The Significance and Implications of US Inflation Reduction Act (IRA)

Lee Hyo-young

(hylee@mofa.go.kr)

Associate Professor,

Korea National Diplomatic Academy

English Abstract

Main Contents of the Inflation Reduction Act(IRA) and its Significance

The Inflation Reduction Act(IRA) signed by President Biden will spend $773 billion on climate change, expansion of healthcare benefits and tax reform in order to reduce budget deficits. The Act also seeks to transit to a eco-friendly economy, seeking to reduce inflation.

As for the legislation, $433 billion will be spent on incentive measures including tax refund and deduction to lower household energy costs, support for domestic production of energy production and storage such as solar panels and batteries and tax credits for the middle class to encourage sales of electric vehicles.

In particular, the bill requires that the final assembly of electric vehicles and batteries take place in North America. Furthermore, a certain percentage of battery components and critical minerals use must be produced or recycled in North America or a country with a free trade agreement with the US.

IRA’s provisions of tax benefits and government subsidies only to electric vehicles manufactured in North America have raised concerns on discriminatory measures against electric vehicles manufactured abroad.

The legislation’s selective application stems from the fact that American electric vehicles are competing against foreign electric vehicles in which Korean electric vehicles ranks second in the US market share as well as excessive dependence on foreign battery materials with more than 90% of certain EV battery components coming from China.

Key Issues of the IRA from an International Trade Law Standpoint

It is highly likely that IRA’s discriminatory treatment of foreign-made EVs and batteries including Korean automakers is in violation of WTO and KORUS FTA standards.

The IRA contains elements that reversely discriminate partner countries in the supply chain. It also advocates protectionism through excessive local content requirement(LCR) that disregards international trade norms.

The US government considers LCR policies to be very effective policy measures in restoring its industry competitiveness and reorganizing the supply chain by onshoring production of items crucial to national and economic security.

The LCR policy distorts trade of import-dependent production materials and raises the cost for domestic consumers and producers. As such, it is prohibited in principle under international trade norms.

Policy Implications

The IRA, the CHIPS Act and the recent executive order on incentives for biotechnology may result in an “incentives war” among countries.

It has broken the seal of regulations on green incentives under the justification of carrying out a global goal of climate change response. Every country will be expected to use incentives without regulations to achieve the goal of reducing carbon emission.

Korea needs to demand and acquire an exemption from the legislation’s application or a postponement of the legislation. It should come up with a realistic negotiation strategy by suggesting bargaining chips that can be reciprocated from the current trade issues.