This opinion piece has been written by Lachlan Nieboer, CEO, Bedford Analysis.
Should the FEOC rules prove effective, the Biden administration is steering towards permanently dividing the global electric vehicle (EV) battery supply chain and deepening the schism between the world's top two economies. It is doing so with the best of intentions, but is it a risk worth taking?
After the fall of the Berlin Wall and the so-called ‘end of history’, the U.S. cashed in its peace dividend and the era of globalization began. Over the course of the next three decades, the U.S. outsourced manufacturing capacity, with growth in the sector slowing from 4.9 percent in the 1990s to 1.4 percent over the last two decades. Simultaneously, the U.S. has managed domestic and international terrorist threats, engaged in wars overseas, and navigated a global financial crisis in 2008. Its failure to invest in clean energy technologies is partly a reflection of these facts. China took the lead, not least in the manufacturing of EV batteries, which Chinese companies CATL and BYD are projected to dominate for years to come.
But this is all about to change. In one of the most ambitious industrial revitalization efforts since the aftermath of World War II, through initiatives like the Inflation Reduction Act (IRA), Bipartisan Infrastructure Bill (BIL), and the CHIPS and Science Act, the U.S. aims to reignite economic growth, bolster job creation, and enhance domestic manufacturing capabilities. These laws offer substantial incentives to spur the adoption of cleaner technologies and align with climate objectives outlined in the Paris Agreement, which President Biden re-joined the moment he took office. The suite of legislation also aims to address the geopolitical challenges posed by China's dominance of the supply chains for clean energy, artificial intelligence, quantum computing, and defense-related technologies. The urgency of these measures is underscored by China's rampant and evolving presence across critical mineral supply chains, particularly in the Global South.
Under an ambitious plan for EV battery component and mineral-sourcing requirements, the IRA offers a $7500 consumer tax credit for newly purchased EVs. Essential to meeting these requirements is that the model be made in North America, and that specific percentages of battery components and critical minerals do not come from a Foreign Entity of Concern (FEOC). The definition of a FEOC is an entity “owned by, controlled by, or subject to the jurisdiction or direction of a government of a foreign country that is a covered nation”.[1] In December 2023, further interpretations of FEOC rules were issued by the Department of Energy (DoE) and the Department of the Treasury. The rules are the tip of the spear of U.S. economic security policy designed to take back control of the domestic supply chain of EV batteries by stimulating a domestic manufacturing renaissance; and managing the latent geopolitical threats emerging from China's current dominance of critical mineral supply chains and clean energy technologies.
According to Mark Twain, history does not repeat itself, but it often rhymes. The battle with international automakers for control of the U.S. automotive market is not a new one. In the 1970s, the U.S. automotive industry was swamped with more affordable Japanese cars. The crisis reached fever pitch by 1980 when American automotive manufacturers held only a 37% share of the total international market (a drop of 24% since 1960), and only 71% of the domestic market. A notorious and controversial bumper sticker campaign (“Buy American”) emerged to boost ailing demand for Ford, Chrysler, and General Motors vehicles. Ironically, it had the reverse effect, as U.S. automakers increasingly moved manufacturing overseas to cut labor costs. The “Buy American” campaign led to the Fair Practises in Automotive Products Act (FPAPA) in 1982 which instituted mandatory “domestic content” requirements on large automotive companies. Prohibitive penalties would apply for companies failing to source manufacturing content domestically (for example, failure to comply would force a company to reduce its sales by 25% the following year). Five out of the six automotive producers targeted by this legislation were Japanese.
The parallels with the FEOC rules are uncanny. Sourcing restrictions on Chinese-owned components and critical minerals will be scaled up over the next five years. By 2029, for a new EV purchase to qualify for the full $7500 EV tax credit, 80% of all critical minerals (excluding trace elements) must be extracted, processed, or recycled by a non-FEOC country; and 100% of all components in EV batteries must be manufactured or assembled in a non-FEOC country. The details of the definitions (“foreign entity”, “subject to the jurisdiction or direction”, “owned by”, and “controlled by”) focus on taming “covered nation” participation in the U.S. EV market. Persons ultimately deemed agents of a “covered nation” (including current or former senior foreign political figures and their immediate family members), parent-subsidiary shareholding structures, licensing, contracts, and intellectual property scenarios are all anticipated and gamed out in the FEOC rules.
The FEOC rules can be further contextualized within a wider web of U.S. legislation and regulations. The Financial Crimes Enforcement Network’s (FinCEN) private banking account regulations in the Bank Secrecy Act (BSA), and the Beneficial Ownership Reporting Rule, mirror the >25% ownership thresholds set out in the FEOC rules. The 2021 National Defense Authorisation Act (NDAA) definition of “foreign entity” (in relation to semiconductors), and Foreign Ownership Control or Influence (FOCI) regulations, align with the FEOC interpretations of “foreign entity”. The Department of the Treasury regulations implementing the Committee on Foreign Investment in the United States (CFIUS) program aligns with the FEOC definition of a “government of a foreign country”. The State Department’s International Traffic in Arms Regulation (ITAR) regulations align with the FEOC rule on the presumption of control arising from >25% of the voting rights of an entity. The Department of Commerce’s Preventing the Improper Use of CHIPS Act Funding also aligns with the FEOC rule on the >25% threshold with respect to voting rights, board seats, and equity interests. The FEOC definitions are therefore consistent within this wider U.S. regulatory context. Presumably, therefore, they work. Certainly, they provide assurance and confidence to businesses that the government is in lockstep on critical security issues across the financial, defense, and manufacturing sectors.
The FEOCs have already had an impact, and behavior is changing. Chinese battery giant CATL has allegedly undergone a shareholder restructuring to avoid FEOC designation, resulting in founder Robin Zeng Yuqun's ownership decreasing from 27.9% to 23.5%. Zeng is a member of the Chinese People’s Political Consultative Conference (CPPCC), an advisory body to the Chinese government. CATL is the dominant global player in the battery industry, and exports battery cells from China for various vehicles including the Tesla Model-3, Ford Mach-E, and Mercedes' EQS and Sprinter models. Some Chinese companies like Envision AESC, EVE Energy, and Gotion, are reportedly exploring strategies to circumvent FEOC designation to expand their presence in the U.S. market. Other Chinese companies like MG (owned by Chinese state-owned car giant SAIC), BYD and Chery have all been planning battery factories in Mexico to circumvent FEOC restrictions by taking advantage of the United States-Mexico-Canada (USMCA) trade agreement (up for review in 2026) and use Mexico as a “back door” into the U.S. market. Other countries like Vietnam and Malaysia are acting as low-tariff conduit countries for Chinese trade to the U.S. Meanwhile, Ford’s US$3.5bn planned battery production plant in Michigan, using CATL-made technology, is on hold after two U.S. House Committees have called for an investigation into the plant’s direct links with the Chinese military, the Chinese Communist Party (CCP) and North Korea’s Ministry of Foreign Affairs. As Elon Musk recently said, without trade barriers in place, China could “pretty much demolish most other car companies in the world”. Lawmakers are therefore likely to be anticipating such loopholes. So far, so good.
But trade, like water, naturally flows along the path of least resistance. If Chinese companies are unwilling or unable to comply with FEOC rules, or unable to find a “backdoor” to low-tariff trade with the U.S., they could well target other markets. China has seventeen Free Trade Agreements (FTAs), as well as partnerships with BRICS+ and Belt and Road Initiative (BRI) members, which could offer a buffer against the potential economic repercussions of non-compliance with FEOC regulations and a staggered withdrawal from the U.S. EV market over the 2020s.[2] China seems to be anticipating this already. Speaking at the Two Sessions recently, China’s Foreign Minister Wang Yi highlighted that Russia is China’s fastest-growing export market, particularly for cars, now that industrial democracies have stopped exporting to Russia. The FEOC rules therefore could well divide global EV supply chains into two distinct blocs: one dominated by Chinese manufacturers and the other by U.S.-based ones. Initially, Chinese companies currently involved in the U.S. battery supply chain, such as BYD and CATL, will be replaced by non-FEOC entities, like LG Energy Solution from South Korea, or other firms established through newly formed bilateral partnerships, especially those fostered by the Minerals Security Partnership. This would open up opportunities for home-grown players in the battery market to step in and fill the void. Meanwhile, Chinese companies will naturally develop new markets in other jurisdictions. Is this the strategic outcome the U.S. administration wants?
Western policymakers often say that this is not a new Cold War. But there is a danger the West is behaving like it is, and – intentionally or not - could contribute to the collapse of China’s economy in the same way that it contributed to the collapse of the Soviet Union. This would not be a desirable outcome. Is there a compromise? In a recent Foreign Affairs article, Brookings scholar and foreign policy expert Ryan Hass emphasized the need for the U.S. to integrate rather than isolate China to maintain a functional international system supporting American security and prosperity. Achieving this requires a delicate balance between safeguarding national security imperatives and securing economic advantages. If the current trajectory of the relationship – spearheaded by the FEOC rules - continues, there is a risk that by the end of the decade, China could potentially emerge as the figurehead of a loosely structured and outmatched coalition of developing nations confronting a vast economic and political alliance anchored by developed democracies. Western leaders must carefully consider the implications of such a scenario. Keeping China engaged within the established rules and norms of the global economy might prevent this, but it too comes with grave economic and security costs. Paradoxically, therefore, China's current involvement in the U.S. domestic EV battery supply chain serves as both a destabilizing and stabilizing force. Not least, it sustains the momentum of the green transition, which risks a slowdown following the implementation of the new FEOC rules. The U.S. administration has made a judgment call. It has calculated that the risks of incentivizing China to operate in its EV supply chains outweigh the risks of creating a China-led second-order EV market in an increasingly fragmented world by the end of the decade. This is a bold call.
[1] The “covered nations” are the People’s Republic of China (PRC), the Russian Federation, the Democratic People’s Republic of North Korea, and the Islamic People’s Republic of Iran.
[2] China’s FTA partners are ASEAN, Singapore, Pakistan, New Zealand, Chile, Peru, Costa Rica, Iceland, Switzerland, Maldives, Mauritius, Georgia, South Korea, Australia, Cambodia, Hong Kong, and Macao.
Opinions expressed in this article are those of the author. The CMA USA is committed to creating a platform to enable open and honest discussion about critical minerals, their supply chains and geopolitics.
About the Author
Lachlan Nieboer
CEO
Bedford Analysis
LinkedIn | Bedford Analysis
Lachlan Nieboer is an academic and independent consultant specialising in the geopolitics of critical mineral supply chains. He is a graduate of the War Studies Department, King's College London, where he attained his MA in Intelligence and International Security; and New College, Oxford, where he studied Classics.
He is founder and director of Bedford Analysis, a geopolitical risk consultancy that specialises in providing bespoke analysis on global critical mineral supply chains. He is also a researcher in the War Studies Department at King's College London (KCL) and is currently co-publishing a paper on critical mineral supply chains.
Previously, he worked as a consultant for world-leading geopolitical advisory service Oxford Analytica; and for a charity that facilitates legal representation across Sub-Saharan Africa.