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Washington sources say Korea, US can find middle ground to minimize impact of US IRA
By Kim Yoo-chul
Despite the victory of U.S. President Joe Biden's party in the November midterm elections, the Inflation Reduction Act (IRA) remains a tricky issue that has complicated relations between the United States and South Korea.
In August, Biden officially signed the IRA into law. The core purpose of the law is aimed at tackling rising inflation in the United States by cutting the fiscal deficit as well as energy and healthcare costs.
Plus, amid Washington's continued rivalry with Beijing in pursuit of supply chain resilience, the White House is using the IRA as a tool for the renaissance of U.S. manufacturing and improving its job markets, as the law offers federal tax credits for purchases of products manufactured on U.S. soil, backing Biden's eco-friendly agenda.
But the key point of concern, at least from Korea's standpoint, is despite Seoul's full support of the Biden administration's political and economic initiatives, the IRA poses complications for the Yoon Suk-yeol administration.
Under the IRA, Korea's top two carmakers ― Hyundai Motor and affiliate Kia ― are excluded from the U.S. federal credits of up to $7,500, because the law stipulates that such financial incentives are limited to vehicles classified as domestic and made in North America.
But given the massive investment commitments confirmed by top Korean exporters, including Samsung Electronics, LG Energy Solution (LGES), SK and Hyundai Motor after Yoon and Biden's agreements made in May to boost economic security cooperation, politicians and government officials are asking U.S. lawmakers and senior officials inside the Biden administration to "revise" the IRA.
A Korean joint delegation of the government and the National Assembly led by Trade Minister Ahn Duk-geun recently met with some U.S. senators and congressmen in Washington, D.C., and requested a provision of a three-year grace period for Korean manufacturers planning to invest in the U.S. But the visit did not generate any substantial outcomes in terms of addressing key outstanding concerns regarding the IRA.
Chance are very low, however, that the Biden administration will revise the IRA, as the law is the result of Biden's focus on a local agenda rather than based in consideration of its estimated impact on U.S. allies and key trading partners. Within that context, Seoul is advised to focus on addressing the discriminatory elements included in the IRA through negotiations, according to two sources in Washington involved in IRA-related issues.
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| US President Joe Biden, left, listens as SK Siltron CSS CEO Jianwei Dong speaks during a tour of the SK Siltron CSS facility in Bay City, Michigan, on November 29, 2022. AFP-Yonhap |
"The IRA was passed by the U.S. Congress without much consideration given to its impact on U.S. allies and partners. Certain elements of the law could be considered discriminatory and in violation of WTO rules," one of the two Washington sources said by telephone.
"Despite that, the best course of action to resolve the IRA issues would be through negotiations or the United States providing exemptions to its allies. The Biden administration is fully aware of Korea's concerns on this issue and has set up a bilateral channel, which is an important sign that some actions will be taken."
The source added that Washington is specifically aware of Seoul's discontent with the IRA, as the Yoon administration has been distancing itself from the country's top trading partner, China, since he took office in May this year. Under his administration, Korea has also shown interest in the U.S.-initiated Chip 4 alliance and Indo-Pacific Economic Framework (IPEF).
Bad scenario to start a trade war over IRA
While critics argue that Seoul's economic security cooperation with Washington has now become "economically costly" for Korean manufacturers with production facilities in the U.S., it is not an ideal choice for the Yoon administration to bring the issue to the WTO as any countermeasure pursued by Korea could be politically dangerous.
"It is hard to preclude a possibility in the future that the U.S. Congress could pass other legislations similar to the IRA in light of the political climate in Washington. So, it would be in the interest of Korea and the United States to develop a consultative mechanism through which the two governments can discuss and coordinate their response early on to avert and minimize the likely impact of the IRA," according to the second source in Washington, adding Korean companies are advised to seek "short-term gains."
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| President Joe Biden speaks after touring a Taiwan Semiconductor Manufacturing Company facility in Phoenix, Dec. 6. AP-Yonhap |
"That's because there will not be any imminent resolution to the IRA issue as the Biden administration itself isn't in a position revise this independently. As the IRA has been enacted into law, now it has become a legislative trade issue that requires resolution by the U.S. Congress in consultation with the White House. If the U.S. applies some types of exemptions for Korea, then this will raise questions from others including the EU pursuing the same or similar types of exemptions," the second source said, while declining to specify what "short-term gains" means and how such goals can be achieved.
Seoul is said to have requested Washington to ease the requirements for the final manufacturing of electric vehicles (EVs), which specify that parts for battery packs and minerals "should come from" North America and on expanding the use of commercial EVs. Citing the sensitivity of the issue, trade ministry officials declined to comment.
China is currently the dominant miner or processer of various types of minerals crucial to the production of EV batteries. Australia mines around half of the global lithium demand, but up to 60 percent is said to have been processed in China, according to government data. Additionally, over 80 percent of Korea's imported lithium, cobalt and graphite ― considered as the key minerals in EV batteries ― are from China. Therefore, the IRA would cost a lot for Korean vehicle manufacturers and make them less competitive.
While some EU members are questioning the validity of the IRA, there is a lower possibility of a trade war between the EU and the U.S. over the law, said experts.
Despite the EU viewing the IRA as anti-competitive and threatening to job markets in Europe, especially in the energy and car sectors, EU officials said they will work with the U.S. to address some of the most concerning aspects of the law, according to officials.
"As far as my understanding, some consulting firms in Washington approached a Korean company with a suggestion to revise the IRA. This (revising the IRA) makes sense theoretically, but it's impossible because of requests to do so from third parties. As a reliable ally, affirmative actions are requested by the Biden administration in addressing outstanding concerns about the IRA," said Choi Seok-young, a former Korean ambassador to Geneva, where the WTO headquarters is located.
