[Electric Vehicle Subsidies, Is This Okay?] While Overseas Countries Protect Their Interests... Korea Fattening Foreign Car Sales

US and Europe Shift to Protect Domestic Industries
No Differentiation in Korea's Subsidy Policy
82.2 Billion Won in Electric Vehicle Subsidies for H1 This Year

[Asia Economy Reporter Yoo Hyun-seok] Countries around the world are adjusting the pace of electric vehicle (EV) adoption by reducing subsidies or restructuring subsidy systems to favor domestically produced products. This is interpreted as a move to strengthen their own industries while controlling the speed of EV adoption. However, in South Korea, subsidies are provided without differentiation, leading to criticism that only foreign companies are benefiting.

According to the completed vehicle industry on the 2nd, the United States implemented the Inflation Reduction Act (IRA) last month. The IRA is a law aimed at addressing climate change and fiscal deficit issues, providing a tax credit of up to $7,500 (approximately 10 million KRW) only for EVs finally assembled in North America.

This policy is seen as an effort to strengthen related domestic industries. Korea Credit Rating Agency explained in a report titled "Impact of the Inflation Reduction Act Enforcement" last month, "Key conditions specify mandatory production and procurement ratios of battery minerals and components in specific regions such as the U.S. and North America," adding, "Ultimately, it is judged that the U.S. government intends to strengthen domestic production bases and supply chains related to EVs (including batteries) and to actively counter China's EV and battery industries."

Other countries besides the U.S. are also making changes to their EV subsidy policies. China has already implemented systems favorable to its own interests. Since April 2020, China has been gradually phasing out EV subsidies. However, China continues to provide subsidies for vehicles equipped with battery swapping service (BaaS) technology promoted by the government and extended-range electric vehicles (EREVs) mainly produced by domestic companies.

Europe is moving toward reducing or abolishing subsidies. Although Europe had taken the lead in rapid EV development and adoption to address climate change issues, the trend is now shifting. Germany will cut subsidies starting next year. Previously, up to 6,000 euros (approximately 8.1 million KRW) were provided, but next year it will be 4,000 euros (approximately 5.4 million KRW), and in 2024, only 3,000 euros (approximately 4 million KRW) will be given. Subsidies are expected to end entirely by 2026. The UK recently ended EV subsidies, and Norway is removing various benefits such as bus lane access and parking fee discounts.

This policy is analyzed by the industry as an effort to protect domestic industries while countering China. Since the U.S. and Europe, which led the internal combustion engine market, are falling behind China in EVs, they are implementing domestic-focused policies.

According to the "Analysis of Eco-friendly Vehicle Support Projects" published last month by the National Budget Policy Office, China accounted for over 50% of global EV sales among the top five countries (China, Europe, U.S., South Korea, Japan) from 2018 to 2021, with shares of 65.7% in 2018, 57.3% in 2019, 47.5% in 2020, and 57.6% in 2021. Europe followed with 14.1%, 22.0%, 35.3%, and 27.2%, while the U.S. recorded 14.7%, 13.9%, 11.7%, and 10.7% respectively.

Professor Kim Pil-su of Daelim University’s Department of Automotive Studies said, "Major powers understand that future food sources and job creation will be based on EVs," adding, "Therefore, their logic is to establish such facilities domestically to secure both food sources and jobs."

Accordingly, there are calls for changes in South Korea’s EV subsidy policy. Korea does not differentiate subsidies between domestic and imported vehicles. This year, vehicles priced under 55 million KRW receive 100% of the subsidy, while those priced between 55 million and 85 million KRW receive 50%.

According to the Korea Automobile Manufacturers Association, the government paid 82.25 billion KRW in subsidies to imported EV companies in the first half of this year. More than half of this, 44.77 billion KRW, went to American EV companies. Tesla alone received 44.19 billion KRW in subsidies. In other words, as long as the price criteria are met, subsidies can be received even for foreign brands. This has led to criticism that foreign companies are being overly favored.

However, since South Korea’s main focus is exports, there is advice to be cautious as policies favoring domestic companies could backfire. Lee Hang-gu, senior researcher at the Korea Automotive Research Institute, explained, "Since South Korea’s market is small and export-oriented, favoring domestic EV subsidy policies could block export routes," adding, "It is necessary to align with global countries’ policies."

Professor Kim Pil-su also emphasized, "South Korea is neither a large market nor a major power, so it is not an easy situation," but added, "Now is the time to consider this seriously, and various ideas are needed."