In One Sentence

• U.S. Trade Representative Katherine Tai remarked that the U.S. needs to “identify and deploy” a number of additional measures to “overcome China’s state-directed industrial targeting” in the electric vehicle sector.
• A bipartisan group of U.S. Senators criticized the Biden administration for having “defied” the purposes of the Inflation Reduction Act by delaying the proposed deadlines to exclude Chinese companies from the U.S. electric vehicle battery and critical minerals supply chains.
• The U.S. Department of Commerce vowed to launch new efforts to keep “building and maintaining critical and emerging tech leadership” through its export controls policy, including by implementing controls on high-end chip exports to China.
• The Department of Commerce has announced the re-establishment of an export administration subcommittee under the President’s Export Council to ensure the effectiveness of export controls and protect U.S. commercial trade.

Mark the Essentials

• In a call with U.S. Secretary of Commerce Gina Raimondo, China’s Minister of Commerce Wang Wentao expressed “solemn concern” about U.S. sanctions on semiconductor manufacturing equipment and “sanctions against and suppression of Chinese enterprises.” In a follow-up press conference, China’s Minister of Commerce reiterated concerns about “the direct interference of the US with Dutch companies’ export of lithography machines to China” and expressed “firm opposition” to “US attempt to use export control as a tool and weapon to disrupt the normal trade between companies from other countries.”
• According to Chinese officials, the banning of Chinese telecommunication companies from the U.S. market constitutes a violation of Washington’s WTO obligations. The sanctions and export controls on chips and chip manufacturing equipment too violate the WTO principles and represent economic coercion that is unrelated to legitimate national security concerns. 
• The House Committee on China has called on the Biden administration to use “all existing trade authorities” and establish “component tariffs” on “PRC legacy chips within finished products” to “stem U.S. reliance” on foundational semiconductors produced in China. The House Committee also called on the administration to work closely with “key trading partners” and make the sanctions multilateral. 
• The National Foreign Trade Council (NFTC) noted that trade compliance needs have added a “tremendously” increasing burden on the private sector as companies grapple with export controls, sanctions, cross-border investment reviews as well as new policies and standards on supply chain resilience and emerging and critical technologies. As per the NFTC, trade compliance is now “deeply integrated with the entire business from R&D forward,” and businesses must take a more “proactive” and “holistic” approach to help identify products and technologies that the government “maybe” would like to control.

Keeping an Eye On…

• Decoupling electric vehicle (EV) supply chains, it turns out, is harder than initially thought, given China’s dominant position within the battery and critical minerals marketplace. On December 1, 2023, the Biden administration released its proposed ‘foreign entity of concern’ (FEOC) rules with regard to critical minerals and battery components, as part of rulemaking for the Inflation Reduction Act’s (IRA) EV tax credit provisions. As per the rule, beginning Jan 1, 2024, an eligible clean vehicle must not contain any battery components that are manufactured in China and, beginning in 2025, an eligible clean vehicle must not contain any critical minerals that were extracted, processed, or recycled in China. Barely seven weeks in, the ground under this rule has already begun to crack. On January 18, Hyundai Motor Group (HMG), the second largest EV seller in the U.S., requested the Treasury Department to temporarily exclude a limited number of critical materials sourced from China—spherical graphite and synthetic graphite most prominently—so as to enable HMG to comply with the FEOC rule. In 2022, China refined and produced 100% of the spherical graphite and 69% of the synthetic graphite worldwide and just this past December, China’s Ministry of Commerce, not coincidentally, imposed controls on the export of several categories of high-purity natural and synthetic graphite materials vital to EV battery manufacturing. Exports of graphite and related products to Japan and the U.S. are currently down by 42% and 20%, respectively, as per December trade data. By contrast, in early January, China approved the export of synthetic graphite as well as finished products containing graphite to a number of major South Korean EV battery companies. These South Korean EV battery companies also happen to be the largest committed foreign investors in the U.S. battery manufacturing sector. They have collectively called for a three-to-four year exclusion from the IRA’s non-FEOC battery and mineral component requirements in order to establish supply chains independent of Chinese input. Clearly, something or someone will have to give here. Either the Korean companies will have to substantially renege on their U.S. investment commitments or, alternatively, the FEOC proposed rule’s timelines with regard to certain critical materials will have to be substantially revised. It bears noting in this regard that the licensing provisions in the proposed rule had already been flexibly written to enable U.S.-based EV and battery companies to enter into IP licensing relationships with FEOC (Chinese) entities, so long as the latter does not exert ‘effective control’ over their operations. Even this baseline of ‘effective control’ now seems likely to shift as Chinese companies become significant players within the battery sector of select U.S. FTA partner countries—South Korea and Morocco most notably. When the final FEOC rules on the IRA clean vehicles’ critical minerals and battery component requirements are written, it will have to bow substantially to the reality of China’s dominant position within these supply chains. Which will, in turn, inflame opinion on the Hill which had hoped to use these rules to elbow out Chinese competition under the guise of supply chain resilience. Decoupling EV supply chains is turning out to be a lot harder than has been the case with chips, at least so far.

Expanded Reading

• ASML’s China Sales Surged Despite Secret Dutch Deal With US, Bloomberg, January 25, 2024 [Paywall]
• Flush With Investment, New U.S. Factories Face a Familiar Challenge, New York Times, January 15, 2024 [Paywall]
• US-China chip war may extend to legacy chips, Asia Times, January 13, 2024
• Readout of Secretary Raimondo’s Meeting with Minister of Commerce of China Wang Wentao, The U.S. Department of Commerce, January 11, 2024
• Chinese commerce minister, U.S. commerce secretary hold phone talks, Xinhua News, January 11, 2024
• MOFCOM Regular Press Conference, Ministry of Commerce People’s Republic of China, January 11, 2024
• Notice of Reestablishment of the President’s Export Council Subcommittee on Export Administration and Solicitation of Nominations for Membership, Federal Register, January 9, 2024 
• Krishnamoorthi, Gallagher Call for Urgent Action to Reduce U.S. Dependence on PRC Foundational Chips, The Select Committee on the Chinese Communist Party, January 8, 2024
• Letter to the Secretary Raimondo and Ambassador Tai, The Select Committee on the Chinese Communist Party, January 5, 2024
• China’s electric vehicle dominance presents a challenge to the west, Financial Times, January 5 ,2024 [Paywall]
• Letter to Secretary Austin and Secretary Yellen, Select Committee On The Chinese Communist Party, January 3, 2024
• U.S. export controls need to ‘change constantly’ even if it’s tough for businesses, Secretary Raimondo saysed-to-change-constantly.html, CNBC, December 5, 2023
• Letter to the ambassador Tai, The Select Committee on the Chinese Communist Party, November 7, 2023