EV Tax Credits to Exclude Vehicles or Parts Made in China

President Biden has introduced new legislation that would simultaneous make it more difficult for China to compete in the U.S. EV market while potentially slowing EV domestic growth.

Electric vehicles adhere to the same unwritten guidelines as most green and renewable technologies – you pay a higher upfront cost than their fossil fuel cousins while enjoying long-term savings.

And what makes this reverse Faustian Bargain even more attractive is tax credits.

As it stands, consumers can shave up to $7,500 off the cost of new EVs in tax credits, as part of the Biden administration’s goal to make 50% of all new vehicles electric by 2030.

But by electrifying the U.S. (and the world), we’ve handed a huge coup to China, which dominates EV and key mineral production, and President Biden is trying to rectify that.

His new proposed guidance takes a phased approach to indirectly shutting out China from the U.S. EV market, with various EV tax credit tiers contingent on not sourcing a certain percentage of parts and minerals from a foreign entity of concern (FEOC), aka China.

It begins modestly, with the $3,750 tax credit requiring 50% of the value of the battery components be manufactured or assembled in North America as of last year. From 2024-2025, that percentage climbs to 60%, all the way up to 100% in 2029.

The critical mineral requirements are similar – in 2023, 40% of the value of the critical minerals contained in the battery had to be extracted or processed in the United States or a country with which the United States has a free trade agreement or be recycled in North America, and by 2027, the applicable percentage is 80%.

Naturally, the $7,500 credit has even more stringent requirements, with the 2025 cutoff introducing a battery component and critical mineral mandate, whereby 60% of battery components and critical minerals can’t originate from FEOCs.

And of course, the new rules polarized lawmakers and trade groups, with even supporters acknowledging the guidance could – for all intents and purposes – squeeze certain models out of the U.S. market. And if certain models can no longer compete, it could slow down the U.S. electrification process.

John Bozzella, CEO of the Alliance for Automotive Innovation, toed the line, claiming the rules strike “a pragmatic balance” that will ensure “the list of eligible vehicles won’t completely disappear in 2024.”

On the other hand, Robbie Diamond, founder and CEO of the advocacy group SAFE, claimed that “today’s guidance doesn’t go far enough to ensure these credits maximally boost U.S. and allied production.”

For better or worse, the new guidance will have a dramatic impact on domestic EV production.