On December 1, 2023, the Biden Administration debuted a new tool in its trade-relief toolbox to curb Chinese imports and their influence in the U.S. economy. The U.S. Treasury Department, Internal Revenue Service (“IRS”) and Department of Energy (“DOE”) announced new rules that beginning in 2024 will cut tax credits for electric vehicles that contain Chinese-made battery components, or are produced by a company connected with the Chinese government. The new rules are being promulgated pursuant to the Infrastructure Investment and Jobs Act, also known as the Bipartisan Infrastructure Law. Under these proposed rules, a vehicle will not be eligible for the electric vehicle tax credit for consumers if the battery contains components manufactured or assembled, or applicable critical minerals extracted, processed or recycled by a “foreign entity of concern,” which includes China.
The economic impact of these measures will look more like a trade restriction than a normal DOE or IRS rulemaking. With China accounting for more than 60 percent of battery cell production world-wide and leading globally in processing of minerals needed for EV batteries, such as graphite and rare earths, these new DOE and IRS rules will be tantamount to a major, impactful import restriction on the covered batteries and component materials from China. The implementation and impact of these import restrictions will be driven by market forces rather than government agencies. As with other recent trade relief measures directed against China, these new DOE and IRS rules will impose a monetary cost on imports from China in order to promote a U.S. national security interest. But, it will be the U.S. consumers who will ultimately decide whether these non-traditional trade remedies are successful as they balance the increased costs of importing products from China versus developing a more robust domestic EV battery industry.
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