'Inflation Reduction Act is in clear violation of KORUS FTA'

Experts criticize US' protectionist political maneuvering ahead of election

By Lee Kyung-min

The much-contested U.S. Inflation Reduction Act (IRA) whereby Korean Electric vehicles (EVs) and batteries will have their tax credits denied or significantly curtailed in the world's largest economy is a clear violation of international trade norms, experts said Wednesday.

They say that the protectionist stimulus package seeks to boost U.S. President Joe Biden's relatively low support rate of around 40 percent in the lead-up to the November mid-term elections, a last-minute move to change the political environment in favor of the Democratic Party.

The Biden administration began denying tax credits of up to $7,500 (10 million won) last month to buyers of EVs manufactured outside the country, as stipulated in the act. A portion of the tax credit ― $3,750 ― will be made available when EV makers use batteries made of at least 40 percent critical materials extracted or processed from the U.S. or countries that have free trade agreements with the U.S., or are recycled in North America. The percentage will increase in stages to 80 percent by 2027.

"The IRA is in clear violation of Article 2.2 under Chapter 2 Section A in the Korea-U.S. Free Trade Agreement (KORUS FTA)," said Song Ki-ho, a lawyer known for his expertise in global trade norms. He led the global trade committee at Lawyers for Democratic Society before becoming the head attorney of Seoul-based law firm Suryun Asia.

Article 2.2 stipulates that the two parties to the FTA "shall accord national treatment" to the goods of each other. It is "with respect to a regional level of government, treatment no less favorable than the most favorable treatment that regional level of government accords."

In other words, it means that Korea-made EVs being denied the tax credit on the grounds of where they are manufactured could amount to discrimination against a product manufactured outside the U.S. and therefore would not be justified.

"Denying tax credits to EVs manufactured outside the country has the same effect as imposing tariffs," he said. "The discriminatory moves will not be remembered as a successful policy steps by its global peers."

Criticism in US

The sentiment is echoed by Mark R. Kennedy, a Wilson Center Fellow and a former member of U.S. Congress for Minnesota's Republican Party.

"I am pleased that the Biden administration has agreed to discuss South Korea's concerns regarding the Inflation Reduction Act," he said in an email interview with The Korea Times.

"Just as America wants to ensure that others abide by the terms of trade agreements, it is important that America does so as well."

His response follows his written analysis of the IRA, titled "Geopolitics, Competition, and the Inflation Reduction Act." The IRA in his view undermines the existing rules-based order.

"A key element of a rules-based order is embracing a level playing field instead of nations tilting the table in their favor," he said. "The IRA reflects a further retreat from global fairness. The European Union asserts that the bill gives advantage to American producers, discriminates against European producers and breaks World Trade Organization (WTO) rules."

Among the other negatives cited by Kennedy is the suppression of innovation. "A key American advantage over its authoritarian rivals is the innovativeness and efficiency of its market-based economy. Price controls suppress innovation and distort markets," he said.

Given the energy crisis Europe faces and Japan's need for energy, the IRA could have focused more on how America could help supply their energy needs, he added.

WTO engagement lacks tangible outcome

Korea seeking WTO mediation will not result in a meaningful outcome within a desired timeframe, according to Moon Jong-chol, a research fellow at the Korea Institute for Industrial Economics & Trade (KIET).

"The prime minister, trade minister and top trade negotiator reiterating that the issue will be taken up for review by the WTO is more of a gesture in a broader context, not of anything tangible," he said. "Limited as the role of trade authorities can be, they cannot sit idly by when the country's leading growth driver industries are taking a hit. WTO dispute settlement is far from a silver bullet, and they know it."

The ultimate goal of the Biden administration is the establishment of far more extensive manufacturing plants within its borders, according to Han Sang-man, president of the Korean Academic Society of Business Administration.

"The U.S. president is desperate to swing public sentiment in his favor in the lead-up to the upcoming election," Moon said. "The message that foreign firms should build more factories within U.S. borders to create quality jobs will resonate with many working-class Americans. Whether the politically motivated policy will push up the approval ratings of Biden and the Democrats remains to be seen."

Trade Minister Lee Chang-yang went to the U.S. and met with nine U.S. members of Congress, Monday, to express his concerns about the IRA. Among them were members of the House Foreign Affairs Committee, including Andy Barr, Claudia Tenney, Darrell Issa and Joe Wilson.

"The discriminatory measures by the U.S. could have negative impacts on Korea-U.S. economic relations at a time when the two countries are making meaningful strides in technological exchanges and resolving supply chain issues," Lee said in a statement provided by the trade ministry.

"Uncertainties must be removed for Korean firms, many of which are making investments in the U.S., a critical step in fortifying cooperation to advance healthy, long-term investments."