Potential Title: Impact of New US Regulations on Chinese Battery Imports on Electric Vehicle Costs

The US government recently introduced new regulations to prevent the inclusion of Chinese batteries in cars sold in the United States, potentially raising the cost of electric vehicles for American consumers. The Biden administration's proposed rules would reduce subsidies for vehicles with Chinese-made battery components or those produced by companies closely affiliated with the Chinese government.

China leads the world in EV battery production, controlling nearly every aspect of the EV battery supply chain, as reported by the International Energy Agency (IEA) in 2023.

As of next month, vehicles containing these components will no longer qualify for the full $7,500 US tax credit after a 30-day public comment period. This tax credit is designed to help consumers save money when purchasing a new electric car.

The US Treasury, Internal Revenue Service, and Department of Energy have issued new guidelines that prohibit the use of parts made or assembled by "foreign entities of concern" (FEOC), which includes companies based in China, Russia, North Korea, or Iran, or those with significant government ownership from these countries. Starting in 2025, eligible clean vehicles cannot contain critical minerals that were extracted, processed, or recycled by a FEOC. Certain battery materials that are challenging to trace will be temporarily excluded to allow companies time to transition.

The rules could have a major impact on the supply chains of car manufacturers. According to the IEA, China produces two-thirds of the world's battery cells, while the United States only produces about 10%. China also leads in the global processing of minerals necessary for electric vehicle batteries, such as graphite and rare earths. The country has recently restricted exports of these materials, citing national security concerns.

The 2024 Hyundai Santa Fe makes its debut at the Hyundai press event during Automobility LA, the media preview day for the LA Auto Show, on November 16, 2023 in Los Angeles, California. (Photo by Robyn Beck / AFP) (Photo by ROBYN BECK/AFP via Getty Images)

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Soon youll be able to buy a Hyundai on Amazon

John Bozzella, president of the Alliance for Automotive Innovation, stated in a Friday blog post that the proposal would offer much-needed clarity to manufacturers. He added that the shift to electric vehicles necessitates a massive overhaul of the US industrial base and won't be accomplished quickly.

Tesla (TSLA), the leading company in the EV market, has issued a warning that the regulations may lead to an increase in the cost of some of its vehicles. Currently, the company's US website indicates that tax credits for two versions of the Model 3 sedan will be reduced from up to $7,500 to $3,750 starting in January. Additionally, the Model Y, which currently qualifies for the full subsidy, is also expected to have a reduced tax credit after the current month.

Tesla has been a loyal customer of CATL, the largest electric vehicle (EV) battery maker in the world, for a long time. However, this year, CATL has faced controversy in the United States due to its involvement in building an EV battery factory in Michigan for Ford (F). The $3.5 billion facility, which would be a wholly owned subsidiary of the US automaker, plans to utilize CATL's technical expertise to manufacture batteries and take advantage of EV tax credits. Ford has not yet provided a comment on how it would be affected by the change in regulation.

Doubling down

The new measures add to existing efforts by Washington to redirect auto manufacturing to the United States.

Biden's Inflation Reduction Act, introduced last year, stipulated that in order to qualify for the $7,500 credit, vehicles must be manufactured in North America. Additionally, a significant portion of their battery components and minerals production must also take place in North America, with at least 40% of the critical minerals used in the vehicle's battery needing to be extracted or processed in the United States or a country with a US free trade agreement.

Since its introduction, the 2022 law has prompted companies to reveal "almost $100 billion in fresh investments for clean vehicles and batteries in the United States," as per a statement from the White House on Friday.

Ford's electric F-150 Lightning on the production line at a facility in Dearborn, Michigan.

Jeff Kowalsky/AFP/Getty Images/File

Restricting the availability of tax breaks for cheaper cars may hinder Biden's aim of increasing EV sales to make up 50% of all new vehicle sales by 2030. A 2022 study by researchers at George Washington University found that financial incentives are crucial for the widespread adoption of electric vehicles. Globally, consumers have been resisting green policies, as many are unable or unwilling to bear extra expenses amidst increased inflation and interest rates.

Currently, of more than 103 EV models for sale in America, only about 20 vehicles qualify for some or all of the tax credit, according to Bozzella.

Electric cars manufactured by BYD are seen in this September 11, 2023 photo, lined up and ready to be loaded onto a ship at the international container terminal of Taicang Port at Suzhou Port in Jiangsu Province, China.

The image is courtesy of AFP/Getty Images.

Cheap electric cars are in demand worldwide, and this presents a challenging scenario for major car manufacturers. Despite the government not specifying which vehicles will become ineligible soon, the recent announcement implies that the list of eligible vehicles will not completely disappear by 2024, which was a significant concern for many.

European lawmakers are looking into China's state support for its EV industry amid a surge of car imports, posing additional challenges for Chinese EV makers. Beijing has criticized the investigation as a "blatantly protectionist act."

Chinas Ministry of Foreign Affairs had not responded to the new US rules as of early Monday afternoon local time.