Biden Faces South Korea Backlash Over New EV Tax-Credit Rules

Four months later, Mr. Chung, Hyundai and many South Koreans are feeling disappointed. The reason: A new U.S. law passed last month changed the eligibility requirements to receive $7,500 tax credits for purchasing electric vehicles. Starting Aug. 16, buyers of cars assembled outside North America could no longer claim the subsidy.

That is a problem for Hyundai Motor Group, the parent of

Hyundai Motor Co.

and

Kia Corp.

, both of which make their EVs in South Korea and ship them overseas. The factory investments promised during Mr. Biden’s visit won’t become operational for years. The new U.S. stipulations severely limit EV access and options for Americans, Hyundai and Kia said in a joint statement. “We support solutions to ensure a level playing field for customers and workers,” the companies said.

The European Union and Japan face similar challenges from the new revisions to the EV tax credit in the U.S. But no country has erupted with the outrage of South Korea, which under new conservative leader

Yoon Suk

-yeol has made deepening its partnership with the U.S. a priority.

The backlash illustrates the frictions that can arise as the Biden administration simultaneously pursues tighter security alliances overseas and seeks economic victories back home. In an era of intensified competition with China, the two U.S. objectives run increased risks of clashing.

The U.S. faces tensions as it seeks to better link supply chains with allies and bring back more manufacturing to America, while seeking measures to avoid involvement with adversarial countries, said Wendy Cutler, a former senior U.S. trade official and current vice president at the Asia Society Policy Institute.

“I don’t think we’ve struck the balance yet, and the electric-vehicle provision underscores that,” Ms. Cutler said. “It’s understandable that South Korea is upset and disappointed.”

On Tuesday, Vice President

Kamala Harris,

in a meeting with South Korea’s prime minister in Tokyo, said she understood the country’s concerns on the new U.S. EV law and they pledged to consult one another going forward. That followed an agreement last week to launch working-level talks to resolve issues related to the tax credits.

Seoul has sent a parade of senior officials to Washington in recent weeks to lodge their dissatisfaction. Mr. Yoon raised the EV subsidy issue with Mr. Biden during a brief exchange at a charity event last week in New York. South Korea’s presidential office said Mr. Biden acknowledged the concerns. The White House said the two leaders pledged to continue cooperation on issues that include supply-chain resilience and economic security.

Seoul is experiencing whiplash after getting assurance from the Biden administration on economic partnership after South Korea committed tens of billions of dollars in U.S. investment, said Andrew Yeo, a senior fellow who focuses on Korean issues at Brookings Institution, the Washington-based think tank.

“There is a mismatch between Biden’s domestic agenda and foreign policy in terms of trying to promote supply-chain cooperation and coordinating with allies on critical emerging technologies,” Mr. Yeo said. “What it comes down to fundamentally is an issue of trust for South Korea.”

The rebukes inside South Korea came swiftly as the EV law neared the finish line in Congress last month. Local talk shows and newspapers compared Mr. Biden’s “Build Back Better” to former President

Donald Trump’s

“Make America Great Again” pursuit. “It’s all America First,” one Korea Economic Daily columnist wrote. “It is a fantasy that the U.S. will take care of everything.”

Until a resolution is reached on the EV tax credits, South Korea’s large firms, including Hyundai,

Samsung

and

LG,

could face public criticism should they announce any further U.S. investments, said Kim Byoung-joo, who has advised multiple former South Korean trade ministers on policy. A compromise could include exempting Hyundai and Kia from the North American assembly requirements or scaling down the size of the tax credits, he added.

“The public is shocked, dismayed, disappointed,” said Mr. Kim, who is now an affiliated professor at Hankuk University of Foreign Studies. “The U.S. government has to do something about it. They can’t just sit there.”

South Korea led foreign countries in creating jobs in the U.S. this year, largely driven by EV battery investment, according to a tally from the Reshoring Initiative, which lobbies to bring back manufacturing jobs to the U.S. South Korea created more than 35,000 American jobs, surpassing Vietnam’s 22,500, Japan’s 14,349 and Canada’s 13,671, according to the group’s tally covering the first half of the year.

Under Mr. Yoon, who took office in May, South Korea has pledged to support the U.S.’s Indo-Pacific economic efforts. That includes participation in a semiconductor alliance involving the U.S., Japan and Taiwan that Beijing has opposed. During his Seoul visit, Mr. Biden’s first stop was to a Samsung Electronics Co. chip-making factory. In July, the head of SK Group, one of South Korea’s biggest conglomerates, traveled to the White House to announce roughly $22 billion in new U.S. investments, on top of a separate $7 billion in EV battery investments for a joint venture with

Ford Motor Co.

South Korea’s auto industry covers 13,000 parts suppliers and some 260,000 workers. Exports of locally produced EVs are a major source of the industry’s growth.

Hyundai—one of South Korea’s largest conglomerates and biggest employers—and Kia together enjoy the No. 2 spot in the U.S. EV market with about 9% market share, far behind leader

Tesla Inc.

but ahead of American auto makers like Ford and

General Motors Co.

, according to research firm Motor Intelligence. About 373,000 EVs were sold in total in the U.S. during the first six months of 2022.

About 70% of the EVs that qualified for the $7,500 tax subsidy before Aug. 16 would be immediately ineligible, according to the Alliance for Automotive Innovation, which represents major car companies. None would qualify for a full credit after requirements that battery parts and critical minerals be sourced in North America start kicking in next year, it added.

The Korea Automotive Industry Alliance, which counts Hyundai and Kia as its largest members, said South Korea’s EV exports to the U.S. are likely to decrease by more than 100,000 vehicles a year. The trade group called for similar treatment as vehicles made in the U.S., Mexico or Canada.

The new U.S. EV provisions also require an increasing percentage of battery components come from the U.S. or its free-trade partners. That affects South Korea’s three main battery makers,

LG Energy Solution Ltd.

, SK On Co. and

Samsung SDI Co.

, which source a majority of their critical minerals from China.

The South Korean battery makers will have more time to comply as they ramp up U.S. expansion plans of their own. By 2025, the three companies, in partnerships with U.S. auto makers, are expected to see their presence increase to 70% of all American capacity, according to the Korea Battery Industry Association, a Seoul-based trade group.

—Tarini Parti contributed to this article.

Write to Timothy W. Martin at [email protected] and Jiyoung Sohn at [email protected]

Four months later, Mr. Chung, Hyundai and many South Koreans are feeling disappointed. The reason: A new U.S. law passed last month changed the eligibility requirements to receive $7,500 tax credits for purchasing electric vehicles. Starting Aug. 16, buyers of cars assembled outside North America could no longer claim the subsidy.

That is a problem for Hyundai Motor Group, the parent of

Hyundai Motor Co.

and

Kia Corp.

, both of which make their EVs in South Korea and ship them overseas. The factory investments promised during Mr. Biden’s visit won’t become operational for years. The new U.S. stipulations severely limit EV access and options for Americans, Hyundai and Kia said in a joint statement. “We support solutions to ensure a level playing field for customers and workers,” the companies said.

The European Union and Japan face similar challenges from the new revisions to the EV tax credit in the U.S. But no country has erupted with the outrage of South Korea, which under new conservative leader

Yoon Suk

-yeol has made deepening its partnership with the U.S. a priority.

The backlash illustrates the frictions that can arise as the Biden administration simultaneously pursues tighter security alliances overseas and seeks economic victories back home. In an era of intensified competition with China, the two U.S. objectives run increased risks of clashing.

The U.S. faces tensions as it seeks to better link supply chains with allies and bring back more manufacturing to America, while seeking measures to avoid involvement with adversarial countries, said Wendy Cutler, a former senior U.S. trade official and current vice president at the Asia Society Policy Institute.

“I don’t think we’ve struck the balance yet, and the electric-vehicle provision underscores that,” Ms. Cutler said. “It’s understandable that South Korea is upset and disappointed.”

On Tuesday, Vice President

Kamala Harris,

in a meeting with South Korea’s prime minister in Tokyo, said she understood the country’s concerns on the new U.S. EV law and they pledged to consult one another going forward. That followed an agreement last week to launch working-level talks to resolve issues related to the tax credits.

Seoul has sent a parade of senior officials to Washington in recent weeks to lodge their dissatisfaction. Mr. Yoon raised the EV subsidy issue with Mr. Biden during a brief exchange at a charity event last week in New York. South Korea’s presidential office said Mr. Biden acknowledged the concerns. The White House said the two leaders pledged to continue cooperation on issues that include supply-chain resilience and economic security.

Seoul is experiencing whiplash after getting assurance from the Biden administration on economic partnership after South Korea committed tens of billions of dollars in U.S. investment, said Andrew Yeo, a senior fellow who focuses on Korean issues at Brookings Institution, the Washington-based think tank.

“There is a mismatch between Biden’s domestic agenda and foreign policy in terms of trying to promote supply-chain cooperation and coordinating with allies on critical emerging technologies,” Mr. Yeo said. “What it comes down to fundamentally is an issue of trust for South Korea.”

The rebukes inside South Korea came swiftly as the EV law neared the finish line in Congress last month. Local talk shows and newspapers compared Mr. Biden’s “Build Back Better” to former President

Donald Trump’s

“Make America Great Again” pursuit. “It’s all America First,” one Korea Economic Daily columnist wrote. “It is a fantasy that the U.S. will take care of everything.”

Until a resolution is reached on the EV tax credits, South Korea’s large firms, including Hyundai,

Samsung

and

LG,

could face public criticism should they announce any further U.S. investments, said Kim Byoung-joo, who has advised multiple former South Korean trade ministers on policy. A compromise could include exempting Hyundai and Kia from the North American assembly requirements or scaling down the size of the tax credits, he added.

“The public is shocked, dismayed, disappointed,” said Mr. Kim, who is now an affiliated professor at Hankuk University of Foreign Studies. “The U.S. government has to do something about it. They can’t just sit there.”

South Korea led foreign countries in creating jobs in the U.S. this year, largely driven by EV battery investment, according to a tally from the Reshoring Initiative, which lobbies to bring back manufacturing jobs to the U.S. South Korea created more than 35,000 American jobs, surpassing Vietnam’s 22,500, Japan’s 14,349 and Canada’s 13,671, according to the group’s tally covering the first half of the year.

Under Mr. Yoon, who took office in May, South Korea has pledged to support the U.S.’s Indo-Pacific economic efforts. That includes participation in a semiconductor alliance involving the U.S., Japan and Taiwan that Beijing has opposed. During his Seoul visit, Mr. Biden’s first stop was to a Samsung Electronics Co. chip-making factory. In July, the head of SK Group, one of South Korea’s biggest conglomerates, traveled to the White House to announce roughly $22 billion in new U.S. investments, on top of a separate $7 billion in EV battery investments for a joint venture with

Ford Motor Co.

South Korea’s auto industry covers 13,000 parts suppliers and some 260,000 workers. Exports of locally produced EVs are a major source of the industry’s growth.

Hyundai—one of South Korea’s largest conglomerates and biggest employers—and Kia together enjoy the No. 2 spot in the U.S. EV market with about 9% market share, far behind leader

Tesla Inc.

but ahead of American auto makers like Ford and

General Motors Co.

, according to research firm Motor Intelligence. About 373,000 EVs were sold in total in the U.S. during the first six months of 2022.

About 70% of the EVs that qualified for the $7,500 tax subsidy before Aug. 16 would be immediately ineligible, according to the Alliance for Automotive Innovation, which represents major car companies. None would qualify for a full credit after requirements that battery parts and critical minerals be sourced in North America start kicking in next year, it added.

The Korea Automotive Industry Alliance, which counts Hyundai and Kia as its largest members, said South Korea’s EV exports to the U.S. are likely to decrease by more than 100,000 vehicles a year. The trade group called for similar treatment as vehicles made in the U.S., Mexico or Canada.

The new U.S. EV provisions also require an increasing percentage of battery components come from the U.S. or its free-trade partners. That affects South Korea’s three main battery makers,

LG Energy Solution Ltd.

, SK On Co. and

Samsung SDI Co.

, which source a majority of their critical minerals from China.

The South Korean battery makers will have more time to comply as they ramp up U.S. expansion plans of their own. By 2025, the three companies, in partnerships with U.S. auto makers, are expected to see their presence increase to 70% of all American capacity, according to the Korea Battery Industry Association, a Seoul-based trade group.

—Tarini Parti contributed to this article.

Write to Timothy W. Martin at [email protected] and Jiyoung Sohn at [email protected]