In what may be the clearest sign of the rising economic and political importance of electric vehicles (EVs) to major economies, the US government has put in place rules favoring EVs that meet specific local content requirements for batteries and minerals.
Under guidance released in April by the US Department of Treasury following the Inflation Reduction Act, effective April 18, 2023, only EVs that fulfill specific mineral sourcing and battery pack content requirements will qualify for tax credits.
The Clean Vehicle Tax Incentives are non-refundable tax credits that reduce an EV buyer’s taxes by up to a maximum of US$7,500 for new EV purchases. Subject to a price cap (i.e., US$80,000 for SUVs, vans, and pick-ups and US$55,000 for other vehicles) and final assembly being done in North America (the US, Canada, or Mexico), the credit is made up of two parts.
Half of the US$7,500 tax credit – US$3,750 – comes from meeting a mineral sourcing requirement, and the remaining half from complying with the battery pack content requirement.
To be eligible for the mineral sourcing tax credit of US$3,750, an EV must have 40% of the value of its critical minerals from either the US or a free trade partner of the US. Critical minerals include lithium, cobalt, nickel, manganese, and graphite. This required percentage share will increase from 40% to 50% in 2024, 60% in 2025, 70% in 2026, and 80% in 2027.
The battery pack content requirement, meanwhile, requires that 50% of an EV’s battery components must be assembled in either the US, Canada, or Mexico. Like the mineral sourcing requirement, the required share of battery pack content will also progressively increase: 60% in 2024 and 2025, 70% in 2026, 80% in 2027, 90% in 2028, to finally 100% in 2029.
Right now, there are only 10 models that are eligible for the maximum US$7,500 credit: the Cadillac Lyriq, four Chevrolet models (Blazer, Bolt, Equinox, Silverado EV), the Chrysler Pacifica plug-in hybrid, the Lincoln Aviator plug-in hybrid, the Ford Lightning, and two Tesla models (the Model 3 Performance and the Model Y).
Our Perspective
There are two key themes that can be gleaned from the US government’s tax credit measure: a revival of industrial policy in developed economies, and an increasingly political dimension to EVs.
The onset of the semiconductor/microchip shortage for the automotive industry coinciding with broader supply chain restrictions due to the COVID-19 pandemic in 2020 has been the catalyst for many governments to seek greater control over supply chains of industries and materials. The economic stakes are particularly high: for example, in the European Union alone, it has been estimated that almost €100 billion in economic value-added was lost in 2020 and 2021 due to the chip shortage.[1] In Japan, new car sales slumped in 2022 to their lowest-ever total since 1977.[2]
With the world’s largest economies also being the world’s largest vehicle producers and exporters, it is unsurprising that the governments of these countries—mainly the US, China, the European Union, Japan, and India—would step in with policy measures that would minimize losses in consumer spending and export and tax revenues associated with their auto industries. The US Inflation Reduction Act that led to these EV tax credit rules are just one example of governments being more aggressive in terms of policy-making to specifically strengthen what they believe are strategic industries. Other recent notable examples are India’s September 2021 Production Linked Incentive (PLI) scheme for the semiconductor industry and Japan’s April 2023 announcement of up to US$1.8 billion in subsidies for battery and semiconductor projects.
The increasingly political dimension to EVs, in turn, is a consequence of the revival of industrial policy to bolster the automotive industry. While the US government making EV tax credits contingent on meeting local assembly and sourcing requirements is obviously an attempt to facilitate a revival of US manufacturing, what is probably more important to monitor moving forward is how industrial policies related to the mining and processing of raw materials for EVs are going to be used to advance non-economic interests, even in countries where there is little or no capability to locally manufacture EV batteries or EVs.
Referring again to the US Treasury’s updated guidelines on the EV tax credit, the battery pack content rules mean practically all imported EVs in the US market are not eligible for the maximum possible tax credit for EV purchases (US$7,500). However, the latest EV tax credit guidelines allowing for critical minerals to come from countries with whom the US has an agreement clearly means that the rules were designed to avoid upsetting historical allies (Japan and the European Union), while advancing US security interests.
It is going to be fascinating to see how governments around the world will use EVs not just to set or achieve economic targets, but as foreign policy tools. In this new age of industrial policy in both advanced and emerging economies[3], automotive industry players need to be vigilant.
[1] https://www.allianz-trade.com/en_global/news-insights/economic-insights/european-automotive-semiconductor-shortage.html
[2] https://www.asahi.com/ajw/articles/14808691
[3] https://www.weforum.org/agenda/2023/05/growth-summit-industrial-policy-officially-comeback-chief-economists/
