Worrying aspects of Inflation Reduction Act

By Ahn Ho-young

The Inflation Reduction Act of 2022 was signed into law by U.S. President Joe Biden on Aug. 16. The law has a lot of merits. It is believed to help the U.S. to reduce the deficit. It will help to lower prescription drug prices, which are too high by international standards as I experienced through many years of living in the U.S. Furthermore, it will significantly help to promote clean energy.

Many independent groups, including an institution at Princeton University, estimated that the investments made by the law would reduce net emissions 42 percent below 2005 levels, compared to 27 percent under current policies.

All in all, I admire the gigantic efforts made by congressional leaders to pass the law and am happy for the above summarized positive impacts that the law is expected to have for the U.S. However, there is an important flaw in the act which causes serious concern for me. The law provides for up to $7,500 subsidies to the buyers of new electric vehicles (EVs).

The subsidy will of course encourage U.S. consumers to buy EVs and reduce emissions. However, there is a catch to the subsidy: it will be provided only for vehicles "finally assembled within North America." Thus, it will effectively ban the import of EVs manufactured abroad. In my view, this flaw in the law must be taken care of immediately for the following reasons.

First of all, the flaw will seriously undermine U.S. efforts to strengthen relations with its allies. Even during his campaign for the presidency, President Biden declared "the U.S. is back," meaning that the U.S. will return to strengthening relations with allies and working with them to reinforce the rules-based international order.

The declaration was reassuring and part of the reason why the U.S. now enjoys such a high degree of approval rating among the citizens of U.S. allies. No less than 83 percent of Korean citizens answered that the U.S. is a reliable partner in a recent Pew Research opinion poll.

Biden's assurances also encouraged a large number of Korean companies to plan and commit a huge amount of new investments in the U.S. Samsung has declared its plan to invest $17 billion and build its second semiconductor foundry in Texas. Hyundai announced its plan to invest $10 billion and build new EV and battery plants in Georgia. As for SK, it announced investments of no less than $30 billion in semiconductors, batteries and bioproducts.

It is against such a backdrop that the "finally assembled within North America" proviso in the IRA Act removed the level playing field from the foreign suppliers of EVs to the U.S. market. It came as a big shock not only to Hyundai and Kia but also to the whole Korean business community and all Korean citizens. In particular, it is putting the new Yoon government in a very difficult corner.

The Yoon government has put the re-strengthening of the Korea-U.S. alliance at the center of its foreign and security policy. It restored joint military exercises between Korea and the U.S. It strongly supported the Indo-Pacific Economic Framework and Chip 4 initiatives of President Biden.

These policies of the Yoon government of course encouraged Korean businesses to decide to make new investments in the U.S. The U.S. law to ban the import of EVs from Korea is making many citizens in Korea question the wisdom of Yoon's firm commitment to strengthening the alliance.

Second, the U.S. must practice what it preaches. President Biden rightly points out the growing tension between democracies and autocracies and emphasizes why democracies must renew their commitment to the values underpinning democracies and stick together to defend them.

An important value, which distinguishes democracies from autocracies, is the former's commitment to the rule of law. The flaw in the IRA Act of 2022 is apparently in violation of World Trade Organization (WTO) law and the bilateral Korea-U.S. Free Trade Agreement (KORUS FTA).

It is in accordance with the KORUS FTA that Korea provides the same amount of subsidy to EVs imported from the U.S. For example, a buyer of a Tesla Model 3 gets a $5,555 subsidy.

Third, the flaw in the IRA will seriously undermine the interests of U.S. consumers. The EV market in the U.S. is booming. Last year, 650,000 EVs were sold in the U.S. This year, it is expected to almost double to 1.2 million cars according to Bloomberg NEF.

More than 25 percent of EVs sold in the U.S. market last year were imports from abroad ― Japan, Germany, Korea and Sweden, all major allies of the U.S. In the first half of this year alone, Korea exported no less than 45,000 EVs, more than the whole export volume of last year's. With the "finally assembled within North America" proviso, these imports from abroad will be effectively banned, leading to a serious shortage of EVs in the U.S. market.

Ahn Ho-young (hyahn78@mofa.or.kr) is chair professor of the University of North Korean Studies. He served as Korean ambassador to the United States and first vice foreign minister.