The Spillover Effect of South Korea’s IRA Problem

North Korea may have conducted a record number of missile tests in 2022, but the ongoing war in Ukraine has put Pyongyang’s aggressions on the back burner for many in Washington. Even Seoul has not focused on the antics of Kim Jong Un in recent months when it comes to defining priorities in its relations with Washington. Rather than focusing on the persisting risks in the Korean Peninsula and the challenges both countries face in confronting North Korea’s military ambitions, there is a growing wedge between South Korea and the United States over trade relations.

When U.S. Vice President Kamala Harris met with South Korean President Yoon Suk-yeol in late September, the conversation was dominated by Seoul’s concerns about South Korean automakers not being able to benefit from the tax credit afforded to electric vehicles manufactured in the United States under the Inflation Reduction Act (IRA). The confrontation between President Joe Biden and Yoon is being closely watched by close U.S. allies across Asia and beyond amid concerns about the difficulties for Washington balancing its domestic interests and foreign policy agenda.

One of the three key laws passed by Congress to bolster U.S. economic competitiveness, the IRA has also been heralded as the driving force to jump-start environmental sustainability and decarbonization in particular. It is foremost a driver for domestic growth within the United States that looks to incentivize the adoption of clean emission technology at home. For the Biden administration, it is a significant step forward in delivering on its campaign promise of investing in a green transition. At the same time, the EV provision is yet another means for the United States to increase its ability to challenge China’s current dominance of mineral processing for batteries needed in EVs by enhancing U.S. domestic production capabilities for EV battery production.

But just as the United States cannot push back against China’s global dominance alone, it cannot increase domestic EV battery production without partners. South Korea has proven to be a critical ally in that endeavor. Hyundai had announced plans to invest $5.5 billion in an EV plant in Georgia in addition to another $5 billion to build an EV battery plant in the state together with SK Innovation. South Korea has recently emerged as the biggest investing country in both Georgia and Kentucky, and given the alignment of Korean investment with U.S. strategic interests for growth as well as competitiveness, the two countries should now be enjoying a new dawn in economic relations.

Instead, the IRA stipulates that the $7,500 tax credit per vehicle can only be applied to EVs manufactured in the United States – that is to say, EVs produced domestically by Tesla, General Motors, and Toyota. Korean EVs, meanwhile, are exempt from that rule since they are made outside of North America. The Yoon government has been pushing hard to change the IRA’s rules, as have European automakers that are similarly exempt from qualifying for U.S. EV tax breaks.

From a foreign policy perspective, it would be prudent for the Biden administration to acquiesce to the South Korean government’s demand that Korean EVs also qualify for the IRA EV goal to lower the cost of green cars and thereby boost the adoption of environmentally sustainable technology. The fact that Korean companies are critical to ensure that the United States can indeed meet its goal to counter Chinese dominance in the EV battery market simply cannot be dismissed.

From a political perspective, however, offering tax breaks to foreign EVs dilutes the imperative of the White House to enhance domestic resilience and competitiveness. The IRA passed with bipartisan support before the midterms, and now both Democrats and Republicans are eying the upcoming 2024 elections. As campaigning for votes ramps up, the need to press ahead with policies that demonstrate the strength of the United States and the interests of U.S. workers will become especially acute. Yet that is cold comfort to U.S. allies and partners worldwide, especially in Northeast Asia.

Since taking office two years ago, the Biden administration has repeatedly emphasized the importance of partnerships and working together with like-minded partners, particularly in facing common threats confronting the Indo-Pacific. Certainly, the president, cabinet members, and senior government officials have stepped up efforts to engage with allies and partners in the region. Yet the latest confrontation between Seoul and Washington over the provisions of the IRA – and, more broadly, how foreign governments can help further the U.S. goal for domestic resilience – has actually increased wariness about how partnering with Washington will unfold in the future. While expectations for FDI into the United States to be completely transactional may be unrealistic, dismissing the impact of sizable investments that further the strategic competitiveness of the United States is hardly the foundation of building a relationship of trust in the future.

South Korea’s ongoing conflict with the United States over the IRA’s EV provisions may at first blush seem simply as a concern for a specific industry and for certain corporate interests in particular. Yet the outcome of tensions between the two sides will not only be closely watched by Tokyo, Taipei, Berlin, and beyond, but may also shape the future strategies of key U.S. allies in determining their economic ties with the United States in coming years.