When work on a $4 billion manufacturing plant for Vietnamese automaker VinFast began in North Carolina in July 2023, Ted Osius, director of the US-ASEAN Business Council, voiced a hope shared by many companies and governments in the Southeast Asian electric vehicle (EV) space: that they would be eligible for tax credits under the US Inflation Reduction Act (IRA).
These hopes were made possible by Washington’s new security-focused industrial policy approach amid growing competition with Beijing. As National Security Adviser Jake Sullivan voiced In an April speech, Washington aims to prevent Beijing from weaponizing its dominance over global clean energy supply chains. Accordingly, the IRA, signed a year ago this week, was meant to build a clean energy manufacturing network that eases overreliance on China by catalyzing private investment and “relocation of friends,” or recalibrating chains. supply to friendly countries. The tax credits offered under Section 45W of the IRA, which offer up to $7,500 for each EV purchased in the United States, are a key component of this policy effort.
There are many conditions that govern eligibility for these tax credits. For example, the final assembly of the EV must occur in North America. At least 40 percent of the minerals in electric vehicle batteries must also be mined or processed in the United States or partners with whom it has free trade agreements, although a ruling by the US Treasury Department. extended the definition of “free trade agreements” to the critical minerals agreement with Japan.
However, countries with EV manufacturing aspirations like Vietnam, or with EV battery ambitions like Indonesia and the philippines have expressed interest in these tax credits. The financial incentives are very attractive: by one estimate, South Korean EV battery makers could get an annual collective subsidy of $8 billion of US taxpayers based on planned capacity.
However, the reality of implementing this tax credit policy is complicated. Geopolitical tensions could not only drive strict requirements that limit eligibility for the tax credit, but broader uncertainty in US politics could raise questions about the longevity of the IRA.
One of the biggest hurdles for Southeast Asian countries seeking to qualify for tax credits lies in the IRA’s exclusion of electric vehicles with battery components manufactured or assembled by a “foreign entity of interest”, apparently referring to China.
Unfortunately for Washington, Southeast Asian countries rely heavily on Chinese expertise and investment to support their EV activities. Indonesia is the world’s largest source of nickel, but its nickel market is dominated by Chinese companies that provided the technological breakthrough to mass refine nickel. Likewise, VinFast associated with Chinese battery producer Gotion High-Tech for its EV line.
The presence of Chinese companies in the Southeast Asian mineral markets is not a matter of geopolitics. Chinese companies simply have the knowledge and resources to help build their local industries. However, while the United States has yet to produce detailed guidance on what constitutes “foreign entities of interest,” Washington is likely to do everything possible to prevent Chinese companies from profiting from the IRA.
The risks are real for Washington, with reports that Chinese companies are investing heavily in South Korean battery factories to exploit a loophole involving South Korea’s free trade agreement with the US to obtain IRA tax credits. The big concern for their Southeast Asian partners, however, is how much collateral damage they could suffer from any of Washington’s China policies.
Beyond geopolitics, there are many practical challenges to implementing IRA tax credits. As South Korea found out, Washington has been relatively adamant about the need for final assembly of an EV to happen in North America. Although US President Joe Biden personally thanked Hyundai Chairman Chung Eui-sun for deciding to build a $5.5 billion EV plant and battery manufacturing factory in Georgia, Hyundai will be ineligible for tax credits until the plant is ready in 2025.
These practical challenges can be managed if countries believe that the benefits outweigh the costs. Unfortunately, a lack of confidence in the direction of US policy would affect these calculations.
Foreign trade leaders have expressed concerns on the longevity of the tax credit scheme if the Republicans retake the White House in 2024, given the number of Republican lawmakers who opposed the IRA’s passage. Democratic lawmakers have also criticized the IRA for eluding The role of Congress in commercial matters. Even if the Democrats retain the White House in 2024, some party members have hinted at legal action to challenge the Biden administration’s interpretation of “free trade agreements,” raising questions about the direction of Washington’s policy.
Ultimately, as Washington embarks on this highly securitized version of industrial policy against an increasingly tense political backdrop, Southeast Asian countries need to be aware of the risks involved in their potential investments. Signing more critical mineral deals, increasing supply chain resiliency, or even entering the US EV market are all worthy targets. However, investing in a multi-billion dollar factory solely to get these IRA tax credits could be a long shot with questionable returns.