167. Will new US tax credits remake electric vehicle supply chains?

Episode Summary

Executive Summary: The episode explains how the Inflation Reduction Act reshapes U.S. EV subsidies, comparing it with prior credits and the abandoned Build Back Better plan. It highlights why Hyundai, Kia, and other foreign automakers are upset, how the law aims to target consumers better and rebuild supply chains away from China, and why Treasury’s implementation will determine who ultimately benefits.

Main Topics: Hyundai’s complaint over IRA EV credits (Priority: 5/5): The show opens with Biden’s announcement of Hyundai investment in Georgia and contrasts that with South Korea’s anger once the IRA’s North American final-assembly rule cut off credits for imported Korean EVs. Why the U.S. lagged in EV adoption (Priority: 4/5): The discussion reviews consumer preferences, low gasoline prices, infrastructure gaps, and supply-chain differences that made EV adoption slower in the U.S. than in China and Europe. Limits of older EV tax credits (Priority: 4/5): The episode explains the 2009 federal EV tax credits, their 200,000-vehicle phaseout, and research showing they were costly and poorly targeted toward wealthier buyers. Build Back Better versus the IRA (Priority: 5/5): The transcript compares the more trade-friction-prone Build Back Better EV credit design with the IRA’s revised framework, which removed the U.S. assembly and union requirements but added new eligibility constraints. Battery supply chains and China exposure (Priority: 5/5): A major focus is the new battery sourcing rules for critical minerals and components, designed to diversify production away from China and reduce dependence on a strategically risky supplier. Trade and geopolitical consequences (Priority: 4/5): The episode explores likely responses from Korea, Japan, Europe, and Canada, including possible but uncertain WTO challenges and the risk that other countries copy the U.S. subsidy model. Uncertainty in Treasury implementation (Priority: 5/5): The conversation ends by stressing that Treasury regulations will define key terms—like foreign entities of concern, free-trade partners, and sourcing rules—which will determine how workable the law is in practice.

Key Arguments: The IRA’s EV tax credits are more targeted than prior U.S. subsidies because they add vehicle price caps, income caps, and used-EV eligibility, which should better steer subsidies toward consumers who might actually switch to EVs. Removing the 200,000-vehicle cap restores eligibility for Tesla and GM buyers, while limiting credits by price and income aims to improve policy efficiency. The North American final-assembly rule is the main reason Hyundai, Kia, and some other foreign automakers are losing access to credits for imported EVs. The battery rules are intentionally designed to push supply chains away from China, which dominates advanced battery manufacturing, lithium refining, and major mineral processing. South Korea, Japan, and Europe may avoid escalating the dispute because they share broader strategic priorities with the U.S. on Russia and China, and because the WTO is a weak venue right now. The commercial EV market may be affected differently because its subsidy rules appear less restrictive than the consumer market’s battery and assembly requirements. The biggest unknown is not the law itself but Treasury’s rulemaking, which will decide how terms are interpreted and whether firms can realistically comply. If other countries mirror the U.S. by subsidizing local EV production, global EV scale could shrink, costs could rise, and the climate transition could slow.

Data Points: Hyundai announced U.S. EV investment: $10 billion - Investment unveiled during President Biden’s May visit to South Korea Advanced automotive technology investment: $5 billion - Part of Hyundai’s U.S. EV supply-chain commitment New factory investment near Savannah, Georgia: $5.5 billion - Part of Hyundai’s U.S. EV expansion plan Projected jobs created: More than 8,000 - Expected employment from Hyundai’s Georgia facility Planned ground-breaking: As soon as January 2023 - Timeline for the new Hyundai facility Expected vehicle and battery rollout: By 2025 - Projected output from the new Georgia plant U.S. EV share of vehicle sales in 2021: 5% - Illustrates U.S. lag in EV adoption EV share of vehicle sales in China and Europe: 16%–17% - Benchmark comparison with U.S. adoption Engine workers in Michigan: About 13,000 - Jobs potentially affected by the shift from engines to EV motors U.S. engine production concentration: Half of engines and three quarters of transmissions in three states - Michigan, Ohio, and Indiana dominate legacy auto parts production 2009 federal EV tax credit: Up to $7,500 per vehicle - Credit established under the American Recovery and Reinvestment Act Old EV credit cap: 200,000 vehicles per company - Phaseout threshold under the earlier federal credit Tesla and GM cap timing: 2018 and 2019 - When they reached the 200,000-vehicle cap EV credit in Build Back Better: Up to $12,500 - Proposed consumer subsidy in the earlier bill Union bonus in Build Back Better: $4,500 - Portion tied to U.S. unionized assembly IRA EV credits duration: Through 2032 - Time horizon for consumer tax credits under the IRA IRA price caps: $55,000 for cars; $80,000 for SUVs, trucks, and vans - Vehicle MSRP limits for eligibility IRA income caps: $300,000 household; $150,000 single - Consumer eligibility thresholds IRA law size: $369 billion - Size of the overall energy and health care package announced in July Korean battery firms: LG Energy Solutions and SK Innovation - Major suppliers in the U.S. battery market China’s advanced battery manufacturing capacity: 80% of world capacity in 2021 - Shows the scale of China’s dominance in batteries China’s lithium refining share: 61% - Share of global lithium refining capacity located in China

Pivotal Quotes: "We understand that the Inflation Reduction Act is very important for the Biden administration. But just one single provision there requiring final assembly in North America is causing huge trouble." — Duk-kun Ahn: South Korea’s trade minister explaining Hyundai’s objection to the IRA’s final-assembly rule "The main goal. And that is to diversify the electric vehicle battery supply chain out of China." — Kristen Gicek: On the purpose of the IRA’s battery sourcing requirements "If these tax credits help facilitate the green transition in the United States, that is probably the most important thing." — Chad Bowne: Explaining why allies may avoid a WTO fight over the IRA

Implications: The IRA will likely accelerate U.S. EV and battery investment, but only if Treasury’s rules are workable. It may also trigger allied friction, supply-chain reshuffling, and a broader global race to subsidize domestic EV production.