When I first registered as a full-time manufacturing lobbyist in Washington, D.C. in 2001, most automotive policy focused on the “Big 3” Detroit-based OEMs versus the “transplants.” By the time we started to emerge from the Great Recession, the auto industry would look drastically different with their political footprints and heft drastically realigned. The OEMs from Europe and Asia were no longer the transplants. They became a cornerstone of U.S. manufacturing that saw the U.S. South, in particular, flourish as workers, assembly lines and production migrated away from traditional powerbases.
Fast-forward through the years as global supply chains increased their integration, China took a larger share of the Tier II and Tier III manufacturing space, and electric vehicles introduced the “skateboard” model, upending the business model of thousands of American suppliers. During the Great Recession, we saw governments across the world prop up key segments of their automotive industries just to keep them afloat and Americans employed.
Today, we see capitals from Asia to Europe to the U.S. not prop up but push ahead their automotive segments as they drive toward electric vehicles (EVs) and, someday, autonomous goods and passenger transportation. However, what was once derided as “bailouts” at times of stress are now touted, and often criticized, as government industrial subsidies. We are no longer in a race to prevent the bottom from falling out. This is a very different race – one to block China from continuing to dominate the EV battery supply chain and create a unified coalition among allies against what Washington increasingly believes is a technology war already underway with Beijing, and one the free world is losing.
While industry expects U.S. domestic battery manufacturing levels to increase by five times between 2021 and 2026, we remain far behind China – not just in final EV manufacturing but also in the inputs needed to produce those batteries. This is why the U.S. Congress sent to the White House a bill that President Biden signed into law last year providing tax credits for purchasing EVs.
Although we were preventing a race to the bottom in 2009, the world’s largest governments are currently helping their industry race to the top of the EV sprint. But how that happens starts with key inputs that the U.S. lacks. In order to lead in the space of EVs, a nation must have the inputs to create that supply chain. Today, China dominates roughly 70% of the world’s lithium and cobalt sulfate refining, nearly 80% of global battery-cell production and 90% of battery anode manufacturing.
Until last year, the U.S. and European Union had little in the way of industrial policy to address these shortfalls and limit their reliance on China. But much of the U.S. incentives are coming in the form of subsidies to American industries at the expense of America’s traditional allies such as the EU, Japan and others. This brings us to the current situation where the Biden administration is hoping to extend a $3,750 tax incentive for minerals used to manufacture batteries to some trade allies, including the EU.
The current debate over government subsidies continues to confuse the media, members of the public and many lawmakers on Capitol Hill. In August 2022, President Biden signed into law the Inflation Reduction Act, which provides a $3,750 tax credit for the purchase of an EV manufactured in North America. The law included a separate $3,750 for sourcing EV battery critical minerals from within the U.S. or from a country with which the U.S. has a Free Trade Agreement.
Contrary to popular belief, however, Washington has very few trade agreements when compared with other countries and not with two of our largest trading partners: the EU and Japan. This makes Washington’s key allies against China among the world’s largest suppliers, and losers, under the new law if they are not eligible for the tax relief.
On April 17, 2022, the Biden administration released a proposed rule effectively, and unilaterally, making Japanese companies that manufacture critical inputs for EV batteries eligible for the Inflation Reduction Act Section 30D tax credit. This is causing an uproar among many on Capitol Hill who say the intent of their 2022 law was to incentivize U.S. battery manufacturing despite a lack of sufficient extraction, processing, refining and manufacturing supply lines in the U.S.
While EVs only accounted for 7% of all new U.S. vehicle registrations in January 2023, that is nearly double the number from just over a year prior, indicating a clear increase in demand from consumers. EVs still have a long way to go, even in California where they only accounted for 2.6% of all new vehicle registrations last year. However, governments across the globe are prodding OEMs and pushing consumers in that direction, making this fight over battery inputs all the more critical.
The Biden administration views this as a fight between a pro-democracy and pro-capitalist West against the foreign adversaries Washington currently defines as China, Russia, Cuba, Iran and North Korea. However, does President Biden have the authority to unilaterally declare Japanese companies eligible for the $3,750 battery minerals tax break? They are already facing challenges from unions, environmental groups and some in industry over their interpretation of the law to make Japan, and potentially the European Union, eligible for the U.S. tax credit.
For their part, the Biden team is stating that this is a generation-defining moment for the automotive industry that they fear may fall deeper into reliance on China for EV batteries, a supply lifeline Beijing could not only use as leverage against Washington but to create a global dependence others cannot resist.
Outside of select parking lots in Detroit, we are long removed from the days when U.S., Japanese and European automakers fought against one another for dominance of the North American market. Today, all sides are wondering how they could dominate any market if they cannot secure alternative sources for the critical minerals for these EV markets that China currently controls.
Expect the coming months to see much more acrimony between U.S. lawmakers and the Biden administration over whether or not Japan is a free trade partner for purposes of the EV battery credit. Years ago, policymakers in both parties stopped making the argument that it is Detroit versus the transplants. Today, the conversation is how much to include our allies in the battle of the free world versus China when it comes to whom dominates supply lines of batteries to the EV market for decades to come.
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