US Blocks China IRA Circumvention... Announces 'Overseas Concerned Entities' Rule Excluding Electric Vehicle Subsidies from July 1

Key Factors: Chinese Private Joint Ventures and Overseas Production Companies

The U.S. Biden administration is set to announce detailed guidelines as early as the 1st of next month regarding 'Foreign Entities of Concern (FEOC)' that are ineligible for electric vehicle subsidies under the Inflation Reduction Act (IRA). This measure aims to block Chinese electric vehicle and battery companies from circumventing the IRA to receive U.S. subsidy benefits.

[Image source=AP Yonhap News]

According to the Wall Street Journal (WSJ) on the 29th (local time), the U.S. Treasury Department will release detailed guidelines related to foreign entities of concern included in the IRA around the 1st of next month.

The foreign entities of concern regulation was included when the U.S. Congress passed the IRA last year to reduce dependence on Chinese supply chains. Components produced by foreign entities of concern will be completely banned from use starting next year, and minerals from 2025. If products or minerals from entities on the concern list are used, electric vehicle subsidies from the U.S., which can be up to $7,500, will be denied.

Currently, the regulation remains ambiguous, but once the Treasury Department issues detailed guidelines, specific foreign entities of concern are expected to be revealed. WSJ reported that subsidies for electric vehicles containing batteries, components, or minerals made by Chinese state-owned enterprises are highly likely to be blocked under these guidelines.

The market is closely watching whether Chinese private companies with partial ownership or companies headquartered in the U.S. or third countries could be designated as foreign entities of concern. Chinese battery companies have so far circumvented the IRA regulations aimed at excluding China from the supply chain through tactics such as technology transfers, joint ventures, and production in third countries.

U.S. automaker Ford had planned to establish a battery joint venture plant in Michigan with Chinese electric vehicle battery company CATL but abruptly decided to halt the project in September due to criticism from Congress and regulatory uncertainties. In particular, competitor General Motors (GM) warned that without strict guidelines, other automakers might also use loopholes by licensing technology from Chinese battery companies to circumvent the IRA.

However, expanding the scope of foreign entities of concern could exclude China from the supply chain but may negatively impact the speed of electric vehicle adoption, complicating the Biden administration’s calculations. Since China holds a monopolistic position in the electric vehicle battery components and minerals market, this could cause supply chain instability for the U.S. electric vehicle industry. With the presidential election next year approaching and President Biden actively promoting the IRA’s achievements, including a visit to Korean wind power company CS Wind in Pueblo, Colorado, broad restrictions that slow electric vehicle adoption could pose a burden on the administration. Eric Sharif, Senior Managing Director at consulting firm Capstone, said regarding the Biden administration’s 2035 carbon-neutral power sector goal, "We are at the moment where we are beginning to realize that it will still not be easy." A researcher at policy research firm Beacon Policy Advisors analyzed, "Considering that automakers use parts from Chinese companies in their supply chains, there are many questions about how precisely the Treasury Department will define this rule."

Attention is also focused on the impact on Korea-China battery joint ventures partially owned by Chinese interests. Chinese battery companies have been criticized for circumventing the IRA by establishing joint ventures with Korean companies and setting up production bases domestically to launder the origin of products. Anticipating damage to Korean companies, the Korean government submitted a letter to the U.S. government in June requesting clarification on the foreign entities of concern regulations.

A Korean government official stated, "The foreign entities of concern regulation is not a new problem but does not represent a major variable," adding, "Once detailed criteria are announced, it will also help resolve uncertainties."

This content was produced with the assistance of AI translation services.