President Biden signed into law the United States Inflation Reduction Act (IRA) on August 16. The IRA is a law designed to alleviate soaring inflation in the U.S. The bill’s primary purpose is to invest $485 billion over ten years in energy security, climate change, health care, and deficit deduction. 80% of the budget invested in the bill will be used to counter climate change, strengthen national energy security, and provide tax credits for purchasing electric vehicles.
With the IRA, it is expected that there will be a significant change in domestic industry. The domestic automobile industry is expected to be hit by the IRA. According to the IRA, batteries must be supplied or recycled from the U.S. or countries that signed free trade agreements with the U.S. Tax credits will be given to electric vehicles that are finally assembled in North America. Hyundai Motor Ioniq 6 and Kia EV 6 are manufactured in Korea and exported to the U.S. Therefore, Hyundai and Kia will be excluded from subsidies. Manufacturers that produce electric vehicle batteries in Korea should reduce their dependence on Chinese battery materials. More than 95% of their core materials are imported from China. Domestic renewable energy companies are expected to benefit significantly because they can receive tax credits for investment in renewable energy facilities and technologies under the IRA.
Korea, an export-oriented economic structure, is in danger by the IRA. The Korea Automobile Manufacturers Association predicts that the export of 100,000 Korean electric vehicles will be disrupted yearly due to the IRA. In response, South Korea’s Foreign Minister Park Jin and Chairman Koo Ja-yeol of the Korea Federation of Medium Business requested a moratorium until 2025, when Hyundai Motor’s electric vehicle plant in Georgia will be completed.
Chinese industry is expected to be hurt by the IRA. China has superior technology in electric vehicle batteries compared to other countries, and CATL, a Chinese battery manufacturer, is the world’s leading battery manufacturer based on its superior technology. However, if the IRA is implemented, it will block China’s export routes. As the U.S. restricts semiconductor exports to supercomputers, China, developing technologies based on U.S. GPUs and Software, is expected to decline its technology level. Due to the IRA, BMW, a German car manufacturer, decided to build an electric vehicle plant in the U.S. instead of its own country. The German economy minister said corporations are leaving Europe for the U.S. due to strong subsidies, adding that the world should not fall into a trade war.
To improve economic activity within a domestic economy, countries are increasingly resorting to protectionism. Countries are promoting their priorities, and protectionism is expanding. The IRA is scheduled to take effect next year. The U.S. has decided to invest 4 trillion won in replacing electric vehicle battery raw materials highly dependent on China with made in America. A White House official said if the U.S. cannot mine and process raw battery materials, the U.S. will have to rely on foreign supply chains that are difficult to trust, disrupting the development of electric vehicles. The U.S. is asking South Korea to participate in the Chip 4 Alliance, a semiconductor cooperation. If Korea participates in the Chip 4 Alliance, China, Korea’s largest semiconductor exporter, is likely to protest. The IRA is expected to have a significant impact on diplomacy as well as trade in Korea.
