The United States limits China’s ability to benefit from electric vehicle subsidies

The Biden administration proposed new rules on Friday aimed at moving more production of electric vehicle batteries and the materials that power them to the United States, in an attempt to build up a strategic industry now dominated by China.

The rules are intended to limit the role that companies in China can play in supplying materials for electric vehicles that qualify for federal tax credits. It would also discourage companies seeking federal funding to build battery factories in the United States from sourcing materials from China or Russia.

These rules could encourage shifts in automotive supply chains, which still rely heavily on China for materials and electric vehicle components. Automakers are also facing intense cost pressures as they try to retrofit their factories to make electric cars, and China offers some of the most advanced and lowest-priced battery technology in the world.

The Biden administration is trying to use billions of dollars in new federal funding to change that dynamic and create an American supply chain for electric vehicles.

The climate law signed by President Biden in 2022 includes up to $7,500 in tax credits for consumers who buy electric vehicles made in the United States using largely domestic materials. The law also included a general ban on Chinese products. Lawmakers ordered companies in China, Russia, North Korea and Iran to be banned from providing certain materials for cars that received those tax breaks.

But the law left several questions open, including what constitutes a Chinese or Russian company. These definitions include any entity established or headquartered in China or Russia, as well as any company in which the Chinese or Russian government owns 25% of board seats or equity stakes, administration officials said.

Chinese companies with operations outside China appear to be able to benefit from the rules as long as the Chinese government is not a major shareholder. This condition came as a relief to some automakers, who feared that the Biden administration would prevent them from contracting with Chinese-owned mines or factories in the United States or other parts of the world.

The law also requires battery makers who enter into contracts or licensing agreements with Chinese companies to ensure they retain certain rights in their projects. This clause is intended to ensure that the Chinese company does not effectively control such a project.

Some conservative lawmakers have challenged Ford Motor Co.’s plans to license technology from the Chinese battery giant known as CATL for a factory in Marshall, Michigan, arguing that such a partnership should not qualify for federal tax credits.

Some Republican lawmakers suggested Friday that the Treasury Department’s guidance was not enough to ease the country’s dependence on China.

“At a time when China is using massive subsidies to undermine American companies and stifle the global market for battery components, the Treasury Department’s preposterous new regulations will open the floodgates for U.S. tax dollars to flow to Chinese companies complicit in trade and forced labor abuses.” said Rep. Mike Gallagher of Wisconsin, chairman of the House Select Committee on the Chinese Communist Party.

The rules will apply to battery components in 2024, and in 2025 for critical metals such as lithium, cobalt and nickel. It can be modified depending on industry commentary.

These rules could have a profound impact on the U.S. electric vehicle market, which is growing rapidly — battery-powered cars accounted for about 8 percent of new cars sold in the third quarter. Auto and battery makers said Friday they were still reviewing the rules, and that it would take some time to determine how many models would be eligible for the tax credits.

Tesla said Friday that the two least expensive versions of the Model 3 sedan will be eligible for only half of the $7,500 credit starting in January. A Model Y sport utility vehicle may also not be eligible for the full credit after December 12. 31, Tesla said. The Model Y and Model 3 are the two highest-selling electric vehicles in the United States. Tesla buys some batteries from CATL.

John Bozzella, CEO of the Alliance for Automotive Innovation, wrote in a blog post on Friday that the rules struck a “practical balance,” including by exempting trace substances. He said that if the administration had banned all small Chinese parts from the supply chain, any car models might not have been eligible for tax breaks next year.

Many cars have already been excluded from purchase credits under other rules, such as the requirement to assemble vehicles in North America. Only about 20 vehicles currently qualify for the program out of more than 100 electric vehicles sold in the United States.

The rules also raised new questions about whether stricter requirements for supply chains could continue a trend of pushing more shoppers to lease vehicles rather than buy them.

The ban on sourcing from China only applies to vehicles that are sold, not those that are leased. Consumers can get tax breaks for electric cars they lease from car dealers, and this has led to a boom in electric car leasing.

Jack Fitzgerald, president of Fitzgerald Auto Malls, which operates dealerships in Florida, Maryland and Pennsylvania, said he has seen a rise in the number of customers leasing electric cars. But he said concerns about electric vehicle range and availability of chargers, more than price, are holding back EV sales.

“That’s the main thing,” Mr. Fitzgerald said.

Auto industry lobbyists have warned that overly stringent rules could stifle electric vehicle sales, and have urged the administration to strike more trade deals to secure supplies of rare battery metals. But Paul Jacobson, GM’s chief financial officer, said the company has structured its electric vehicle operations to be successful regardless of federal rules.

“We are not proving the work to say this has to happen” regarding regulations, Mr. said. Jacobson told reporters Thursday. He added that if regulations change, “it’s not a sad thing for us.”

While the rules may cause headaches for automakers, they will likely benefit companies that plan to source batteries from factories in the United States.

“It’s actually good news for us,” said Siu Huang, CEO of Factorial, a Massachusetts company developing the next generation of electric vehicle batteries with backing from Mercedes-Benz, Hyundai and Stellantis, owner of Dodge, Jeep and Ram.

Obtaining large quantities of lithium, an essential element in batteries, can be difficult because most of the metal is processed in China. Huang said. She added that the rules will encourage investment in refineries located in the United States. “This will definitely be another incentive to build more local supply,” she added. Huang said.

John DeMaio, CEO of Graphex Technologies, which is building a plant in Michigan to process graphite for batteries, said the rules could temporarily slow electric vehicle sales by making it more difficult to qualify for the tax credit. But he added that it would encourage investment in local suppliers in the long term.

“It may be a whirlwind, but overall it provides certainty and clarity to keep people off the fence,” he said.

The rules will help advance the administration’s goals of building an American clean energy supply chain while also reducing emissions in the transportation sector, Deputy Treasury Secretary Wally Adeyemo said in a briefing with reporters.

“These changes take time, but companies are making investments and Americans are buying these cars,” he said.

Over the past year, companies invested $213 billion in manufacturing and deploying clean energy, clean vehicles, building electrification and carbon management technology in the United States, according to tracking by the Rhodium Group and the US Energy and Environmental Policy Research Center. Massachusetts Institute of Technology. This represents an increase of 37 percent over the previous year.

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However, the global electric vehicle industry remains largely anchored in China, which is the world’s largest manufacturer and exporter of electric vehicles. China produces about two-thirds of the world’s battery cells, and refines most of the metals that are essential to operating an electric car.

The rules also prevent automakers from sourcing the nickel used in their batteries from Russia, which is one of the world’s largest nickel producers.

One challenge facing automakers is developing systems to track all of their battery components through a long, often opaque supply chain.

The Treasury Department said vehicles that are incorrectly reported will be deducted from an automaker’s eligibility for tax credits, and automakers that commit fraud or intentionally ignore the rules could be deemed ineligible for the credit in the future.