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US to limit China’s ability to benefit from electric vehicle industry

A worker at the Ford F-150 Lightning plant in Dearborn, Mich., on April 4, 2022. New government rules will try to shift more production of electric vehicle batteries and the materials that power them to the United States.SYLVIA JARRUS/NYT

WASHINGTON — The Biden administration proposed new rules Friday aimed at shifting more production of electric vehicle batteries and the materials that power them to the United States, in an attempt to build up a strategic industry now dominated by China.

The rules are meant to limit the role that Chinese firms can play in supplying materials for electric vehicles that qualify for federal tax credits. They will also discourage companies that seek federal funding to build battery factories in the United States from sourcing materials from China or Russia.

The rules could cause some consternation among automakers, who continue to rely heavily on China for materials and components of electric vehicles. They are also facing intense cost pressures as they try to modify their factories to make electric cars; China offers some of the most advanced and lowest-priced battery technology in the world.

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The Biden administration is trying to use billions of dollars in new federal funding to change that dynamic and create a US supply chain for electric vehicles, through both carrots and sticks.

The climate law President Biden signed in 2022 includes up to $7,500 in tax credits to consumers who buy electric vehicles made in the United States, using largely domestic materials. The law also included a general ban on Chinese products. Lawmakers mandated that firms in China, Russia, North Korea, and Iran be prohibited from providing certain materials to cars that received those tax breaks.

But the law left open several questions, including what constitutes a Chinese or Russian company. Administration officials said those definitions include any entity incorporated or headquartered in China or Russia, as well as any firm in which 25 percent of the board seats or equity interest were held by Chinese or Russian governments.

Chinese companies that set up operations in countries outside China — like Gotion, which plans to build a battery factory in Michigan — appear to be able to benefit from the rules, as long as the Chinese government is not a significant shareholder.

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The law also requires battery makers that strike contracts or licensing agreements with Chinese firms to ensure that they are retaining certain rights over their projects. That provision is intended to make sure a Chinese firm is not effectively in control of such a project.

Some conservative lawmakers had challenged Ford Motor Co.’s plans to license technology from the Chinese battery giant known as CATL for a plant in Marshall, Mich., arguing that such a partnership should not be eligible for federal tax credits.

The rules kick in for battery components in 2024 and in 2025 for critical minerals such as lithium, cobalt, and nickel. They will remain open for public comment for several weeks and could be adjusted depending on the views of industry.

The rules could have a profound effect on the US electric vehicle market, which is rapidly growing; battery-powered vehicles made up about 8 percent of new cars sold in the third quarter. Car and battery makers said Friday morning that they were still reviewing the 62 pages of rules released by the administration and that it would take time to determine how many models would qualify for tax credits.

John Bozzella, CEO of Alliance for Automotive Innovation, wrote in a blog post Friday morning that the rules had struck “a pragmatic balance,” including by exempting trace materials. If the administration had banned all minor Chinese parts from the supply chain, no car models might have qualified for tax credits next year, he said.

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Many cars have already been disqualified from purchase credits by other rules, like a requirement that vehicles be assembled in North America. Only about 20 vehicles currently qualify for the program out of more than 100 electric vehicles sold in the United States.

The rules also raised new questions about whether stricter requirements for supply chains could continue a trend of driving more shoppers to lease, rather than buy, vehicles.

The prohibition on sourcing from China applies only to vehicles that are sold, not to those that are leased. Consumers can receive tax credits for electric vehicles they lease from auto dealers, and that has led to a boom in EV leasing.

Over the past year, companies have invested $213 billion in the manufacturing and deployment of clean energy, clean vehicles, building electrification and carbon management technology in the United States, according to tracking by the Rhodium Group and the Center for Energy and Environmental Policy Research at the Massachusetts Institute of Technology. That is a 37 percent increase from a year earlier.

Still, the global electric vehicle industry remains heavily anchored in China, which is the world’s largest producer and exporter of electric vehicles. China produces about two-thirds of the world’s battery cells and refines most of the minerals that are key to powering an electric vehicle.

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This article originally appeared in The New York Times.