Challenges created by the IRA

Cheong In-kyo

The author is a professor at the Department of International Trade at Inha University.

The Inflation Reduction Act (IRA) U.S. President Joe Biden signed on Aug.16 is an extension of his campaign slogan “Build Back Better,” which envisions measures to buttress the middle class. Although the law has the goal of reducing inflation, the details of the act are mostly unrelated to curbing consumer prices, except for some reduction in drug prices for medical insurance coverage. Instead, the keystone of the law is to promote the use of renewable sources like solar and wind power and electric vehicles (EVs). The plan also aims to bolster the approval rating of Biden and help the Democratic party win more seats in the mid-term elections in November.

The IRA was tabled by the Democrats, who dominate the House of Representatives and control exactly half of the 100-member Senate. Under such circumstance, Democratic Sen. Joe Manchin opposed the act that the Republicans would never support. He kept opposing tax credits for consumers with a bill aimed to proliferate EVs and reduce fossil fuel consumption, as he represented West Virginia that produces coal. The DP leadership sought a behind-the-scenes negotiation to persuade inner opponents.

Senate majority leader Chuck Schumer and other Democratic leaders met with Manchin privately throughout the summer to package the bill to appease opponents. The work on IRA had been so discreet that even the highly informative Pharmaceutical Research and Manufacturers of America could not attempt lobbying to stop the provision of controlling prices of prescription medicines.

Samsung Electronics has been willingly complying with the Biden administration’s promotion of the chip industry in America by vowing to add a next-gen foundry in the country. Hyundai Motor and Kia also plan to build their first EV-focused plants in the U.S. Korean battery makers will build a combined 11 plants across North America by 2025. Korea could not but feel betrayed by the clandestine and hurried enactment of the bill that restricts tax benefits to EVs assembled outside the U.S.

To become eligible for tax grants this year, EVs must be assembled in the U.S. From next year, EVs must be fully produced on U.S. turf and use minerals and battery materials sourced from the U.S. or countries with free trade agreements with the U.S. About 10 EV brands produced in the U.S. are entitled to tax benefits. Hyundai and Kia cars shipped from Korea are excluded.

Given the reaction, Hyundai Motor Group likely was not aware of the details of the bill in advance. The law has been criticized, as U.S.-based Korean carmakers cannot fully meet the requirements for mineral sourcing by next year.

The U.S. argues that the move is necessary to contain China. Korean battery makers with high reliance on Chinese suppliers also are under challenge. The IRA aims to stamp out geopolitical risks from China on batteries and EVs following chips. Even as China excels in battery material and technology, the U.S. chooses to erase Chinese influence by prioritizing security over economic interests.

Carmakers from auto-strong Germany and Japan also could not lobby against the bill due to the stealthy negotiations. The bill was softened from the original outline to reflect the demands from Sen. Manchin. Since the bill was enacted hastily to meet the November elections, some of the provisions could be amended through enforcement decrees.

Korea must first draw concessions through bilateral talks with the U.S. instead of filing complaints with the World Trade Organization or the FTA arbitration mechanism. The government must keep up senior-level negotiations after a recent visit by a vice-ministerial delegation to Washington.

We will have to work together with the European Union and Japan, if necessary. Korea must set its negotiating and lobbying strategy by also taking into account the post-election environment in the U.S.
Translation by the Korea JoongAng Daily staff.