The Inflation Reduction Act (IRA), signed into law by President Joe Biden on August 16, 2022, aims to curb inflation by directing a total of $773 billion in federal funding for beefing up climate efforts, reducing healthcare costs, and implementing corporate tax reform. $433 billion will be spent on fostering the renewable energy industry, providing “clean vehicle” tax cuts, and formulating responses to climate change with government spending and tax breaks. The IRA, which includes President Biden and the Democratic Party’s key policy initiatives, embodies the thrust of his administration’s “Build Back Better Act (BBB)” aimed at implementing Biden’s presidential pledges, which can be said to have rolled back the $3.5 trillion budget package of the BBB bill, focusing on the environment and health sectors.

Prior to the enactment of IRA, the Biden administration signed into law the “CHIPS and Science Act of 2022” on August 9. The CHIPS Act allocates a total of $280 billion to strengthen U.S. competitiveness in cutting-edge technologies, ultimately seeking to facilitate job creation, promote industrial competitiveness, and bolster American global leadership. Of the budget allocated, $52.7 billion will be invested in the semiconductor sector, including direct subsidies to build semiconductor manufacturing facilities, boost advanced semiconductor manufacturing R&D, and provide tax credits for investment in semiconductor facilities and equipment. The CHIPS Act also contains a ‘guard rail’ provision  that prohibits U.S. and foreign semiconductor manufacturers subsidized by the U.S. government from expanding or constructing new production facilities in ‘countries of concern’, such as China. This means that South Korean companies operating semiconductor plants in China cannot expand existing production lines or upgrade their technologies. Since these investment restrictions are arbitrary in nature, they can cause a supply-demand mismatch in the semiconductor industry, consequently destabilizing the global semiconductor market. However, observers also pinpoint that IRA’s guard rail provision does not significantly affect South Korean companies’ semiconductor plants in China. And from a long-term perspective, South Korean semiconductor manufacturers may also benefit from the Biden administration’s containment policy against China’s economic rise.

In accordance with IRA, electric vehicles (EVs) must be produced in the North American region to qualify for government subsidies and tax incentives, which stokes concerns about discriminatory treatment of foreign-made electric vehicles. The imposition of discriminatory measures comes from the fact that U.S. and foreign-made EVs are competing against each other in the U.S.  market, with the market share of South Korean EVs in the U.S. ranking second in 2021. Moreover, certain critical materials required to make EV batteries which are sourced by China account for more than 90 percent, heightening Washington’s concerns over excessive reliance on foreign supply chains. On the other hand, U.S. semiconductor companies are competitive in the design of semiconductors and manufacturing equipment, while foreign semiconductor manufacturers are more competitive in the fabrication process. As the U.S. has yet to perfect its domestic supply chains for manufacturing semiconductors, it needs to forge and deepen cooperation with countries that have advanced semiconductor manufacturing technologies such as Korea and Taiwan, and boost the domestic industry by attracting investments through tax credits and subsidies. In the case of EV batteries, IRA aims to create a more level playing field by offering incentives to domestic companies since external competitors are all vying for market dominance with aggressive industrial policies and subsidization. What is noteworthy is that, IRA, unlike the CHIPS Act, was legislated quite covertly without going through the normal process of gathering opinions from interested parties, partly due to the reason that the legislation contains President Biden’s priority policy objectives involving climate change and labor issues, particularly  ahead of the U.S. midterm elections in November 2022.