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The Biden administration has sought to strangle China’s role in the U.S. electric vehicle supply chain with rules that critics say will slow the transition away from gasoline-powered cars.

The U.S. Treasury Department announced Friday that starting next month, no U.S.-made electric vehicles that contain battery components made in China will be eligible for the full subsidies included in President Joe Biden’s landmark $369 billion climate law -dollar offers.

Electric vehicles are also ineligible for the Inflation Reduction Act incentives if they are manufactured by companies with close ties to the Chinese government or are manufactured with a licensing agreement with a China-based or Beijing-controlled operator.

“With this guidance and the clarity it will provide, we are ensuring that the future of U.S. electric vehicles is made in America,” said John Podesta, Biden’s top clean energy adviser.

The rules were introduced after Biden met Chinese President Xi Jinping last month in an attempt to ease tensions between the world’s two largest economies.

Podesta said: “China still dominates supply chains for key technologies.” . They far surpass the United States and our allies in the production of batteries and their components.”

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Not only does China dominate electric vehicle and battery production, but it also processes more than half of the world’s lithium, cobalt and graphite, which are key inputs.

Ahead of next year’s election, the Biden administration is trying to walk a fine line between its efforts to electrify the economy to reduce emissions and its push to create jobs and compete with China. The government has set a goal for electric vehicles to account for 50 percent of all new car sales by 2030.

The rules are expected to result in fewer car models being eligible for the full $7,500 per vehicle IRA tax credit in the near future. They also apply to $6 billion in grants awarded under the 2021 U.S. Infrastructure Act and, starting in 2025, for critical minerals used in electric vehicle components.

“If you’re trying to source all the components of an electric vehicle without resorting to Chinese content. . . It will be more logistically challenging and likely a more expensive product at this point,” said Eli Hinckley, partner at Baker Botts. “It’s not a 2024 exercise. Building a supply chain takes several years.”

However, the government said automakers would have a two-year transition period to adapt to rules for small battery parts that don’t have traceability standards, such as electrolyte salts.

The Alliance for Automotive Innovation, which represents auto and battery manufacturers in the U.S., said the Treasury Department had struck a “pragmatic balance” on the tax credit and called the two-year transition period “significant and well-advised.”

The trade association had warned that the excessively strict rules could lead to all registered electric vehicles disappearing from the market. Only about a fifth of electric vehicles sold in the U.S. were eligible for full tax credits before Friday’s rules, the trade group estimated.

“Treasury’s efforts to make the rules workable mean the list of eligible vehicles will not completely disappear in 2024,” the alliance said.

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Since Congress passed the IRA last year, the U.S. has seen a surge in investment in the electric vehicle supply chain. But many projects are not expected to come online until the second half of the decade. U.S. automakers including Ford, General Motors and Tesla have postponed their factory ambitions due to a slowdown in demand.

GM said its electric vehicles are “well positioned” to qualify for the tax credit. Ford said it was reviewing the impact of the rules.

Conservative politicians and advocates for domestic manufacturing and energy security criticized the rules and accused the Biden administration of not going far enough to rule out Chinese involvement.

Mike Gallagher, the Republican chairman of the House China Select Committee, said the U.S. Treasury Department had issued “naïve” regulations that would “open the floodgates to American taxpayer dollars flowing to Chinese companies engaged in trade violations and forced labor abuses.” .

West Virginia Democratic Sen. Joe Manchin, a key architect of the IRA law, accused the Biden administration of “trying to find workarounds and delays that leave the door wide open for China to prey on the backs of American taxpayers.” benefit”.

John DeMaio, president of Hong Kong-based Graphex Group, a graphite processing company, said the new rules would help “accelerate” the company’s plans to move operations out of China, but acknowledged they would be a “challenge.” would represent the industry.

“It’s very hard to completely extricate ourselves from China,” said DeMaio, whose company is building a processing plant in Michigan. “It’s like holding a wolf by the ears. You don’t necessarily like it, but you can’t let it go.”

Additional reporting by Demetri Sevastopulo in Washington

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