The clouds on the horizon for America’s electric vehicle industry

With representatives from 197 countries gathered this week in Dubai to discuss ways to fight climate change, Sen. Marco Rubio (R-Fla.) introduced a bill that would make the much-hyped energy transition a bit harder. It’s a reminder of the difficult trade-offs facing U.S. policymakers.

Many bemoan the slow pace of climate progress. Even with pledges, as the Council on Foreign Relations has noted, the world is not on track to meet its target of limiting warming to 1.5°C. But electric vehicles, or EVs, have emerged as a bright spot in recent years.

As Apostolos Petropoulos of the International Energy Agency recently put it, “The game-changer has been the policy support for the shift to electrification quite substantially reducing oil demand from the transportation sector, which has been the key driver of global oil demand growth.”

The environmental good news partly rests on the fact that China is good at making batteries for electric cars, and they are willing to partner with U.S. firms. Chinese-based Contemporary Amperex Technology Co., with its leading-edge technologies and well-developed supply chains, is the world’s leading EV battery maker with 37 percent market share in the first half of this year. 

China is also a leading manufacturer of electric cars and is quickly getting them onto the road. Last year, about one-third of new cars sold in China were electric compared to 9 percent in the United States. CATL is also reportedly working on a battery that could power electric airplanes.

The bad news, from the standpoint of U.S. national security policymakers, is that China is the leader in making these batteries. Washington does not want U.S. firms overly reliant on the communist nation and is increasingly restricting domestic electric carmakers from sourcing in China.

Case in point, on Dec. 1, the Biden administration released new guidance on eligibility for EV tax credits. It aims to prevent these credits from bolstering sales of electric cars made in or reliant on China or other foreign entities of concern. The guidance would classify such an entity as a company with at least 25 percent voting interest, board seats or equity interests held by the government of a covered nation (including a senior official of such a government), regardless of where the relevant activities occur.

Some licensing arrangements, such as what Ford has with CATL, might survive the policy. Overall, the guidance appears to be less stringent than many industry participants had feared, but not stringent enough for others. Rep. Michael Gallagher (R-Wisc.), head of the Select Committee on China, and other members of Congress said Treasury did not go far enough.

Rubio’s legislation goes even further and would block any of the federal incentives to automakers that offshore any of their production.

From a business perspective, it will already be incredibly tough to meet the newly announced China sourcing restrictions, let alone what’s on the horizon if Rubio’s legislation comes to pass. The fact is there is no commercially viable way to build an EV battery — now, or in the near future — without some Chinese content. It will take several years if not decades to build out new supply chains, and U.S. production of key EV battery inputs like graphite, lithium, nickel and cobalt is simply unrealistic without a now-absent will to tolerate more domestic mining and refining.

Meanwhile, the U.S. faces a chicken-and-egg problem with EV charging stations. The longer it takes to make affordable and reliable electric cars, the less enthusiasm there will be to build out the needed EV charging station infrastructure across the country.

Without new trade deals with source countries for raw materials or a “minerals club” among advanced economies and potential raw materials exporters, it may be prohibitively expensive to realize Biden’s electric car goals. But, as witnessed at the trade summit last month in the Indo-Pacific, not many countries are willing to sign on to the overly prescriptive labor regulations that many in Congress seek.

To speed up the EV transformation, deals might need to be made with countries that lack the labor protections, environmental standards and social standards that some in Congress want to hold out for.

Christine McDaniel is a senior research fellow with the Mercatus Center at George Mason University.