The Biden administration’s abrupt withdrawal of subsidies for South Korean electric vehicles is threatening to undermine trust in the US, Seoul’s trade minister has warned, as trade tensions grow between the allies.

Seoul is furious that EVs manufactured by Hyundai in South Korea will be excluded from generous consumer tax credits contained in the Inflation Reduction Act, a landmark US climate, tax and spending law.

The furore illustrates the impact on US allies of Washington’s efforts to boost domestic manufacturing in high-technology sectors including EVs and semiconductors as competition intensifies with China.

In an interview with the Financial Times, Ahn Duk-geun recalled Joe Biden’s visit to South Korea in May, when the US president and Hyundai chair Euisun Chung announced a $5.5bn investment to build the company’s first dedicated EV plant and battery manufacturing facility in the US.

“President Biden himself said ‘thank you very much, chairman Chung, I will not let you down’ — that was the exact statement, and it was widely broadcast in Korea,” said Ahn, a professor of international trade law who assumed office shortly before Biden’s visit.

“Then when this new law was enacted and signed by President Biden, and [it became clear that] that company was being discriminated against, this situation provoked emotional and political repercussions.”

The Inflation Reduction Act, signed into law by Biden last month, lays out tax credits of up to $7,500 for EVs assembled in the US, Canada, and Mexico. But Hyundai’s Georgia plant is not scheduled to begin production until 2025 — making it ineligible for the subsidies until then.

“That caused big trouble for Hyundai Motor Company, which decided to make a huge investment based on the current arrangement,” said Ahn, who suggested that “not many [US] congressmen and senators were fully aware of all the details of the IRA”.

Ahn stressed that US officials had acknowledged Hyundai’s predicament and were working positively with their Korean counterparts to try to “minimise the damage”.

“We don’t want to aggravate the problem by adopting similar retaliatory measures,” said Ahn, who reiterated South Korea’s position that left open the possibility of taking action at the World Trade Organization.

“But you never know, if the situation gets really serious, we are flexible too.”

Ahn also acknowledged disagreements between Seoul and Washington over US restrictions on the transfer of cutting-edge manufacturing capabilities to semiconductor facilities in China.

“Our semiconductor industry has a lot of concerns about what the US government is doing these days,” said Ahn, citing the recently enacted Chips Act, which prohibits recipients of US federal funding from expanding or upgrading their advanced chip capacity in China for 10 years.

“Of course, we share the US government’s concerns about the top level of semiconductor products because there is the danger [that they could be] utilised for military purposes,” said Ahn.

“At the very low end are semiconductor products which have nothing to do with those kinds of purposes, and we thought these were for general commercial purposes,” he added.

“The problem is in the grey area, where the US government is trying to reach down to what were previously more general commercial areas, and the Korean government sometimes has disagreement about demarcation.”

As with many export-oriented countries, South Korea is finding itself increasingly caught up in the intensifying competition between Washington and Beijing.

“Like many other countries’ companies, Korean companies are trying to reduce their reliance on the Chinese market,” Ahn said.

He cited Beijing’s policy to “arbitrarily interfere with businesses” as well as its “dual circulation” import substitution policies as the most important factors driving foreign companies to reduce their exposure to China.

He added that over the course of the decade, the “structure of trade” between South Korea and China “will be changed”, moving down the value chain as the exchange of sensitive technologies is increasingly controlled.

“Maybe the trade volume will increase,” said Ahn. “But maybe it will be an increase in the trade of low-value products, whereas the trade in high-end, technologically advanced products might be reduced.” He said that Korea was looking to expand ties with the US and EU as part of a drive to reduce its trade dependence on China.

Ahn said that while South Korea and China remained interested in the possibility of a trilateral free trade agreement with Japan, these efforts were being hampered by Tokyo’s resistance relating to unresolved political tensions with Seoul over Japan’s historic occupation of the Korean peninsula.

He added that Japanese opposition had also complicated South Korea’s bid to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, an Asia-Pacific trade pact that does not include the US or China.

“It’s a very important topic for us and we have already talked to all CPTPP members except Japan, which is still very reluctant to talk to us unless we solve these diplomatic issues,” said Ahn. “The official stance of the Japanese government is still very stubborn.”

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