Has Joe Manchin Saved the North American Auto Industry?

Joe Manchin (D-WVA), the bane of President Biden's policies that address climate change, may have saved the North American automotive industry from becoming simply the U.S. auto industry. How did he do this? By rejecting the original Build Back Better Act's $12,000 EV and EV battery subsidy program, which would have limited most of the subsidies to vehicles and batteries built in the U.S. (not in North America), and with union labor. (The new legislation at $430 billion is less than 25% of the original BBBA package.)

Instead, the revised and sharply limited legislation, the Inflation Reduction Act of 2022 (IRA), maintains the current EV subsidy of $7,500 for vehicles built in North America, albeit with many conditions, and lifts the 200,000-vehicle cap as of January 1, 2023, a significant boon for major EV producers such as Tesla and General Motors. Further, it makes the subsidies available for individual taxpayers making up to $150,000 and couples reporting up to $300,000, another boon for the auto industry since high income Americans are those most likely to be able to afford the steep prices for EVs.

Because of limitations on the sourcing of EV battery materials and components, subsidies for most EVs sold in the U.S. will be problematic for at least the next five years. The subsidies are not available for automobile purchases above $55,000 (take that Lexus, Mercedes and Porsche!) but do apply to small trucks and SUVs up to a purchase price of $80,000. Some vehicles that were previously eligible for the earlier $7,500 subsidy are no longer so as of the signing of the law on August 16. Still, experts suggest that U.S.-based automakers (regardless of ownership) with North American-centered battery supply chains and North American-based producers of battery raw materials will eventually reap significant benefits through being able to offer the subsidy incentive to many of their potential customers.

Others can decide whether subsidizing high income EV purchasers at the obvious expense of taxpayers who cannot yet afford EVs is responsible tax policy, even if it somewhat encourages the switchover to EVs over the next five to 10 years. Perhaps as a sop to the rest of the population, the legislation provides a $4,000 subsidy for purchasers of used EVs.

The new law also provides subsidies of more than $20 billion for auto and parts producers to retool for EVs, batteries and motors, conditioned on achieving higher domestic content over next several years (and thus reducing dependence on Chinese EV batteries and materials). For those auto and battery manufacturers (e.g., Ford, General Motors, Toyota, LG Energy Solutions, Samsung and others) who have already committed billions of dollars to EV and EV battery production in Alabama, Kentucky, Michigan, Ohio, North Carolina and Tennessee, these loans and grants would offer an additional incentive, along with the substantial state-offered subsidies in each instance noted above to locate production in their jurisdictions.

Under such circumstances, will the elimination of limits on consumer subsidies to U.S.-produced EVs and EV batteries in favor of North American production stem the otherwise "Buy American, invest American, employ Americans" policies of the Trump and now Biden administrations? As some Canadian and Mexican government officials—who protested vigorously against the original BBBA auto subsidies—realize, the revised law is a positive step in favor of the USMCA.

Even if vehicles and key components produced in Canada and Mexico are eligible, vehicles produced in significant auto exporting nations such as Germany, Japan and South Korea are not. The eligible vehicles must be produced with battery materials from the U.S. or from a country that has a free trade agreement with the U.S., e.g., from Canada, Mexico and South Korea among others, but not Japan, Europe or (of course) China. Some foreign officials have complained about the discrimination and charged that the subsidies specific to EV and EV battery manufacturers are a violation of the WTO's Agreement on Subsidies and Countervailing Measures if they cause injury to other producers (difficult in practice to demonstrate). Rules against performance requirements,” tying benefits to sourcing parts and components locally rather than from other producers may also be violated.  Moreover, while Canada and Mexico have not committed resources to subsidize the EV industry, it may be that subsidies offered by Germany, Japan and South Korea to their own EV producers undercut the practical risk of a WTO action. (In any event, since December 2019 when the WTO's Appellate Body ceased to function, the risk of trade sanctions against the U.S. or any of the other WTO parties has been negligible.)

Still, it is much too soon to rejoice. First, the USMCA rules of origin agreed to by all three parties in 2018 strongly encourage auto and auto parts production in the U.S. (and to a lesser extent in Canada) by requiring 40% of auto values and 45% of small truck values to be derived from workers paid at least $16 per hour, which cuts out most Mexican production. The new rules of origin — denying full credit to major auto components made in North America with some imported parts —  currently under USMCA Chapter 31 litigation among the three parties, could further jeopardize the current integration of the industry if the U.S. view prevails.

As is obvious to many readers, Mexico is no longer as attractive a place for new capital investment as it was before Andrés Manuel López Obrador (AMLO) became president on Dec. 1, 2018. Stellantis (formerly Fiat-Chrysler) has announced plans to build a battery factory in Windsor, Ontario, where it produces minivans for the U.S. market. Ford is now making EVs in one of its Mexican factories (in part because of duty-free exports that are possible to the more than 20 nations with which Mexico has free trade agreements). However, Ford has not announced any plans for new facilities in Mexico. General Motors’ management has gone further, indicating that it will not invest more in auto production in Mexico unless and until Mexico implements plans for cleaner electricity production.

In my view, Mexico’s highly negative investment climate is the other factor — perhaps as or more important than U.S. federal and state subsidies to auto and auto parts production — that may well discourage Mexico from receiving major new investments in the sector that represents well over 20% of USMCA regional trade. Leaving aside the litigation against AMLO’s government resulting from the “creeping expropriation” of U.S., Spanish and Italian clean energy projects and U.S.-owned fuel distributors in Mexico, encouraged under the previous administration's 2013 legislative and constitutional changes, other major industries and services appear to be holding back as well.

Most of the government power monopoly CFE's electricity is generated with Pemex's dirty fuel oil or coal; even a switch to natural gas, let alone clean energy, is years, perhaps decades, away. Nor is the government apparently authorizing new independent power projects, many of which produce cleaner energy than CFE for their customers. For example, where a multinational enterprise such as General Motors has a commitment to achieving carbon neutrality by 2045 or 2050 (or Microsoft Mexico states that it will be carbon negative globally by 2030), is it wise to  invest in Mexican facilities that will bring down the average for decades?

EV and EV battery producers have further reasons not to choose Mexico. First, other than in high pollution areas such as metropolitan Mexico City, there is no obvious environmental benefit to substituting EVs for gasoline vehicles when the energy required for charging is expensive, unreliable and dirty. Second, the relatively high cost of EVs for the vast majority of Mexican citizens is prohibitive and is likely to remain so for years.

In conclusion, it is evident that Sen. Manchin (perhaps with the assistance of the government of Canada) and those who accepted his conditions for the IRA have saved the U.S. government from what could have been a mortal blow to an integrated North American industry by refusing to go along with an increased consumer subsidy fully available only for EVs and batteries produced in the U.S. with union labor. Whether that will be sufficient to save regional, particularly Mexican, automotive production in the coming years and decades in view of other U.S. subsidies and Mexican anti-foreign investment policies remains to be seen.