China files WTO complaint over ‘discriminatory’ US subsidy scheme

China has escalated its confrontation with the United States over electric vehicle (EV) subsidies by filing a complaint with the World Trade Organization (WTO).

Beijing deems the practices under the US Inflation Reduction Act (IRA) “discriminatory”. It feels targeted in particular and believes they are a form of unfair competition in the changing automotive market.

Joe Biden’s IRA provision offers substantial tax credits for EVs, but only if assembled in the US or a country with which it has agreed upon a free-trade agreement – like Japan – and if their batteries use components and critical minerals sourced from the same regions.

China pugilist, EU diplomat

The policy has significantly disadvantaged Chinese electric cars in the US market, sparking Beijing’s claim that it distorts fair competition and disrupts the global supply chain, violating WTO rules.

The Chinese Ministry of Commerce’s criticism of “discriminatory subsidies” asserts that US law unfairly targets Chinese EV manufacturers and suppliers by excluding them from tax credits due to their origins. This is a strategic effort by China to challenge what it perceives as protectionist measures by the US.

The European Union isn’t a free-trade partner of the US and suffers from the same constraints and subsidy scheme exclusions. But instead of protesting, EU officials have sought negotiations for exemptions rather than filing a WTO complaint. Though these talks aimed for a swift agreement from the start, they have been ongoing for over a year and continue to this date.

‘Foreign Entity of Concern’

One pillar of this US policy is the definition of a “Foreign Entity of Concern” (FEOC), which targets entities under Chinese, Russian, North Korean, or Iranian governmental control or influence. The term was defined and agreed upon only in December last year.

After this unison in the American government, EVs containing battery components produced by these FEOCs – mainly China – have ceased to qualify for total US subsidies starting this year.

It further tightens from 2025 to exclude critical minerals mined, processed, or recycled by FEOCs. Only a few non-traceable materials, such as salts, binders, and additives, will be allowed.

This regulation impacts not only successful Chinese automakers, like Polestar, but also national automakers like Ford, known to have had to adjust its battery factory plans involving Chinese battery giant CATL to comply with the IRA. As China accounts for more than 50% of the worldwide lithium-ion battery cell production, basically every car manufacturer has a link with this “FEOC”.

Protectionist Chinese joint ventures

In response, American authorities have claimed that the IRA aims solely at “decarbonizing the US” and equally puts accusations on China’s part, as reported by Bloomberg. Beijing required foreign firms to form joint ventures with local companies to operate within its borders.

This policy has been instrumental in transferring knowledge and technology, especially in the automotive sector. Additionally, China’s subsidies to its manufacturers and a now-abolished whitelist for battery suppliers favoring Chinese companies have been points of contention.

The WTO’s dispute resolution process now faces the task of solving this complex case. WTO rulings on trade disputes are supposed to conclude in six months but often take longer. Europe has asserted China’s arguments concerning the IRA’s competition curbing, but the former prefers not to start a legal battle.