U.S. Debates How Much to Sever Electric Car Industry’s Ties to China

The Biden administration has been trying to jump-start the domestic supply chain for electric vehicles so cleaner cars can be made in the United States. But the experience of one Texas company, whose plans to help make an all-American electric vehicle were upended by China, highlights the stakes involved as the administration finalizes rules governing the industry.

Huntsman Corporation started construction two years ago on a $50 million plant in Texas to make ethylene carbonate, a chemical that is used in electric vehicle batteries. It would have been the only site in North America making the product, with the goal of feeding battery factories that would crop up to serve the electric vehicle market.

But as new facilities in China came online and flooded the market, the price of the chemical plummeted to $700 a ton from $4,000. After pumping $30 million into the project, the company halted work on it this year. “If we were to start the project up today, we would be hemorrhaging cash,” said Peter R. Huntsman, the company’s chief executive. “I’d essentially be paying people to take the product.”

The Biden administration is now finalizing rules that will help determine whether companies like Huntsman will find it profitable enough to participate in America’s electric vehicle industry. The rules, which are expected to be proposed this week, will dictate the extent to which foreign companies, particularly in China, can supply parts and products for American-made vehicles that are set to receive billions of dollars in subsidies.

The administration is offering up to $7,500 in tax credits to Americans who buy electric vehicles, in an effort to supercharge the industry and reduce the country’s carbon emissions. The rules will determine whether electric vehicle makers seeking to benefit from that program will have the flexibility to get cheap components from China, or whether they will be required instead to buy more expensive products from U.S.-based firms like Huntsman.

The lawmakers who wrote the climate bill, including Senator Joe Manchin III, the West Virginia Democrat, included language that bars an electric car from qualifying for the tax breaks if the critical minerals or other components used in its battery were made by “a foreign entity of concern.” Lawmakers defined that as any firm that is owned by, controlled by or subject to the jurisdiction of North Korea, China, Russia or Iran.

But they left it up to the Biden administration to fill in the details, including important questions like what constitutes a Chinese company, and what product qualifies as a “battery component.”

The administration faces a tricky calculation with the new rules. If it allows more companies to qualify for the benefits, Americans will have a wider choice of low-cost electric vehicles to choose from. That would put more clean cars on the road and help to mitigate climate change. It could also help to shore up the finances of U.S. automakers that are losing heavily on electric vehicle production.

But such a path could undercut the administration’s other priority — to build more secure supply chains for electric vehicles. The government has been aiming to use the climate law to boost manufacturing of electric vehicles and their parts in the United States and in allied countries, and reduce dependency on China, which dominates global markets for electric vehicles and their batteries.

The effort to balance these concerns has touched off a fight between automakers and parts manufacturers, U.S. miners and labor unions.

Automakers have been awaiting the guidelines with trepidation.

Carmakers like General Motors and Hyundai, spurred by the new climate law, are racing to build factories in the United States to produce batteries and process materials like lithium. But they are still years away from being able to produce an electric vehicle without materials and components from China, auto industry representatives say.

China dominates production of materials, like graphite and processed lithium, that are essential to the flow of electricity within a battery, and to the cathodes and anodes, the basic building blocks of a battery. Through both formidable government subsidies and enormous economies of scale, Chinese firms now sell some of the world’s most advanced electric vehicles and the components used to make them at much lower prices than competitors in other countries.

Automakers are also under intense pressure to keep costs down by buying from the cheapest suppliers. Ford Motor lost $1.3 billion on electric vehicles in the third quarter, the company said last month, equaling a loss of $36,000 on every vehicle it sold.

In June, Tesla, which sources key parts from China, submitted comments to the government arguing that the coming restrictions on foreign entities should be less restrictive. The limits on foreign purchases should be confined to major battery parts, like the cathode and anode, not the various minerals or other parts used to make them, Tesla proposed.

In the worst case, said Albert Gore III, executive director of the Zero Emission Transportation Association, “you can have vehicles made in the U.S., with the vast majority of parts coming from the U.S., that could be disqualified from the tax credit because a single part comes from China.” Mr. Gore, whose organization counts Tesla as well as battery makers as members, said he expected the administration to strike a balance.

In contrast, miners and other makers of battery materials and components say that allowing China to supply cheap parts could open the United States to a flood of foreign products. That would ensure that the United States was merely an assembly point for Chinese-made technology and products, and leave the U.S. economy highly vulnerable, they say.

So far, the climate law appears to have done more to stimulate investment in factories to make electric vehicles and their batteries than in the mines and facilities that produce the minerals, chemicals and smaller components that go into the battery itself.

In fact, the only cobalt mine planned in the United States, owned by Jervois in Idaho, temporarily closed this year. The company blamed cratering prices, caused by a new rush of material produced by China. Jervois restarted some exploratory drilling this fall, thanks to new funding from the Defense Department.

Until the final rules are issued, some companies have halted plans for new U.S. investment, conscious that their business calculations could change significantly in the coming months.

“You’re seeing a bit of a holding pattern until the final guidance is released by the administration,” said Abigail Seadler Wulf, the vice president and director of critical minerals strategy at Securing America’s Future Energy, a nonprofit organization.

Mr. Huntsman said that unless the government restricted the use of Chinese materials, there was no point in investing further in the company’s Texas project. He said the Chinese government was heavily subsidizing the production of ethylene carbonate, allowing Chinese firms that account for 90 percent of the global production of the chemical to sell it so cheaply.

“The question, really, is how does the United States want to respond to this?” he asked.

Alan Rappeport contributed reporting.