U.S. President Joe Biden’s administration has issued long-awaited rules that will limit Chinese content in batteries eligible for electric vehicle (EV) tax credits starting next year.

The move is believed to choke off China’s role in the United States’ EV supply chain with rules that critics allege will slow U.S. transition from petrol- powered cars.

The guidelines issued Friday by the U.S. Treasury Department were required by the massive Inflation Reduction Act (IRA), which was signed into law by Biden last year.

The U.S. Treasury will temporarily exempt some trace critical minerals from new strict rules barring materials from China and other countries deemed a “Foreign Entity of Concern.” (FEOC)

The guidelines establish a 25% ownership threshold for an FEOC company or group. The restrictions will apply to battery components next year, then include suppliers of key battery raw materials, such as nickel and lithium, in 2025.

The definition has wide-reaching implications because starting in 2024, vehicles containing any battery components manufactured or assembled by FEOCs will no longer qualify for the tax credit.

The new rules are designed to wean the U.S. electric vehicle battery chain away from China, a difficult challenge given that the EV industry is still heavily reliant on China for critical minerals and components that go into their products.

Ahead of next year’s election, the Biden administration is trying to walk a fine line between its efforts to electrify the U.S. economy to cut emissions and its drive to create jobs and compete with China. The administration has set a 2030 target for EVs to represent 50% of all new vehicle sales.

“If you’re trying to source all of the components of an EV without drawing on any Chinese content . . . it’s going to be logistically more challenging and likely a more expensive product at this moment in time,” said Eli Hinckley, partner at Baker Botts. “It’s not a 2024 exercise. This is multi years of building out a supply chain.”

Under the guidelines, any company that is subject to the jurisdiction of China’s government, or is controlled by the government, including if it is at least 25% owned by a Chinese government authority, would be considered an FEOC.

The restrictions would also apply to all production inside of China. However, foreign subsidiaries of privately-owned Chinese companies in non-FEOC countries, like Australia or Indonesia, would be allowed so long as they are not controlled by China’s government.

The Chinese embassy in Washington slammed the rules, calling them “another example of the U.S.’ practices of unilateralism and economic bullying”.

China accounts for 85% to 90% of global rare earth element mining and processing, and it refines 60% of the lithium, 65% of the nickel and 68% of the cobalt needed for EV batteries, according to a September research note by Goldman Sachs Group Inc. The bank also estimates that 65% of battery components, 71% of battery cells and 57% of the world’s EVs are made in China.

(SD-Agencies)