The IRA continues to be a heavy point of contention in Europe, with the European union and the US increasingly engaged in discussion regarding the bloc’s inclusion in the landmark legislation. The European Union is aiming for battery minerals produced within the bloc to be eligible for full subsidization under the IRA. In our view this movement would really cement the IRA as little more than anti-China legislation.
What originally looked like a North and South American pact with the inclusion of Australia to trade on superior terms to the rest of the world for EV batteries has become the Americas, Europe, Japan, and South Korea against everyone else, but with particular emphasis on China.
It has become like this because the original terms of the IRA caught Europe in the crossfire between a US-China trade war, stuck between a rock and a hard place during a war-induced energy crisis that limited the available funds of member states. This meant that Europe just isn’t in a position to compete with the IRA’s generous subsidy packages, leading to dwindling investment and job losses on the continent as OEMs pack up and leave for the US and greener pastures.
Europe effectively had two options, the first was to go the truly American route of suing at first sight, complaining to the World trade Organization that the IRA is against free-trade rules concerning artificial stimulus warping the international competitive environment. Ironically this would have been following China and could have led to worsening trade relations within the US and the EU.
The EU seems to be holding this as a last resort should negotiations break down, as the second option was to talk its way into the IRA’s terms to bring it on an equal level with the US and prevent any further investment drain from the continent. We will have to see just how far Europe can integrate itself into the IRA as this current development only concerns minerals mined within the EU, where part of Europe’s problem is that it looks increasingly unlikely that it will be able to meet its own EV-spurred mineral demand, meaning it can forget about supplying the US in any significant quantity any time soon, as it just doesn’t have enough.
Discussions are likely to culminate later this month ahead of guidance offered by the US Treasury as to who exactly will qualify for subsidy, this will be a key indicator to who fires the first lawsuit.
Elsewhere, Japan’s industry minister – Yasutoshi Nishimura – has said the country is actively talking with Canada for greater cooperation within battery metal supply chains.
A public-private partnership of Japan’s Ministry of Economy, Trade, and Industry and representatives of 16 companies visited Canada last week to discuss future cooperation on battery metal supply chains to the country.
Nishimura declined to give specific details of what was covered within the meetings but gave an indication that further discussion could take place at an upcoming G7 ministerial meeting which Japan will be hosting. A ministerial meeting will be held on April the 15th to 16th in the city of Sapporo to discuss climate, energy, and the environment.
Since the Inflation Reduction Act (IRA), Japan has rather frantically been trying to hold its position as a major manufacturer of batteries through joint ventures and overseas factory announcements such as those with Tesla. Panasonic was once Tesla’s exclusive battery producer for its 18650 batteries and produced a large amount of the company’s 2170 cells, but has since been losing ground to Tesla’s own in-house production and the company’s cooperation on LFP batteries with CATL, although Panasonic is the first to be certified to build 4680 batteries for Tesla.
While Japan, and South Korea for that matter, weren’t initially included within the IRA’s “friendly country” criteria sharing a free-trade agreement with the USA, we expect the country to be included in a future clarification of the IRA due to its deep historical ties.
Japan’s discussions with Canada do raise some questions though. Let’s say Panasonic wants to import natural graphite from Canada since it’s more or less the only relevant mineral it can’t import from Australia, it then makes its batteries in Japan, only to then sell it back to the US market to an automotive OEM. Producing batteries in Japan simply doesn’t make sense when importing raw materials from Canada, meaning Panasonic can’t economically produce batteries domestically without sacrificing economics. The conclusion is that it must start building them in the US.
The discussion between the two countries is likely to involve Japanese battery companies like Panasonic and Canadian mining companies setting up the battery supply chain of extraction, refining, processing, and manufacturing within Canadian territory, as no matter how much Panasonic wants to produce batteries in Japan to maintain its domestic workforce, it will struggle immensely to compete due to the logistics involved.
Much like Japan’s EV industry, Japan’s battery industry is going to struggle against Chinese competitors due in large part to its geography, which will eventually force it to wind down domestic production if it wants to remain competitive. Companies like Panasonic will have to follow the subsidies if it wants to remain competitive, otherwise there is a significant risk of being outcompeted through the virtues of lower labor costs, geographic advantages, and economies of scale.