For Southeast Asia, US Industrial Policy Might be a Risky Bet – The Diplomat

When work on a $4 billion manufacturing plant for Vietnamese automaker VinFast started in North Carolina in July 2023, Ted Osius, the pinnacle of the U.S.-ASEAN Enterprise Council, expressed a hope shared by many firms and governments within the Southeast Asian electrical automobile (EV) area: that they might be eligible for tax credit below the U.S. Inflation Discount Act (IRA).

These hopes have been made doable by Washington’s new security-focused industrial coverage strategy amid rising competitors with Beijing. As Nationwide Safety Advisor Jake Sullivan expressed in an April speech, Washington goals to forestall Beijing from weaponizing its dominance over world clean-energy provide chains. In step with this, the IRA, signed one 12 months in the past this week, was meant to construct a clean-energy manufacturing community that eases over-reliance on China by catalyzing personal investments and “friendshoring,” or recalibrating provide chains to pleasant international locations. The tax credit provided below Part 45W of the IRA, which affords as much as $7,500 for every EV purchased in the USA, are a key element of this coverage effort.

There are numerous situations that govern eligibility for these tax credit. For instance, ultimate meeting of the EV should happen in North America. No less than 40 % of EV battery minerals should even be extracted or processed in the USA or companions with whom it has free commerce agreements, although a U.S. Treasury Division ruling prolonged the definition of “free commerce agreements” to the essential minerals settlement with Japan.

Nonetheless, international locations with EV manufacturing aspirations comparable to Vietnam, or with EV battery ambitions comparable to Indonesia and the Philippines have all expressed curiosity in these tax credit. The monetary incentives are very interesting – by one estimate, South Korean EV battery makers may earn an annual collective subsidy of $8 billion from U.S. taxpayers based mostly on deliberate capability.

Nonetheless, the truth of implementing this tax credit score coverage is difficult. Not solely may geopolitical tensions drive strict necessities that restrict tax credit score eligibility, however broader uncertainty in U.S. politics may increase questions concerning the longevity of the IRA.

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One of many largest obstacles for Southeast Asian international locations seeking to qualify for tax credit lies within the IRA’s exclusion of EVs with battery parts manufactured or assembled by a “overseas entity of concern,” ostensibly referring to China.

Sadly for Washington, Southeast Asian international locations rely closely on Chinese language experience and investments to help their EV actions. Indonesia is the world’s single largest supply of nickel, however its nickel market is dominated by Chinese language firms that supplied the technological breakthrough to mass-refine nickel. Likewise, VinFast partnered with Chinese language battery producer Gotion Excessive-Tech for its EV line.

The presence of Chinese language firms in Southeast Asian mineral markets isn’t a matter of geopolitics. Chinese language firms merely have the knowhow and sources to assist construct their native industries. Nonetheless, whereas the USA has but to attract up detailed steering on what represent “overseas entities of concern,” it’s seemingly that Washington will do its utmost to forestall Chinese language firms from benefiting from the IRA.

The dangers are actual for Washington, with experiences that Chinese language corporations are investing closely in South Korean battery factories to use a loophole involving South Korea’s free commerce settlement with the U.S. to reap IRA tax credit. But the large concern for its Southeast Asian companions is how a lot collateral injury they could incur from any of Washington’s insurance policies vis-à-vis China.

Past geopolitics, there are numerous sensible challenges for the implementation of IRA tax credit. As South Korea found, Washington has been comparatively rigid over the necessity for ultimate meeting of an EV to happen in North America. Regardless that U.S. President Joe Biden personally thanked Hyundai Chair Chung Eui-sun for deciding to construct a $5.5 billion EV plant and battery manufacturing manufacturing unit in Georgia, Hyundai can be ineligible for tax credit till the plant is prepared in 2025.

These sensible challenges may be managed if international locations imagine that the advantages outweigh the prices. Sadly, an absence of belief in U.S. coverage route would have an effect on these calculations.

International commerce leaders have expressed worries over the longevity of the tax credit score scheme if Republicans reclaim the White Home in 2024, given what number of Republican lawmakers opposed the IRA’s passage. Democratic lawmakers, too, have criticized the IRA for bypassing Congress’ function in commerce issues. Even when Democrats retain the White Home in 2024, some occasion members have hinted at authorized motion to problem the Biden administration’s interpretation of “free commerce agreements,” elevating questions on Washington’s coverage route.

In the end, as Washington embarks on this extremely securitized model of commercial coverage towards an more and more fraught political backdrop, Southeast Asian international locations ought to pay attention to the dangers entailed of their potential investments. Signing extra essential minerals agreements, rising provide chain resilience, and even getting into the U.S. EV market are worthy objectives. Investing in a multi-billion-dollar manufacturing unit solely to reap these IRA tax credit, nevertheless, would possibly grow to be a dangerous wager with a questionable payoff.