Can US reduce inflation by severing supply chains?

On Aug 16, US President Joe Biden signed into law the Inflation Reduction Act of 2022, according to which $369 billion would be invested in clean energy to reduce emissions and fight climate change, $64 billion would be spent under the Affordable Care Act to lower health insurance costs, and a minimum of 15 percent corporate tax would be imposed on companies earning more than $1 billion a year.

The legislation requires total investments of $437 billion and is expected to raise $737 billion, reducing deficit by $300 billion.

On the pretext of fighting inflation, the White House promises to "lower costs for families, combat the climate crisis, reduce the deficit, and finally ask the largest corporations to pay their fair share". But the IRA won't directly address many of the causes behind the surging prices of goods and services, from gas and food to restaurant meals and rent, even though the consumer price index is still at a four-decade high.

In fact, the nonpartisan Congressional Budget Office said that the changes will have a "negligible" impact on inflation this year or the next. This makes the IRA a scaled-down version of the "Build Back Better Act" proposed by the Biden administration in 2021.

The IRA, in fact, is a climate bill. The $369 billion investment is related to "climate change and energy security" including tax and other incentives to promote the production of electric vehicles and critical minerals, and develop renewable energy technologies, and thus represents "the single largest investment in climate and energy in American history".

These provisions are intended to put the United States on path to reduce about 40 percent emissions by 2030, but they also reflect economic and geopolitical objectives, including the desire to lessen the US' "reliance on China, ensuring that the transition to a clean economy creates millions of American manufacturing jobs, and is powered by American-made clean technologies". That means the bill is aimed at China.

Biden's goal is to ensure that 40-50 percent of all new vehicles sold by 2030 are EVs－a giant leap from just 2 percent in 2020－and for that, the IRA provides up to $7,500 tax credit for each eligible EV. But only those EVs will get the tax credit whose 50 percent battery materials and components are made in North America starting from January next year. From 2029, EVs that only use North American-made battery materials and components will qualify for the tax credit. Also, key battery minerals used in these EVs should be mined and processed in the US or countries with which it has a free trade agreement.

The bill is actually another "Buy American" legislation aimed at severing ties with the China-centric EV supply chains, especially the battery supply chain.

Scaling up battery production in the US is at the core of the IRA. Nickel, cobalt and lithium are the key metals used in high-performance batteries. But the US is not a big producer of any of these metals and, typically, countries that produce such metals in bulk don't manufacture battery components or batteries. An apt example is Chile, which produces 25 percent of the world's lithium, but no appreciable amount of batteries.

China has been the world's largest new energy vehicle market for seven consecutive years and an important link in the global battery supply chain. Battery metals mostly come from China or companies that have close ties with China. And Chinese battery makers including CATL and BYD account for about half of the global market share.

If carmakers in the US and its allies such as European countries, Japan and the Republic of Korea and their companies, including Tesla, BMW, Toyota, Kia and Hyundai, sever ties with Chinese suppliers, they would have to spend much more on purchase and delivery, because a large percentage of the materials used in the batteries made by ROK companies come from China. That's why the ROK is using all possible diplomatic and trade channels to seek exemption from the IRA. And in case it does not succeed, it could seek redress through the World Trade Organization, because the IRA violates the principles of non-discrimination against most favored nations.

Industry observers say the US legislation, which follows the passing of the CHIPS and Science Act, shows Washington feels "intimidated" by China's rising tech prowess and rues its own incompetence in maintaining supremacy in EV technology. That said, the US still relies heavily on Chinese manufactured goods for clean energy.

Biden has repeatedly targeted China in his speeches, saying that the US wants to catch up with China in the field of new energy. It seems that the only consensus the Democrats and the Republicans have is on checking China's tech rise. The IRA makes it crystal clear that the true intention of the US is to check the progress of China's new energy sector. Before that, the US had already created obstacles for Chinese solar panel makers in the Xinjiang Uygur autonomous region by accusing them of using "forced labor".

The author is an assistant researcher at the Institute of American Studies, the Chinese Academy of Social Sciences. The views don't necessarily reflect those of China Daily.