Will Congress Amend IRA to Punish Chinese-Owned Plants In Mexico?

There is no shortage of politics around electric vehicles, and the latest is a move by Chinese automakers to try to get around U.S. rules about domestic sourcing of batteries and other content by locating plants in Mexico with which the U.S. has a free-trade agreement.

MG, BYD and Chery are all exploring plant locations in Mexico, which has gotten the attention of trade hawks in Congress.

Under the Inflation Reduction Act (IRA) of 2022, buyers of U.S.-made EVs are eligible for a $7,500 per-vehicle tax credit. The IRA blocked all foreign-made vehicles from receiving the tax credits to protect U.S. manufacturing jobs and ease angst over enriching Chinese companies at the expense of the U.S. economy.

As anti-China sentiment grows in Washington and among working-class voters, the White House recently introduced new regulations to prevent U.S. car companies from using materials and parts from China and Russia in their EVs as an extra measure, making the supply chain for automakers extremely challenging because of China’s current domination of EV battery technology.

The likely expansion of Chinese automakers into Mexico is fueling fears that China plants south of the border could serve as a backdoor to growing their business in the U.S. and avoiding the letter of the IRA law.

Washington is becoming more anti-China with each passing month. Sen. Joe Manchin (D-WV), who is not running for re-election in 2024 but who is chair of the Senate Energy and Natural Resources Committee, said last week that he wants Congress to vote on reversing the Treasury Department's EV tax-credit guidance, saying it will increase U.S. reliance on China. He says the current Treasury guidance will make it easier for Chinese companies to take advantage of the EV tax credit “while hurting American taxpayers and increasing America’s reliance on foreign nations for battery and vehicle component supply chains, including China.”

Starting in January, EVs with battery components made by a “foreign entity of concern” won’t qualify for the federal $7,500 tax credit. A foreign entity of concern is defined as any company “owned by, controlled by, or subject to the jurisdiction or direction” of China, Iran, Russia or North Korea. Starting in 2025, the rules tighten even more: Eligible EVs must not contain “critical materials” extracted, processed, or recycled by foreign-controlled entities.

Mexico's automotive industry, meanwhile, is gearing up for a surge in EV production, with experts projecting growth of 179% by the end of the year, according to a recent report by American Industries Group.

The boom is largely attributed to an influx of new Asian automakers, particularly from China, says Gerardo González, Guanajuato regional director for American Industries Group. Mexico’s auto industry has attracted significant investment in 2023, with Tesla and Tata Group planning to build gigafactories in the north of Mexico.

Foreign direct investment in Mexico is also on the rise: Greenfield foreign direct investment reached a record $40 billion in 2022 and increased 40% in the first half of 2023. According to FDI Intelligence, manufacturing projects accounted for more than half of last year’s total, with automotive companies leading the way. U.S.-based companies accounted for 41%, followed by 28% by Asian companies.

The underdeveloped U.S. EV supply chain has caused research firms to forecast that U.S. sales of EVs will not meet Biden Admin. goals of 50% of total sales by 2030 and 66% of total sales by 2032. Plante Moran, for example, says it expects EVs to account for only 35% of new-vehicle sales by 2030 because of supply-chain issues, as well as consumer adoption rates.