Biden administration eases rules on battery minerals as reports say it prepares to boost EV tariffs

Relaxed sourcing requirements on graphite and other minerals for electric vehicle batteries give automakers more time to build up domestic supply chains, but they also highlight national security concerns over China's role in the electrification of the auto industry.

The rule — finalized by the Department of Treasury and the IRS last week — extends eligibility for the $7,500 EV tax credit to vehicles with Chinese-sourced graphite by two years, until 2027. The 2022 Inflation Reduction Act bars tax credit eligibility for vehicles with battery components from foreign entities of concern, including China, as of Jan. 1 and, eventually, critical minerals sourced from such places.

The dependence on Chinese graphite is so strong that if Chinese sources withheld the mineral, they could eviscerate the U.S. EV transition without selling a single car, some experts say. And China is so far ahead on critical mineral production it will take years for the U.S. to build its own domestic supply chain.

While the Biden administration is forgiving Chinese graphite, it appears to be drawing a line at EVs made in China.

President Joe Biden is expected to quadruple tariffs on Chinese EVs and other critical minerals, The Wall Street Journal reported Friday. The move is a result of growing fears among lawmakers and industry stakeholders of Chinese dominance in the EV segment. As with other industrial technologies, such as steel and semiconductors, battery value chains and other EV-related technologies are seen as crucial to the long-term national security of the U.S. — as well as a way to reduce planet-warming carbon emissions.

"It's not just about our domestic ability to produce EVs, it's that having onshored and friend-shored mineral supply chains is a national security imperative," said Leslie Hayward, vice president of public affairs at Securing America's Future Energy, a group that advocates the national security benefits of EVs . We need "to be able to own our defense destiny as well as our energy destiny."

The DOT's timeline extension is being largely praised by industry stakeholders, who say it gives needed flexibility to develop domestic and allied sources of graphite. But it's unclear if the two-year extension is enough for the U.S. to ramp up critical mineral mining.

Chinese mines produce around 75 percent of the world's graphite, a critical mineral used in EV battery production that has no real replacement.

Extensive permitting requirements for mining are one of the biggest barriers to U.S. production, according to experts. It can take upward of a decade for a new mining project to get approved because of federal, state and local environmental regulations.

"Ultimately, permitting reform is going to take congressional action. There's only so much that the administration, regardless of party, can do with the executive pen," said Edward Hild, a principal attorney in the government practice at Buchanan Ingersoll & Rooney.

Previous attempts at permitting reform failed in Congress. Hild said competing interests among Democrats and Republicans make any successful legislation "unlikely," especially in an election year.

The graphite extension encourages EV adoption in the U.S., but the move also may raise investment risk by undermining the urgency to develop domestic sources. While the Treasury's rule requires automakers to show the steps they are taking toward replacing foreign entity of concern sources of graphite, the extension might delay investment in allied sources, experts say.

"The challenge is that this two-year extension creates a lot of uncertainty because it's not clear that it's truly going to be just two years," Hayward said. "It's hard for the miners and investors to know with certainty that there will be a clear market for their graphite from companies that are trying to qualify for the EV tax credit."

A spokesperson for General Motors said all its EVs qualify for the full consumer tax credit and the automaker "plans continued North American manufacturing and supply chain investments to support a resilient, domestic automotive industry." GM is involved in an array of domestic mining and processing efforts including lithium projects in Thacker Pass, Nev. and the Salton Sea in California, as well as graphite from Canada.

If tensions between the U.S. and China were to increase, China could block graphite exportation — jeopardizing the automotive industry and its transition to EVs.

"We're reliant on such a high percentage" derived from foreign entities of concern "on critical minerals in general still today that there could be supply chain holds because of concerns from a completely different area," said Danielle Spalding, public affairs director at battery recycling company Cirba Solutions.

Friday's relaxed rule escalates existing concerns over reliance on China for domestic production. Sen. Joe Manchin, D-W.Va., whose vote was critical for the passage of the Inflation Reduction Act, said the extension jeopardizes "energy and national security," while making the U.S. more dependent on Chinese resources.

"The entire point of the Inflation Reduction Act was to provide American businesses the incentives they need to bring our energy and manufacturing supply chains back to the U.S., reduce our dependence on foreign adversaries and create good-paying American jobs," Manchin said in a statement.

The same graphite used in EV batteries is also employed in fighter jets and other national defense resources, making it critically important that the U.S. builds up its own graphite supply chain in the event of a conflict with China, Hayward said. Without a domestic supply chain, national defenses could be compromised.

Friday's relaxed rule underscores growing economic concerns among stakeholders about the impact China could have on the U.S. auto industry with regards to EVs.

A survey from consulting firm AlixPartners found that most EV buyers are aware of Chinese brands, a result, the firm said, that bodes "ominously" for traditional automakers.

China heavily subsidizes EVs and thus significantly undercuts U.S. vehicles on price. While stiff tariffs may keep out cars made in China, it would do little should a Chinese automaker build a factory in Mexico to circumvent trade restrictions that have led to increased calls from Congress to ban EVs altogether.

"I implore you to take bold, aggressive action and to permanently ban EVs produced by Chinese companies or whatever subsidiaries they establish to conceal their origins," Sen. Sherrod Brown, a Democrat from Ohio, wrote in a letter to President Biden last month. "Chinese electric vehicles are an existential threat to the American auto industry."

Biden is expected to raise tariffs on EVs made in China from 25 percent to roughly 100 percent next week as a result of these concerns, The Wall Street Journal reported Friday. It is unclear what will happen with tariffs on imported graphite.