South Korea-US Relations Are Troubled by the Inflation Reduction Act

The Inflation Reduction Act (IRA), one of U.S. President Joe Biden’s major domestic victories, is unexpectedly generating strife in ties between the United States and South Korea.

Senator Joe Manchin insisted that any new legislation be written to lower domestic inflation, which led to the creation of the IRA, which was intended to save some of the Biden administration’s “Build Back Better” campaign. The Act offers major funding to combat climate change while simultaneously applying additional levies and bargaining leverage to some of the causes of inflation. Tax incentives to stimulate the adoption of electric cars (EVs) in the United States are one of the essential elements to that purpose, but these measures have also become tense with South Korea.

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South Korea views the EV sections of the Inflation Reduction Act as being against both the expanding economic connection between the two nations as well as trade regulations. An official from South Korea described the measure as a “betrayal” and warned that it would make collaboration in other spheres of the relationship more difficult. The CHIPS and Science Act, along with National Assembly Speaker Kim Jin-suggestion, pyo’s may make it more challenging for South Korean companies to fulfil their commitments to invest in the US, and a Korean columnist argued that Biden’s trade policies are no better than those of former President Donald Trump’s “Make America Great Again” initiatives.

Senior Korean officials have visited the US in order to discuss this matter with Congress and their American colleagues. It’s also possible that the subject may be brought up at the presidential level.

The United States has so far responded favourably to Seoul’s request to continue talking about the IRA-related concerns. For instance, Jose W. Fernandez, the undersecretary of state for economic development, energy, and the environment, stated, “We take the Republic of Korea’s concerns seriously and are ready for meaningful conversations.” However, U.S. officials have not yet offered any suggestions on what they may do to allay South Korean worries.

The Functions of the Inflation Reduction Act

The most significant piece of climate change legislation in American history is the Inflation Reduction Act. Between 37 and 41% less greenhouse gas emissions from 2005 levels are anticipated in the US by 2030. If passed, the proposal would represent a significant step for the United States in the direction of the global objective of lowering emissions sufficiently by 2050 to avoid a rise in the world average temperature of more than 1.5 degrees Celsius.

However, South Korea is mainly concerned with the laws pertaining to EVs and EV batteries.

A $7,500 tax credit is available under the Inflation Reduction Act for electric vehicles made in the country. Presently, 26 of the 32 EV models available in the US are made here at home. Only the Nissan Leaf and a few European models are produced in the US of them. Currently, all of the EVs sold by Kia and Hyundai are produced abroad, disqualifying them from the tax credit.

The tax credit is subject to new limits starting in 2023. Vehicles must still be made in the United States, but additional specifications have been imposed regarding the mineral composition and EV battery parts. 40% of the minerals used in an EV battery must originate in the United States or from U.S. FTA partners in order to qualify for the tax credit’s maximum amount of $3,750. For the remaining $3,750 of the total tax credit, 50% of the components must originate in the United States or from U.S. FTA partners.

By 2027, this need will increase to 80% for minerals, and by 2029, it will be 100% for components. Vehicles utilising minerals or parts from questionable foreign businesses won’t be qualified for the EV tax credit after 2025, nevertheless.

As China is now the leading miner or processor of many of the minerals required to create EV batteries, the provisions for EV batteries are intended to support supply chains in the United States and among U.S. FTA partners. For instance, while around 50% of the world’s lithium is mined in Australia, more than 60% of it is processed there.

Any EV battery manufacturer will find it difficult to achieve these standards, as the case of lithium demonstrates. More than 80% of South Korea’s imports of lithium, cobalt, and graphite—three essential materials for EV batteries—come from China. China manufactures 85% of the world’s battery anodes and 70% of its cathodes, according to the International Energy Agency. Almost 85% of the anodes and 73% of the cathodes that South Korea uses in its electric vehicle batteries are imported from China.

Why There Are Tensions Between South Korea and the IRA

The worries of South Korea go beyond the specifics of the Inflation Reduction Act. In particular, Seoul has engaged with the Biden administration on supply chain resilience, semiconductors, and climate change to strengthen commercial ties between the US and South Korea. As a result, South Korean businesses have committed to a number of sizeable investments in the US.

In order to allay American worries about semiconductors, Samsung said during the South Korea-U.S. Summit on 2021 that it would invest $17 billion in a new foundry there. This year, SK Hynix revealed that it will invest $15 billion in R&D and a materials and packaging plant.

Additionally, U.S. and South Korean businesses have been working together more on EV investments. South Korean companies are in charge of a large portion of the investment in EV battery manufacturing in the United States and will supply EV batteries to producers in the United States, Japan, and Europe in addition to Korean automakers. In order to increase the manufacture of EV batteries, South Korean companies would together invest more than $13 billion in the United States by 2025.

Hyundai and Kia also stated earlier this year that they will invest $5.5 billion in a combined EV and EV battery production plant in Georgia, in addition to their investments in EV batteries. Once it is operational in 2025, the new facility should be able to generate 300,000 EVs annually.

These EV-related investments are anticipated to generate 35,400 more employment than those made in the EV sector by any other nation.

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Although there are worries that the IRA’s demand that EVs be put together in the US has hurt Korean companies, these worries have been made worse by Seoul’s efforts to increase economic ties with Washington. Additionally, they go against the KORUS FTA’s national treatment provisions.

The Inflation Reduction Act was largely meant to solve domestic inflation and climate change issues in the United States, but it has unintentionally strained relations between the United States and South Korea. As South Korean businesses create new supply chains to satisfy the restrictions against components and minerals from foreign organisations of concern, the IRA may actually help them in the medium run by locking up the U.S. EV battery market. However, in the near term, it has harmed South Korean EV chances in the American market and, more crucially, it has harmed ties with a significant ally of the US.