US know it’s China’s clean-tech world for now

The Inflation Reduction Act's (IRA) essential problem is that it aims to foster a US clean tech boom without using clean tech from the world's number one supplier of clean tech. The Venn diagram of "clean tech suppliers" and "China" is, like time, a flat circle. News that Tesla Inc may follow Ford Motor Co in partnering with a large Chinese company to build a domestic electric vehicle battery plant is the latest reminder of this dilemma and the contortions by politicians and companies alike to get around it.

China has spent years and billions upon billions building dominance in clean tech. Thus, at least to fend for the US in the near-term against impending climate change pressures, in an ironic turn, American companies would be licensing technology from a Chinese company to utilise here in the US.

Contemporary Amperex Technology Co, or CATL, is the largest battery maker in the world. In addition, it dominates the supply of lithium-iron-phosphate, or LFP, batteries. These lack the range of more traditional nickel-based chemistries but are safer and, crucially, cheaper. Tesla's expansion in China and its cheapest Model 3 variant in the US owe much to using CATL's LFP cells in its batteries. Similarly, Ford wants to use those batteries to boost production of its burgeoning EV line, so it's building a factory in conjunction with CATL in Michigan.

In keeping with the US government's objectives, Tesla and Ford want to build more EVs, make these more affordable and build as many of them as possible, and get their components, at home. That, after all, is how you qualify for as much as possible of the various EV subsidies offered under the IRA, including up to $7,500 of federal tax credits for drivers. Getting as much of that credit is critical, not just to narrow the EV price premium compared to traditional vehicles but also in terms of competing within an increasingly crowded field of EV models. That was one rationale for Tesla cutting prices at the start of the year in order for some models to meet the IRA's criteria.

The CATL partnerships pose a thorny political problem, though. These factories would build batteries in the US using, as much as possible, components and minerals supplied from within the US or friendly countries. Yet they would do so using the intellectual property of a Chinese national champion, which would, by definition, expand its market and profit partly on the back of US taxpayers.

Senator Joe Manchin, whose crucial vote for the IRA depended in part on strict domestic-content rules, is angry about anything that might let those subsidies leak to foreign companies anywhere. That includes efforts by President Joe Biden to carve out a role for allies without needing to amend the IRA. Friday morning's clarification from the Treasury Department about content rules for the federal EV tax credit highlighted the role of suppliers in countries with free trade agreements — and pointedly said "free trade agreement" isn't defined in statute. It added that "newly negotiated critical minerals agreements" might yet help foreign suppliers qualify. This is a clear signal that the recent deal struck with Japan may soon be extended to the European Union, allowing them to participate in IRA benefits. With typical understatement, Manchin described the new proposed rules as "horrific." And that's allies, folks. Little wonder he also flatly opposes any Chinese involvement.

Can he oppose it though? The IRA's provisions are rooted in physical flows: What gets mined, refined and put together where. By building and operating any CATL-linked plant themselves, Ford's approach, and presumably Tesla's if it were to happen, fits with this reading of the legislation. The difference is that, in an ironic turn, these would be US companies licensing technology from a Chinese company to utilise here in the US. One has to imagine at least some of the ire in Washington stems from the uncomfortable reversal of traditional industrial roles there. Nonetheless, on its face, this looks like a straightforward case of companies doing what companies do: Surveying the hurdles in front of some subsidies and digging a tunnel instead.

That said, Ford and Tesla should dig carefully. China-bashing is just about the last bipartisan sport left (which is why Biden tapped into it to get the IRA passed in the first place). Governor Glenn Youngkin of Virginia nixed a plan to site Ford's factory in his state, despite the thousands of jobs it would have brought. Performative as that may have been, daring Congress and the White House to impose even tighter restrictions on Chinese involvement is risky. If Friday's report from Reuters that Elon Musk may soon visit China to meet with Premier Li Qiang turns out to be accurate, it suggests the Tesla chief retains his knack for pouring napalm on troubled waters.

Above all, though, the gamesmanship around these plants is less bug than feature of the IRA. The legislation itself resulted from a tortuous process requiring its green principles to be repackaged as a plan for reviving America and checking China. While the intent of seizing leadership in one of the defining industrial sectors of the 21st century is laudable, the unspoken other half of that intent must be recognition that America is a long way from realising it today.

That means, at least in the near term, dealing with things as they are, where China has spent years and billions upon billions building dominance in clean tech. Just as the price cap on Russian oil exports — designed to hit Moscow's revenue but not disrupt supply — implicitly accepts existing conditions for now, so the IRA must operate in a world that is only beginning to move away from decades of forging complex, regime-agnostic supply chains. As it is, parsing each gram of lithium, graphite and all the rest of it for provenance will be an immensely difficult task, fostering an industry of consultants and verifiers on its own.

In decrying critical mineral agreements with like-minded allies, Manchin would be effectively strangling domestic EV production at birth, which really would violate some of the spirit of the IRA. As for railing against using Chinese technology to kickstart a domestic industry in the US, why not take advantage of it until the US is in a position to compete on its own terms. After all, that's what China did.

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement