country.

While there are concerns that the IRA’s requirement to assemble electric vehicles in the US has put Korean companies at a disadvantage, these concerns have been amplified by Seoul’s efforts to deepen economic cooperation with Washington. It also conflicts with the national treatment provisions of the Korea Free Trade Agreement.

The Inflation Control Act was designed primarily to focus on US domestic concerns about inflation and address climate change, but it had the unintended consequence of creating friction in relations between South Korea and the United States. In the medium term, the IRA could already benefit South Korean companies by shutting down the electric car battery market in the United States as they develop new supply chains to meet requirements against components and metals from the foreign entities involved. But in the short term, it has hurt the prospects for South Korean electric cars in the US market and, more importantly, hurt relations with a major partner of the United States.

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