Update: What the new Treasury rules mean for EV supply chains

This episode is two conversations. The first, recorded the week it aired, is about the newly released foreign-entity-of-concern guidance. The second, from April, is about the round of guidance that preceded it, and it is what makes the first one legible.

The December guidance defines a foreign entity of concern as, broadly, a company in China, Russia, North Korea or Iran, and attaches a 25% ownership threshold to it. Jaffe describes that threshold loosely, as ownership by the Chinese government or the Communist Party in one breath and as ownership by a Chinese company in the next, so the precise test is worth reading in the rule itself. What he is confident about is the effect. He had expected a spaghetti colander and got a stainless steel bowl. The one significant opening is a de minimis provision for small quantities of low-value material, which he reads as covering things like cathode binder, electrolyte salts, solvents and additives, and which holds until 2026. Timing does almost as much work as substance here: the battery component rules take effect on January 1, 2024, while the minerals rules do not start until 2025. That two-year runway is why he counts automakers as quiet winners, since it gives them time to build the tracing systems that prove where every input came from.

The bite lands upstream, in the refining and precursor steps China dominates. Graphite is the extreme case, since essentially all of it comes from China today, leaving roughly two years to stand up a North American supply; plants under construction could be producing meaningful volumes by 2026, which Jaffe calls both possible and a tremendous challenge in the same breath. Chinese majority stakes also disqualify some Indonesian nickel and some Congolese cobalt, along with one large lithium mine and some Argentinian lithium salt operations. What the rule does not do is ban Chinese technology outright. The guidance lays out what Jaffe calls gymnastics around licensing, permitting an arrangement like Ford’s with CATL as long as control genuinely stays with the American company and the licence is not a joint venture in disguise. The reach extends past materials, too: equipment bought from Japanese or Korean suppliers has to run control software that did not originate with a foreign entity of concern.

Now rewind to April, when Treasury went the other way. The credit has two halves with different geographies. Strategic minerals must come from the United States or a free trade partner, starting at 40% of value in 2023 and rising ten points a year toward 80%. Battery components must be made in North America, starting at 50% and rising toward 100%. Between them sat a gap nobody had classified: the precursor chemicals and cathode powders that are no longer minerals and not yet components. Treasury put those constituent materials on the minerals side, subject to a test requiring 50% of the value added at each processing step to occur in the US or a free trade partner. Since Korea is a free trade partner and Japan had just been given a battery materials agreement by executive order, existing Korean and Japanese cathode and anode plants qualified rather than having to be rebuilt in North America. Joe Manchin accused Treasury of blatantly expanding the definition of a critical mineral, and Kann notes that companies building domestic cathode capacity weighed in strongly too. Jaffe’s reading is milder. It does not remove the incentive to build cathode capacity in North America, he says; it puts that choice on a level playing field with Korea and Japan.

Put the two rulings side by side and a single design shows through. Treasury had a choice between rules precise enough to capture every nuance and rules broad enough that carmakers could actually comply, and it erred toward the broad brush: an alliance of countries supplying the chain, with China walled out of it. Jaffe is careful about how much of the resulting factory boom to credit to the law. Companies were going to build these plants regardless, he says; what changed is where. Car factories would probably have happened anyway, but the battery plants and the supply chain behind them largely would not have, and several projects planned for Europe were redirected to the United States.