Long-awaited guidance from the US Treasury Department that could prevent automakers from buying materials from China will likely resemble regulations aimed at protecting the US semiconductor industry, industry experts told S&P Global Commodity Insights.

The CHIPS and Science Act, signed into law in August 2022, created a threshold for companies considered foreign entities of concern (FEOC) and then barred US companies that do business with them from accessing new federal funding. The Treasury Department's pending FEOC guidance related to Inflation Reduction Act clean vehicle credits will determine to what extent automakers can buy battery materials from companies based in China, Russia and other nations of concern to the US federal government.

An automaker's purchase of components and materials from these countries could prevent buyers of certain electric vehicle models from accessing a tax credit worth as much as $7,500 per car.

The modeling of FEOC guidelines based on CHIPS and Science Act language could cut the number of EV makes and models qualifying for US tax credits, at least in the short term.

"We anticipate the Clean Vehicle Tax Credit (30D) Foreign Entity of Concern draft guidance or rulemaking to come out imminently," Ben Steinberg, executive vice president and co-chair of the critical infrastructure group at Venn Strategies, told Commodity Insights in an email. Venn Strategies is a government affairs company that leads the Battery Materials & Technology Coalition trade group.

"As anticipated, it will drive investment for batteries and their materials within the US and our free trade agreement partners and disincentivize manufacturing with countries like China and Russia," Steinberg said.

Turning to CHIPS

Although the Treasury Department clarified some sourcing and manufacturing requirements related to the tax law in March, automakers, consumers and those in the upstream EV supply chain continue to await the FEOC language that could bar them from buying from companies based in China or Russia. The agency has said it intends to release the guidance before the end of the year, although industry sources who have spoken with the Treasury Department over the past several months told Commodity Insights that they expected the guidance sooner than Dec. 31.

"The US has already created a blueprint for FEOC interactions through the CHIPS and Science Act implementation as part of the Department of Commerce work to bolster semiconductor manufacturing in the US," Steinberg said. "We suspect that the Biden administration, Department of Treasury and the federal interagency will use this as a baseline for implementing guidance on batteries and critical minerals."

In its final rule on CHIPS, officially called Creating Helpful Incentives to Produce Semiconductors, the Commerce Department worked to prevent federal funding from benefiting North Korea, China, Russia and Iran. The rule refers to these as "covered nations" and outlines a 25% direct or indirect voting interest, board seat and equity interest cap by such a covered nation as the threshold for certain FEOC language contained in the bill. Semiconductor-makers that do business with companies that cross the threshold could lose access to federal funding.

Similarly, vehicles from automakers that buy battery components and critical minerals from companies that cross that threshold could lose eligibility for the prized tax credit. The law's battery component sourcing restrictions come into force in 2024 and the critical mineral limits in 2025.

The Treasury Department did not respond to a request for comment on the guidance's relationship to the CHIPS and Science Act.

Enforcement questions linger

Under the CHIPS and Science Act, entities receiving semiconductor incentives from the US government are required to enter a funding agreement with the Commerce Department that includes stipulations about joint research and technology licensing with FEOCs. This is different from the self-certification structure of the clean vehicle credit, which does not involve direct funding to automakers.

"This is not a new industry that is trying to understand how to kind of track and monitor the supply chain, but batteries [have] an incredibly complex supply chain," Chris Burns, CEO at battery materials company NOVONIX Ltd., told Commodity Insights. "And so the question is, what are the audits, or the audit rights, or the audit conditions, or the proof that [will] have to be provided [for the credit]?"

Those audit conditions could draw on self-certification allowances already present in other areas of the 30D credit, a person who works for a battery company and who is familiar with Treasury Department discussions told Commodity Insights, requesting anonymity given the shifting nature of guidance discussions.

"If you look at other parts of 30D, [the Treasury Department] has said that they're going to allow the automakers to basically self-certify that they're meeting the critical minerals and battery components thresholds," the source said. "I am guessing they will do something similar for this, at least for the first couple of years."

Treasury's guidance will likely not answer every question, the person said.

"If some of their prior rulemakings are any indication, some of these issues are going to still be up in the air," the source said, specifically referencing questions over whether EVs involving products from joint venture deals like Ford Motor Co.'s agreement with Chinese battery-maker Contemporary Amperex Technology Co. Ltd. will qualify for the 30D credit.

Although the CHIPS and Science Act might act as a baseline for FEOC definitions, the two bills have different incentive structures and likely different enforcement mechanisms for FEOC limits.

China supply chain

The inclusion of China in a FEOC list could pose a challenge to tax credit-seeking automakers depending on the speed of the Treasury Department's final rule implementation, as the country has a strong hold on semiconductor and battery minerals supply chains alike.

"In my opinion, the goal doesn't need to be to remove China from the supply chain; they play such a dominant role today [that] that's going to be impossible," Burns said. "The goal is to do enough that we are not solely reliant on China [in the] supply chain, and not just because it's China, but that's a more broad statement that we need to have diversity and security in the supply chain."

Although the US is looking to enter new battery metals agreements to meet free trade agreement sourcing rules under the Inflation Reduction Act, FEOC language, which is likely to bar Chinese materials' tax credit eligibility, will force automakers and members throughout the battery supply chain to contend with China's role in the sector.

The guidance will land as US passenger plug-in EV sales are expected to jump 101.8% between 2023 and 2027 to hit 2.9 million units, according to S&P Global Market Intelligence data. That demand shift will contribute to an expected 167.2% spike in lithium demand for passenger plug-in EVs in the US over the same period. In 2022, China produced 22.6% of the world's lithium chemical brine supply and 18.5% of global lithium raw material supply overall, according to Market Intelligence data.

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