WITH THE American midterm elections fast approaching this month, U.S. President Joe Biden’s foreign policy objectives and trade policies have largely shifted away from his original stance. This points to a potential contradiction with domestic bipartisan consensus to reinforce alliances and an inconsistency with World Trade Organization (WTO) obligations. In fact, Biden may be “waging war against his own agenda” by leaning towards an America First policy that vitiates its allies[1]. The Biden administration’s trade policies, specifically his policy on Electric Vehicles (EVs), are a rising concern for major U.S. trade partners as they are discriminatory and harmful to U.S. allies[2].

The Inflation Reduction Act and policy on EVs

   The Inflation Reduction Act (IRA) is one of the primary reasons behind the recent surge in Biden’s approval ratings. Senator Joe Manchin suggested the IRA as a measure to curb the ramifications of the Build Back Better Act[3] and reduce domestic inflation. Despite the act’s benefits to the U.S. domestic economy, the IRA’s EV policy is currently a source of contention between South Korea and the United States[4].

   The IRA provides $7,500 in tax credits for EVs manufactured in the United States. As of now, 26 out of 32 EV models are domestically manufactured; the Nissan Leaf and several European EV models are the only ones produced outside the United States. The EVs produced by Hyundai Motor Co. and Kia Co.—Korea’s major vehicle manufacturing companies and two of the main EV producers of the U.S.—are not one of the 26 EV models made in the U.S. as the cars are assembled in South Korea, meaning that they will not be eligible for the tax credit. This would greatly disadvantage the companies within the U.S. market. Despite the challenges it poses to one of the United States’ most important allies, another reason why the Biden administration continues to push the IRA forward is because the EV policy is significant to achieving the administration’s climate change initiative to reduce U.S. greenhouse gas emissions by 2030.

   To make matters worse, starting in 2023, there will be supplementary limitations on achieving the tax credits. For companies to receive $3,750 in tax credits, 40% of the minerals used in their EV battery production must come from within the United States or U.S. Free Trade Agreement (FTA) Partners. For countries to qualify for the remaining $3,750 in tax credits, 50% of the battery components have to come from the United States or U.S. FTA partners and the vehicles themselves must be manufactured in the United States[4]. The battery component requirement will increase to 80% in 2027 and prospectively to 100% by 2029. However, as early as 2025, vehicles that use minerals or components from countries other than the United States will not qualify for receiving any EV tax credits at all. 

    With China being the main miner and processor of minerals necessary for EV battery production, the limitations imposed on foreign companies’ EV battery production are a means to strengthen the U.S. and their FTA partners’ supply chain and weaken China’s. This arrangement places South Korea in a predicament, as more than 80% of its cobalt, graphite, and lithium imports essential for EV battery production are imported from China[5]. With the IRA, Biden is attempting to control and filter foreign companies’ trading practices and protect domestic American companies from competitors at the cost of their allies’ trade systems. This decision can result in diplomatic tensions and place South Korea and other countries who depend on the United States for trade in an economic conundrum[5]. 

    Biden’s diplomatic policies that prioritize the United States at the cost of its allies are increasingly resembling the “Make America Great Again” policies of former U.S. President Donald Trump—a likely result of the Democratic Party’s anxiety on winning House and Senate seats in the upcoming midterm elections. The Biden administration’s shift in policy is once again disenchanting U.S. partners who were expecting him to take a turn from the former Trump administration’s policies. If Biden continues to take the stance Trump took regarding trade allies, future prospects look bleak. 

     The Biden administration, however, does seem to be making efforts to lessen the disconcertment the IRA caused amongst the United States’ major allies. In May, the White House launched the Indo-Pacific Framework for Prosperity (IPEF), a trade deal to protect its allies and “provide a counterweight against China’s economic clout in Asia[5].” IPED signifies how Biden is, to a certain degree, mindful of the difficulties U.S. allies will face due to the IRA. Although IPEF aims to stimulate equitable and durable trade amid member states, the main purpose of the deal is to counterbalance China’s economic influence over Asia and increase U.S. economic competency. Here, we can see that even the United States’ goal of protecting its allies is motivated by its competition with China. The deal, therefore, does not do much to assuage the concerns of member states. Additional concern stems from the fact that IPEF is not a conventional free trade deal; it lacks incentives to increase market access or decrease tariffs, meaning that U.S. trade partners are not likely to benefit from negotiations or expect tax policies to change significantly[5]. Thus, IPEF—a measure aimed at “protecting” U.S. allies—may actually be one of the most “America centric” policies that the Biden administration has come up with.

How South Korea is responding to the EV provision

   South Korea perceives the EV provision of the IRA as a contravention of trade rules that stands in the way of establishing lucrative economic relationships. Additionally, Korea sees the EV provision as an infringement of the free trade agreements between the United States and Korea, which forbid discriminatory policies on mutually imported products[5]. The EV policies have especially angered South Korean companies, given Seoul’s long history of continued efforts to establish good economic ties with the United States. The Samsung Group and SK hynix Inc.’s continued investment commitments in electric vehicle batteries, research and development programs, semiconductor systems, biopharmaceuticals and other facilities in the United States are some examples[5]. The disconcertment amongst Korean companies is caused by a perceived lack of loyalty from the United States, who seem to be indifferent to the economic conundrum South Korea is bound to face due to the discriminatory EV policies. In response to the situation, Kwon Oh-hwan, a Hyundai Motor Co. worker and labor organizer, stated that the workers were back-stabbed, frustrated, and blind sighted with the IRA as the company found their previous tax breaks for EVs to be essential in determining both the Korean companies’ and the nation’s economic well-being. Kwon further supplicated the Korean government to no longer “be pushed around by the Biden administration’s protectionist measures[6].”   

   As paramount as the United States is to determining South Korea’s economic prospects, South Korea is also an important partner to the United States, as Korea provides EV batteries to European, Japanese, and American producers. Korea is also one of the main manufacturers of EVs in the United States, meaning that maintaining a “disloyal” stance towards Seoul could lead to consequences for the United States as well[6]. If Biden continues to push his EV policy and remain negligent to Seoul’s concerns, the trust between the United States and South Korea will likely be damaged.

     Although some may consider the United States to have responded positively to the situation, with claims by U.S. officials to address Korea’s concerns, there is still no course of action the United States will take to soothe Seoul’s concerns[5]. Though a summit between South Korean President Yoon Suk-yeol and President Biden was expected to take place in September where they could have discussed the issue, the summit was replaced by an abrupt fundraising event. Yoon still expresses hopes to “cooperate closely” with the United States to swiftly handle the situation, but the only reply from Biden was that he is “well aware” of the issue and that “serious consultations” are necessary[6]. Biden also sent a letter to Yoon on October 5, pledging to note South Korea’s concerns about EVs and promising that he would “continue frank and open-minded discussions with Seoul on this matter[7].” As of now, it seems that the United States is continuing to respond to Korea’s concerns with words rather than actions.

   Park Hyun, a Senior Correspondent for The Hankyoreh, wrote an editorial expressing his concern that the United States is “morphing from a guardian of free trade into a disrupter of international trade norms,” pointing to how the situation is looking grim for South Korea, an ally that relies heavily on the United States in both economic and military aspects[5]. The IRA was even called a “betrayal” by a senior official in Seoul, hinting at the possibility of the EV provision impairing other aspects of the U.S.-Korea relationship[8].

   Unlike the United States, which has maintained a relatively unresponsive attitude, the Korea Automobile Manufacturers Association announced that it would continue to communicate its stance to the U.S. government and that both parties would maintain close ties to discuss the issue so that future relations will not be damaged further. This IRA situation is causing several South Korean media outlets to raise questions as to how Seoul should respond. Some suggest that South Korea’s participation in U.S.-led regional economic initiatives—IPEF, the CHIP 4 Alliance, etc.—should be reconsidered. Others suggest that the trade dispute should be dealt with independently from Seoul’s participation in IPEF, revealing how experts are divided on how Korea should respond to the discriminatory EV policy[6]. 

The larger concern

    As South Korea is heavily reliant on the United States for its exports, it is essential for Seoul to prevent policies that will damage major exporters like Samsung Electronics and the Hyundai Motor Co., as their prosperity is essential to maintaining the prosperity of the Korean economy. Currently, South Korean high-tech companies lack the ability to become self-sufficient because of their high reliance on the United States. Seoul, therefore, cannot be overly aggressive when reaching a negotiation with the United States, given Korea’s “economically inferior” position on the global trading stage. As the United States owns the world’s most significant automobile market, Korean companies have no choice “but to grit their teeth and make the best of the challenges presented by the IRA[6].” The current U.S.-China trade wars and global geopolitical shifts also place the South Korean government and companies in an increasingly volatile political and economic landscape, further complicating how Korea should respond. 

       Korea faces a quandary as it cannot search for and join an alternative market. It would be wiser to consistently buy market shares in the United States despite the discriminatory policies and the disadvantages South Korea will face. Thus, at the current moment, the less risky approach would be for companies to embrace approaches that lessen the ramifications of the IRA and its EV policy rather than completely turning their backs on the United States[5].

Choosing between China and the United States

      South Korea is facing a dilemma regarding the need to choose between China and the United States when it comes to establishing economic partnerships. With the United States taking a disloyal stance towards Korea, there are doubts about siding with the nation in the future. Korea hopes that the United States will no longer be indifferent to its plight, as they depend on Korea as much as Korea depends on the United States militarily and economically. After all, South Korea is the United States’ seventh biggest trade partner and home to 28,000 U.S. troops[5]. Especially considering South Korea’s role in several U.S.-led regional economic initiatives that help the United States enjoy economic prosperity and compete with China, the United States cannot perpetually ignore Korea’s complaint. 

   That being said, Korea is also dependent on China, with China being South Korea’s biggest and most important trading partner. Korea is therefore stuck between China and the United States, taking the position of an “innocent bystander” being damaged in the crossfire between two economic giants. All in all, it is clear that the dispute should be handled swiftly as continued dissonance could induce diplomatic fallout. One possible solution is that Seoul could file complaints to the WTO bringing the issue to greater attention and inviting international scrutiny—something the Biden Administration would not look forward to.

   Currently, the Yoon administration is taking steps to enlarge security and economic relations with the United States. This could provide a stepping stone for Korea to take a “more assertive stance” not just with the United States but also with other partners such as China. If the situation is inadequately dealt with, Korea could “once again become the victim of the great powers[5].” Thus, it is essential for Korea to “get over its ‘small country’ mentality and adopt an active posture[5].” 

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   Biden's discriminatory EV policy will deliver major blows to international relations, as it could cause a change in power dynamics, pushing countries to choose which side to take in the already intense China-U.S. competition. The prospect for future U.S.-South Korean diplomatic relations remains grim as long as there is no remedy to proficiently handle the distrust, dissatisfaction, and discontentment caused by the discriminatory EV policy—not only for South Korea, a faithful ally to the United States, but also for other major U.S. allies and trade partners. Even though some solutions have been proposed and South Korea has explicitly shown its dissatisfaction, the United States, as of now, has taken no concrete steps to actively resolve the issue. 

[1] CGTN

[2] Business Times

[3] Build Back Better Act: An act introduced by Congress, in accordance with President Biden’s Build Back Better Plan, aimed at rebuilding the American middle class curbing climate change

[4] The Diplomat