Imagine the dilemma of elected government officials trying to explain to constituents that a vote for more domestic jobs could also mean less choice and possibly higher prices for consumers. Then, consider that same government official telling industry leaders that the global supply chains they’d set up to optimize production needed to be shifted to the United States or countries with certain types of trade agreements with the United States, and that furthermore, the time in which to rejigger those supply chains before negative consequences were imposed would be just two years. Well, that’s exactly what some U.S. government leaders faced when they passed the Inflation Reduction Act (IRA) in 2022.
One of the goals of the legislation was to reduce U.S. dependency on China and instead, shore up domestic supply chains. How? By encouraging companies to produce and source inputs in the United States. Not only would this be a good move for U.S. national security, it would also create new domestic jobs. Two industries targeted under the IRA were electric vehicles (EV) and the batteries that power them. The legislation takes a carrot and stick approach to achieving its objectives. Companies can capitalize on a variety of incentives if they comply with the policy, but at the same time, may be penalized if they don’t. For example, EV makers must meet certain domestic content requirements in order for their vehicles to qualify for $7,500 consumer tax rebates. In other words, for consumers to effectively receive a $7,500 discount on the purchase of their new EV, automakers need to move production, especially as it relates to the vehicle’s battery to the United States. Sound simple? Well, not really.
So far, automakers have struggled to make the switch to greater domestic production. New rules on exactly what is required to qualify for the $7,500 tax rebate went into effect on January 1, 2024. Currently, just 13 models qualify for the tax rebate. That’s right, for now, consumers looking to buy an EV and receive the $7,500 tax rebate have just 13 models to choose from, down from about 24 in 2023. While that number may go up as companies make additional changes, at the moment, the policy, while creating some domestic jobs, has greatly reduced consumer choice when it comes to buying EVs. For automakers, a major challenge is finding viable domestic alternatives for the materials used in batteries. China has long dominated the market for those inputs, and finding new supply chains is proving difficult. For consumers, this could mean higher prices at least in the short term as demand for EVs concentrates around those that qualify for the tax rebate. Indeed, those automakers that do meet the tax rebate qualifications may find themselves, at least in the short term, in a rather unique position of being protected not only from foreign competition, but also from some domestic competitors as well. If all of this leaves you a little confused, imagine what it means for that lawmaker who is likely urging constituents to be patient when they assess the pros and cons of the IRA.
Discussion Questions:
1. Discuss the economic tradeoffs in this situation. Is the move to reduce dependency on China and create domestic jobs beneficial if it comes at the expense of consumer choice?
2. Reflect on the longer term goals of the Inflation Reduction Act. Why does the United States want to reduce its dependency on China? Is this goal compatible with the basic economic principles of efficiency? What are the implications for automakers?
Sources| LA Times: https://www.latimes.com/business/story/2024-01-02/electric-car-models-eligible-for-7-500-tax-credit-cut-to-13; CBS News: https://www.cbsnews.com/news/electric-car-batteries-inflation-reduction-act-us-manufacturing/, https://www.cbsnews.com/miami/news/ev-tax-credits-just-changed-again-heres-where-you-can-still-get-discounts/; Forbes: https://www.forbes.com/sites/forbestechcouncil/2023/07/26/how-the-inflation-reduction-act-is-a-victory-for-us-ev-battery-manufacturers/?sh=5e7cdb6c7891; Unsplash: Photo by Caleb Fisher on Unsplash