Seoul, HMG scurry to respond to US IRA stripping of tax credits to Korean EVs

[Photo by EPA Yonhap]

South Korean government will continue to argue for the conflict in the bilateral Free Trade Agreement as well as the World Trade Organization (WTO) rules as the U.S. Inflation Reduction Act (IRA) puts brake on the strong drive of Korean-made green vehicles on U.S. roads.

The IRA that immediately went into effect upon signing by President Joe Biden on Tuesday strips full-electric Ioniq of Hyundai Motor and EV6 of Kia Corp. of tax grant.

The act changed the availability of EV tax credits under Biden’s “Buy American” rule that spurs production and purchases of Made in America EVs. Only new EVs assembled in North America are now qualified for the up to $7,500 credits.

Korean brands have been excluded from the list of 21 EV models produced in North America by Audi, BMW, Ford, Chrysler, Lucid, Rivian, and Mercedes Benz, according to U.S. Department of Energy.

Hyundai Motor Ioniq and Kia EV6 lost the tax credit from Wednesday, which could halt strong sales of green fleet that have pushed Hyundai Motor Group to No. 5 rank in sales from previous No. 7 in the first half.

The move has startled the Korean automaking group as well as the government as the change was expected to take place from early next year.

Hyundai Motor fell 2 percent Thursday after a 3.8 percent loss in the previous session and Kia 2.5 percent after previous 4.02 percent fall.

The exclusion of Korean EVs from the tax credits list comes despite concerns delivered by Seoul to Washington before passage of bill.

“We are reviewing counter measures from various angles as to limit damage on Korean EV manufacturers,” said an unnamed official from the Ministry of Trade, Industry and Energy on Wednesday.

The Korean government remains careful, however, on dealing the issue as it could develop into an international dispute.

Seoul plans to carry out a detailed analysis of the clauses in the Inflation Reduction Act and make formal position on the issue. Measures could include bringing the issue to the World Trade Organization (WTO) and referring to Korea-U.S. free trade agreement.

Trade Minister Ahn Duk-geun said last week that Seoul has told Washington about the concerns that the law may violate trade norm such as Korus FTA and WTO arrangement and asked U.S. authorities to ease conditions that limits to those EVs assembled only in the U.S.

It remains uncertain, however, whether Korea will gain benefits through WTO petition.

“The Inflation Reduction Act is a discriminative action against [Korean manufacturers],” said Cheong In-kyo, professor of international commerce at Inha University. “International conflict has been widely foreseen.”

Cheong, however, noted that functions of WTO appellate body have been suspended for several years and it remains unclear when results will come out after filing a petition.

“The Korean government should consider the ramifications of taking the issue to the WTO given the trend of intensifying ties between Korea and U.S.,” he said.

Seoul is also mulling utilizing FTA.

“The Inflation Reduction Act could be in violation of the Korus FTA that states national treatment obligation,” said Jung Ha-neul, head of System for International Law and Order. “There is possibility that the rule does not fulfill performance requirement.”

National treatment under Korus FTA requires each party to treat the goods of foreign products as favorable as that of regional goods.

Korea could raise an issue that the U.S. has violated such clause that bans unfavorable levy of taxes or fines on import goods versus regional goods.

Kia EV6

The performance requirement is a clause that bans unreasonable imposition of duty such as requiring foreign investors to use local raw materials. The Inflation Reduction Act may go against this clause as EVs produced with materials and components produced in a particular country are not subject to tax credits.

The U.S. rule could also be in violation to the WTO’s agreement on subsidies and countervailing measures.

Seoul may also raise an issue with the most-favored nation treatment clause in the Korus FTA that states each party to impose preferential measures granted to investors or products of other countries to contracting FTA parties.

“Trade disputes change depending on details of fact relevance so it is difficult to conclude violation of duty,” Cheong said. “Extra credits that require final assembly of EVs in the U.S. may also be in violation of import substitution payment ban requirement under General Agreements on Tariffs and Trade.”

Industry Minister Lee Chang-yang is expected to convene an emergency industry meeting next week to discuss measures with companies in automobile, battery, and chips sectors.

Hyundai Motor has not released a formal response, but it is expected to fasten schedule for EV production in the U.S. The company plans to add EV lines at its Montgomery facility. It earlier announced to invest $7.4 billion to create EV-focused production facility in the U.S. by 2025.

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