The US Inflation Reduction Act – The EV World is Watching

Therefore, this alert focuses on the implications of the IRA on the global supply chain and their interplay with longstanding US trade rules. 

Background

From a supply chain perspective, the new requirements for the Clean Vehicle tax credit include North American final assembly and sourcing restrictions on EV battery components and critical minerals. In addition, starting in 2024, vehicles cannot have any battery components sourced from a foreign entity of “concern,” which includes China. And, starting in 2025, EV batteries cannot have any critical minerals sourced from a foreign entity of concern, which includes China.

More details on these credits can be found here.

What We Know So Far

• The US Treasury Department and the Internal Revenue Service have been tasked with the IRA’s rule-writing. The IRA requires certain “proposed rules” to be published by March 2023.
• In January 2023, the Treasury Department published its “first thoughts” to begin the process of IRA implementation, particularly for Section 30D – “Anticipated Direction of Forthcoming Proposed Guidance on Critical Minerals and Battery Component Calculations for the New Clean Vehicle Credit.”
• Much of the clarifying guidance for the production incentives and credit provided by Section 45X has yet to be released.
• Key US trade partners have voiced strong concerns in regard to these production credits and other provisions. The European Union has stated that “[w]e are deeply concerned with the domestic content and local assembly requirements in the current proposed text of the [IRA] electric vehicle tax credit.”

Lingering Questions

The devil still resides in the fine print. For companies with cross-border operations, the IRA rules and definitions will be important to watch. For instance:

• How will “final assembly” in the IRA’s North American requirement be interpreted?
• How will the global supply chain for electric vehicles, as currently constructed, satisfy the new critical minerals and battery component requirements, including minimum North American and/or US trade partner sourcing percentage thresholds?
• If most EVs rely on the Chinese battery supply chain to some extent, will it be possible for any EVs to be eligible for the consumer EV credit?  If not, is there any wiggle room for the Treasury to promulgate rules to allow for some form of transition or delay?
• Will the IRA’s North American production and sourcing requirements align or differ from the US commitments with the United States-Mexico-Canada Agreement (USMCA), World Trade Organization, and other trade agreements?
• Will US trade partners launch trade actions against the United States based on the IRA?

How We Can Help

EV assemblers and parts suppliers who must rely on the global supply chain will need to find bridge solutions to remain competitive. For example, strategic application of USMCA regional value content rules provide a unique and competitive opportunity for many companies. Even companies seeking to benefit from the provisions of Section 45X will need to understand the trade rules, as many materials used in Section 45X-eligible production require importation. Our team at ArentFox Schiff has been working with the automotive and vehicle sector to provide executives with a business understanding of these rules and how they apply to their specific supply chains.

The AFS Electric Mobility team will stay on top of developments as they arise throughout 2023. Readers can subscribe to our alerts and our podcasts at here.