The recent Inflation Reduction Act in the United States made news for its tax breaks for electric vehicles (EVs). But those tax breaks were not as universally accepted as many people believed. Some critics pointed out that most EVs would not qualify for the tax breaks.
South Korea and the European Union had further concerns that the tax breaks would violate World Trade Organization (WTO) rules.
What the Tax Breaks Say
Before getting into the controversy surrounding the EV tax breaks, it’s important to understand them. Before the Inflation Reduction Act, electric vehicles in the United States came with tax credits. But the Inflation Reduction Act ended some of these.
According to the Inflation Reduction Act, there is still a $7,500 credit for EVs. But it only applies to EVs assembled in the United States.
Starting 2023, there will be even more requirements. Half of the tax credit, $3,750, requires 40% of the minerals in the EV battery to come from the United States or its FTA partners. In 2027, the requirement goes up to 80%, and it is expected to be at 100% by 2029.
The other $3,750 of the credit is dependent on the components coming from the U.S. or FTA partners.
The Goal of the Tax Credit Changes
The idea behind the tax credit changes is simple. The United States wants to protect its economic interests and those of its FTA partners.
The Problem for South Korea and Other Countries
There are numerous issues with the Inflation Reduction Act’s changes to tax credits for South Korea and others. To start, the requirement that EVs must be assembled in the U.S. is a challenge. No EV sold by Kia or Hyundai is built in the United States, so they won’t be eligible for the tax credit.
Even if South Korean automakers changed their assembly locations, they would still have to meet the battery mineral requirements and the component requirements.
South Korean experts have cited the Korea-U.S. Free Trade Agreement (KORUS FTA) to explain why this change is a problem. Article 2.2 in Chapter 2, Section A says that the two parties must have a national agreement that benefits each other.
Under this article, the United States not offering tax credits on Korean-made EVs is problematic. It could be considered discrimination against a product made outside the U.S.
South Koreans are far from the only ones to criticize the changes to EV tax credits. Mark R. Kennedy, a former U.S. Congress for Minnesota member and a Wilson Center Fellow, shared his criticism. He pointed out that the IRA “reflects a further retreat from global fairness.”
He went on to say that the EU says the bill gives American producers an unfair advantage. This discriminates against producers in Europe (and South Korea) and also breaks the rules of the World Trade Organization. Kennedy also pointed out that changes suppress innovation.
It Damages the Relationship with South Korea
Overall, these changes to the EV tax credits damage the relationship between the United States and South Korea. This is especially important given the major investments announced in 2021.
The South Korea-U.S. Summit included Samsung announcing a $17 billion investment in the U.S. The same year, SK Hynix announced an investment of $15 billion in research and development, materials, and packaging.
There is also the fact that the U.S. and South Korea have been closely collaborating on EV investments. Additionally, South Korean batteries for EVs are used in Japan and Europe as well as the U.S.
The Inflation Reduction Act included changes to the tax credit for EVs. These changes make it harder for South Korean and other foreign automakers to create eligible vehicles. Many argue that this gives American automakers an unfair advantage.
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