US-China Economic and Security Review Commission Gets Advice on EV Supply Chain Restrictions

An expert on China's electric vehicle manufacturing praised the Inflation Reduction Act's incentives to build U.S. advanced battery manufacturing capacity but told the U.S.-China Economic and Security Review Commission that completely cutting China out of that sector's supply chain is impractical. The Zero Emissions Transportation Association has made similar arguments (see 2208040045); the Treasury Department has not yet said how the "country of concern" restrictions for EV tax credits will be applied. However, Treasury allows leased cars to avoid all the localization rules.

Ilaria Mazzocco, a senior fellow with the Trustee Chair in Chinese Business and Economics at the Center for Strategic and International Studies, testified Aug. 21 at the commission. In her written testimony, she said: "The current position of Chinese firms (especially in the battery segment) means it will be extremely challenging to create affordable, competitive products in the United States or elsewhere without any reliance on Chinese supply chains in the medium term. Clarifying when and under what conditions, and for how long such integration is acceptable could be helpful for companies navigating this space."

During the hearing, she said trade-offs between the value of supporting U.S. economic development and diversification in the industry and the affordability China offers need to be taken into account.

Policymakers often focus on China's strategy of inking deals abroad for mining and its strategy of dominating processing, and the leverage that gives it for economic coercion. Mazzocco emphasized that China's growing strength in electric vehicles and batteries "hinges on cost advantage."

Mazzocco warned that if Congress or the administration decides to hike tariffs on Chinese inputs beyond the Section 301 tariffs, that could cause U.S. auto manufacturing to stick with internal combustion engines longer because EVs could be priced out of reach. If that were to happen, it would make the domestic auto industry less competitive and less innovative, she said.

"The cost of these vehicles could also undermine supply chain diversification initiatives underway in the United States," she said.

It's important to maintain the goal of de-risking, but politicians "need to be more realistic," Mazzocco said.

She said because Chinese companies are so advanced in advanced battery design, there are some technologies they build that other companies don't have. That is Ford's explanation for why it is licensing designs from CATL; CATL produces lithium iron phosphate batteries, which are less expensive and more durable than a cobalt-nickel standard.

Commissioners asked Mazzocco if China's government subsidies, intellectual property theft, lower environmental standards, worse working conditions and tariff protections for the Chinese auto industry drove China's rise in EVs.

Mazzocco said all those played a role -- including that consumer subsidies were available only for Chinese-built cars. (The IRA takes a similar approach, though Mexican- and Canadian-assembled cars can qualify, too).

However, she noted that the CATL-Ford deal that some politicians are criticizing is the reverse of the usual IP anxiety -- CATL is providing access to its IP.

Commissioners asked Mazzocco which parts of the EV supply chain should be out of bounds for Chinese firms, and what conditions should be met for a Chinese firm to operate in the U.S. in the sector.

She said it depends on the segment, and what companies are involved. "I haven’t seen anything that suggests to me that these Chinese companies are a risk to the United States," she added. "I think they're helping expand [domestic manufacturing] capacity."

Global supply chain consultant Christopher Gopal, who teaches at the University of California San Diego, was much more concerned about the intertwined economies of the U.S. and China.

He said there are "a lot of issues in allowing Chinese companies" in EV infrastructure projects. He said politicians should examine "critical supply chains" and "impose some restrictions on who can buy into them, who can invest in them."

For these critical supply chains, the government should set sourcing parameters, not just restricting certain countries, but also dictating how much of a percentage of the goods can be sourced from any one country, and how the supply chain should be regionalized, Gopal said.

"We’ve come to the realization over the last year that driven by a pandemic, global conflicts and events, our critical global supply chains … are highly vulnerable and dependent on China," he said. He said companies that made globalization decisions that concentrated production in China were guilty of "willful blindness."

He listed food, personal protective equipment, antibiotics, hypersonic technology, electric vehicles and artificial intelligence as critical sectors that should be regulated. "Critical chains are not just semiconductors and AI," he said.

Mazzocco said that in order to de-risk, the U.S. needs more partnerships with other countries -- the U.S. does not have the only auto sector threatened by China's rise.

Logan Wright, Rhodium's director of China markets research, testified to the commission that a good way to do that is to reduce trade barriers for allies in the industries where China has become dominant, and the U.S. feels that's a technology disadvantage.

Mazzocco warned the commission that if "critical" is not defined, everything will be critical. She said politicians should take "a narrow view on what is actually a national security threat."