The United States' Inflation Reduction Act

Hello, readers! Today, we are covering:

Index

Zoom In

Don't forget to leave your feedback below!

The United States' Inflation Reduction Act

Writer: Daeho Park, Jiyoung Kang

Editor: Sunny Um

Senior Editor: Regine Armann

Editor-in-Chief: Fred McNulty

Illustrator: Ah-young Kim

A recently-passed piece of major domestic legislation in the United States is causing huge controversy in South Korea.

On August 16 this year, the Inflation Reduction Act (IRA), worth USD $740 billion in total and consisting of USD $440 billion in policy enforcement and USD $300 billion in fiscal deficit reduction, was signed into law by U.S. President Joe Biden.

In response to climate change, it stipulates that 375 billion will be invested to reduce greenhouse gas emissions to 40% by 2030.

To this end, it also includes tax deductions of up to USD $4,000 for used cars and up to USD $7,500 for new cars that meet certain requirements, in order to expand the supply of electric vehicles. However, electric vehicles using Chinese core minerals and batteries will be excluded from the benefits, and only electric vehicles using batteries and core minerals produced in North America.

All Korean electric vehicles, including the Hyundai Ioniq 5 and the Kia EV6, which are currently sold in the U.S., are produced in Korea, raising concerns that they will be at a disadvantage. If Korean electric vehicles are excluded from the subsidy benefits, it is highly likely that Hyundai’s plan to lead the U.S. electric vehicle market by introducing new lineups such as the Ioniq 6 and the EV9 next year will be disrupted.

The most noticeable characteristic of the Biden administration is its emphasis on eco-friendly policies. In the past, the Trump administration withdrew from the Paris Climate Accords and sought to increase oil and gas production, while the Biden administration is now trying to respond to climate change and foster an eco-friendly energy industry. The IRA, which contains this vision for green energy, was recently passed by the U.S. Congress. After the IRA was passed, the news that Korean electric vehicles will be excluded (Korean link) from the electric vehicle tax credit made the rounds in Korea. However, there is actually more to the IRA than electric vehicles.

Although the main focus of the IRA is to reduce inflation – hence its name – it actually contains other initiatives. The core of the IRA is to provide USD $369 billion (about ₩480 trillion) in the form of tax credits and subsidies to new and renewable energy and electric vehicle businesses. This is the largest response to climate change in U.S. history. It aims to reduce U.S. greenhouse gas emissions by about 40% by 2030.

This act demonstrates the United States’ concerns about how to expand the renewable energy market. In fact, the challenge will not only be shouldered by the United States, but by all countries that have declared carbon neutrality. The IRA supports the green energy industry while at the same time taking an inclusive stance towards the oil and gas industry. Lawmakers argue that is because oil has to play an important role in maintaining the stability of energy prices during the period when the renewable energy industry is expanding. Inflation cannot be reduced when oil prices rise, and it is difficult to develop new and renewable energy sources in such a situation. As energy costs rise, the public prefers to increase supply, irrespective of the energy source, to stabilize prices.

On August 23 (Korean link), Bloomberg predicted that Korean renewable energy companies would in fact benefit from the IRA, referring to solar power company Hanwha Solutions (한화솔루션) and wind power company CS Wind (CS윈드). It stated that the tectonic shift in energy transition induced by the United States will act as an opportunity for domestic renewable energy companies. The article mentions that Hanwha Solutions will receive USD $200 million in tax credit next year by passing the IRA, adding that Korean renewable energy companies are considering additional investments in the U.S. market.

On the other hand, although passing the IRA works as an opportunity for domestic Korean companies, there are concerns that it may result in a crisis for the country. The outflow of related companies overseas could lead to major job losses in Korea in the mid to long term.

Critics point out that the Korean government's response was late, and that it should have moved faster, that the South Korean government should have actively carried out its concerns through diplomatic channels before President Biden's signature.

For example, although President Yoon recently met with Arizona governor Doug Ducey about the bill, he neglected to meet with Nancy Pelosi—who controls the U.S. House of Representatives—when she visited Seoul. Since the bill is signed and sealed now, Korea's options have been narrowed.

The Biden administration's move is even more painful for the Yoon administration because it promised “close ties and cooperation between the two countries” during President Biden's visit to Korea just three months ago.

In May, President Biden visited Korea and thanked Samsung Electronics and the Hyundai Motor Group, which decided to make large-scale investments in the United States side by side, leaving with a huge bundle of investments. This is why some say that Korea has been hit in the back of the head by the U.S. At the time of Biden's visit to Korea, there was criticism that Korea has gained nothing. Adding the exclusion of subsidies for Korean electric vehicles has cast serious doubt on the government’s diplomatic abilities.

A Korean government delegation will visit U.S. administration agencies and Congress, including the U.S. Trade Representative (USTR) and the Treasury and Commerce Department, to convey South Korea's concerns and opinions (Korean link) on the electric vehicle subsidy policies laid out in the new IRA.

Yoon Kwan-seok (윤관석), chairman of the National Assembly's Trade, Industry, and Energy Small and Medium Venture Business Committee (산업통상자원중소벤처기업위원회), urged the government to take comprehensive measures, saying, "We are also preparing a congress resolution to express concerns about discrimination against Korean electric vehicles and batteries."

The government believes that the IRA is likely to violate the Korea-U.S. Free Trade Agreement (FTA) and World Trade Organization (WTO) regulations, and plans to actively consider whether to file a complaint.

Asked whether the IRA violated the Korea-U.S. FTA or WTO rules, Minister of Trade, Industry, and Energy Lee Chang-yang (이창양) said at the National Assembly's Commerce and Industry Committee, "The government cannot officially say it is a violation, but it will proceed with the WTO filing process if necessary."

Minister Lee said, "The Korea-U.S. FTA regulations require us to choose between the Korea-U.S. FTA or WTO procedures," adding, "We need to carefully compare the two, but if we go through the WTO procedure, we can cooperate with Japan and EU countries."

Trade Minister Ahn Deok-geun (안덕근) of the Ministry of Industry also said, "There is a very high possibility of violating the Korea-U.S. FTA," adding, "There is a possibility of violating the principle of non-discrimination of the Korea-U.S. FTA."

"Next week, the head of the trade department will visit the United States, and there will be a meeting with the U.S. Commerce Minister around mid-September, so I will also visit the U.S.," he said. "We will convey domestic concerns to reduce damage to our companies."

Outro

As it stands now, South Korea is at the mercy of lawmakers in the United States. Unfortunately, with midterm elections coming up in November in the U.S., it seems unlikely that legislators would move to make it easier to import foreign made automobiles. Furthermore, it remains unclear how effective the Yoon administration's lobbying will be given that the IRA was such a major accomplishment for the Biden administration.

From the sole perspective of rolling back the restrictions on electric vehicle tax credits, it is unclear whether it would be more advantageous for South Korea if the Democratic Party or the Republican Party is victorious in the United States later this year.

While the Democrats have more influence from environmentalists who favor getting as many electric vehicles on the road as possible, revising one of the Biden administration's chief accomplishments will likely not be a high priority. On the other hand, Republicans have been more critical of the IRA as a whole, but they are also critical of environmentalism, with a solid majority of the party denying the existence of manmade climate change.

What also remains unclear is the extent to which President Yoon would be willing to criticize the United States openly. This is due to Yoon having run on an explicitly pro-U.S. campaign platform, not to mention the pro-U.S. sympathies of the Korean right-wing.