EV battery supply chain under pressure: The price of a beautiful bill

In July, US President Donald Trump signed a new federal budget — also referred to as the One Big Beautiful Bill Act — into law. Key priorities include cutting government spending to address the increasing national debt and lowering energy costs by boosting domestic oil production.

While the bill purports to support domestic electric vehicle (EV) production and the broader EV battery supply chain, it introduces uncertainty around how these goals will be achieved. This ambiguity is especially risky in a capital-intensive sector where the US is still working to catch up with mainland China, reduce reliance on foreign inputs and generate new jobs.

As of Sept. 30, the budget eliminated the $7,500 tax credit for new EV purchases and the $4,000 credit for used EVs. Both incentives, created under the Inflation Reduction Act (IRA) in August 2022, had been integral to consumer adoption of EVs.  

To qualify for the $7,500 credit, EVs could not exceed a maximum retail price of $80,000 for electric vans, sport utility vehicles and pickup trucks, and $55,000 for electric sedans and small cars. Batteries had to contain 60% of critical minerals produced in the US (or in a country with which the US has a free trade agreement), and battery components had to be 60% manufactured or assembled in the US.

Although these mandates were challenging for global carmakers, the tax credits made EVs more affordable. Over the past two to three years, several global car and battery makers invested heavily in the US — with more than $100 billion in automotive investments announced within 18 months of the IRA’s passage.

Furthermore, removing tax credits and related policies brings uncertainty to the market, potentially encouraging direct imports of battery cells and modules from mainland China, which would undermine recent battery company investments in the US. Following the IRA’s enactment, South Korea’s LG Energy Solution, SK On and Samsung SDI, as well as Japan’s Panasonic, all announced major investments to build a US EV battery supply chain ecosystem.

Ali Adim, head of battery research at S&P Global Mobility, notes that Section 30D tax credits were closely tied to Foreign Entity of Concern (FEOC) guidelines, which “significantly restricted the import of battery cells from China.” Under this framework, China’s lower-cost batteries couldn’t offset the $7,500 tax credit, limiting their competitiveness. However, with that credit now eliminated, tariffs remain the only substantial barrier to Chinese imports. Adim adds that without domestic lithium iron phosphate (LFP) battery production, the US would need “at least a 60% import tariff . . . to level the playing field for the American battery producers.”  

The US is still heavily dependant on other countries such as Japan and korea for battery components espeically cathode active material. Increasing the tariffs could create an inflationary pressure on the cells produced in the US.

At the same time, battery makers, which are working to produce LFP cells in the US but are dependent on manufacturing equipment from mainland China, could face significant hurdles, thanks to the tightened FEOC guidelines introduced under Section 45X of the new budget bill.

Under the IRA’s Section 45X, which was designed to stimulate the creation of a localized EV battery supply chain, automakers received credits of $35 per kilowatt-hour for each battery cell and $10 per kilowatt-hour for each battery module produced and sold in the US. These manufacturing credits complemented demand-side incentives, attracting significant new investments.

The new federal budget does not immediately eliminate these credits but phases them down beginning in 2030, with full termination by 2033, adding long-term uncertainty for investors.

The budget bill also revises Section 45X manufacturing credits by adding new FEOC restrictions and modifying domestic content rules. The main goal of this change is to prevent battery manufacturers from mainland China — whether in a partnership or a joint venture — from qualifying for the credits. 

Adim explains that “a potential silver lining of the [budget bill] is the continuation of the advanced manufacturing tax credit through 2033, which could help revitalize the disrupted US battery industry.” Moreover, clearer guidelines in areas such as licensing and joint ventures with foreign entities may finally enable large-scale domestic LFP production. Nevertheless, he cautions, “sourcing FEOC-compliant materials for LFP components remains a critical challenge that must be addressed.”