In this episode, I'm joined by Jake Higdon and Isabel Munilla, who helped develop the original "foreign entity of concern" (FEOC) standards for the Inflation Reduction Act, which sought to encourage domestic supply chains. We explore the security risks that prompted FEOC policy, the delicate balance required to do it right, and the absolute hash that Republicans made of it in their recent budget bill, to the point that it may kill the domestic manufacturing they claim to support.
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David Roberts
All right. Hello, everyone. This is Volts for August 6, 2025, "What the FEOC?" I'm your host, David Roberts. In the late 2010s, everyone in and around US politics became extremely concerned over the fact that China dominates the supply chain for numerous technologies that are key to the 21st century, including microchips, solar panels, and batteries. First-term Trump ramped up tariffs on several products from China. But it was under Biden that this concern found full expression.
When putting together the Inflation Reduction Act, administration wonks developed an elaborate system of terms and rules regarding "foreign entities of concern," or FEOC. Several of the clean-energy tax credits in the bill were only available to developers who could show that they were making good-faith efforts to maximize domestic content in their supply chains. The idea was to progressively ramp up a domestic manufacturing base that could eventually, if not replace, at least buffer China.
Like many parts of the IRA, those FEOC provisions were only beginning to do their work when Trump came into power and ended them. They were replaced in the recent Republican budget bill with a rather more crude and draconian version, a set of rules that numerous people inside and outside the industry have warned are basically impossible to follow. The result is likely to be almost no one getting the tax credits and no manufacturing boom — perversely, a gift to China.
Jake Higdon and Isabel Munilla saw it all go down in the Biden administration. They worked at the Department of Energy developing the FEOC standards — he as a senior advisor on manufacturing, her as a deputy secretary, focused on critical minerals — and have watched with dismay as their work is replaced by a Neanderthal version of itself. He is now working with the nonprofit California Forward; she is consulting. I am excited to have them here with me today to discuss why these standards were developed in the first place, what value there is in them, and how the mess Trump has made of them might be repaired.
All right, then. With no further ado, Jake Higdon and Isabel Munilla, welcome to Volts. Thank you so much for coming.
Isabel Munilla
Thanks for having us.
Jake Higdon
Thanks for having us.
David Roberts
So I want to start by taking a step or two back and just to discuss why we're doing this, why any of this. So, you know, classic free trade theory, which every major Democrat was an enthusiastic proponent of my entire life until about five minutes ago, says that, you know, countries specialize in different things. There's division of labor. So, you know, if China is better at doing stuff at the low end of the value chain, like digging up minerals and processing minerals and building parts, and we're better at the innovation and services side of things, then that's all to the good.
Then everybody benefits. You get efficiency, you get, et cetera. That's basic free trade theory. What's happened is that basically it seems to, like, from my outside perspective — kind of like a school of fish — all of a sudden, everyone in D.C. abandoned that idea and has decided that we want to intervene in markets for basically, I think, security reasons. So maybe, Jake, we'll start with you, just sort of like flesh out what is the danger here that all of this is meant to address in the first place.
Jake Higdon
Yeah, absolutely. So I think you teed it up well in your introduction, David. There was a point several years back where it seemed like the world was starting to really take seriously the shift towards clean energy, towards batteries and electric vehicles. And China in particular, and Isabel can speak more to this, made a big bet on all of these industries. And there was growing concern in Washington that we would, in two ways, be on the short end of the stick in that arrangement. And one, we might be reliant on China over the long term in supplying the inputs, the critical minerals, the components that we need for our energy economy.
And we might also not get the benefits that come with domestic investment in these supply chains, in this manufacturing that is looking to be the future of the energy sector. And so Democrats and Republicans, to your point, came to seemingly a rare bipartisan consensus that we may need to have a set of rules as we make big bets on the energy technologies of the future that ensure that those investments are driving towards US supply chains as well as supply chains with our partner countries or allies, and weaning us off of China's dominance.
David Roberts
I've asked a lot of people this question, and basically what you said is what I hear, which is: people got concerned because China dominates these supply chains. But that to me is just not enough. Like, pick various consumer products. I mean, other countries than us dominate supply chains on lots of products. Again, free trade theory says there's nothing wrong with that. Like, if they're better at doing that at low cost, good for them. We benefit. They benefit from us buying it. We benefit from them doing it. So I would like you to at least take a second to flesh out why, why, why are we concerned?
What concretely do we think China might do? What is the... like, put some flesh on the bones. What is the concrete danger? And Isabel, please feel free to jump in here.
Isabel Munilla
Yeah, I'll hop in. You know, Jake is right in terms of what we've seen over the last few years. The investment in clean energy, our focus on that. But I think what we need to remember is the COVID crisis and the Russia-Ukraine war also set the stage at the same time for massive, massive supply chain disruptions. And these were disruptions that US citizens felt on a daily basis from normal products that we needed. But then when we look more closely at critical technologies, and right now we're talking about clean energy, but we also looked at semiconductors and a bunch of other critical technologies.
I think once that shock of the supply chain hits, that happened over the period of COVID, over that period, we realize the scale, not just of our dependence, but the scale of the concentration in production and manufacturing on technologies that for us were not easy to replace. The alternatives and shifting to alternatives, these were not quick and easy fixes. So I think it was just the scale of those various shocks. Right. The scale to the system. And then when we look at the COVID crisis and we look at the ways that supply chains were halted and how difficult it was to, once those supply chains were halted, how difficult it was to ramp production back up once production ramped down, I think all of those impacts had really a pretty big political effect, certainly on US machinery.
So what we're talking about here are the FEOC rules that are applying to a range of energy sectors. But I think a couple of examples that we've seen where China has sort of weaponized its control over some of these sectors and frankly the scale of its investment on these sectors — and one thing I should say before we move forward, David, is that this is their national economic policy. They are simply exercising economic statecraft to protect a strategic priority that they've established for many decades. Right. So 40% of China's GDP growth in 2023 was clean energy.
I mean, it's dramatic.
David Roberts
Let me, let me jump in because I don't want to move past this quite yet because I'm a little fixated on this subject. So you, you've actually laid out there three dangers. One is in an extraordinary circumstance like COVID that shuts down the entire world's supply chains, we will be screwed. The second danger is not just that the supply chains are concentrated in China per se, but just that they're concentrated. Just the concentration itself creates a level of brittleness. So you have kind of single points of failure.
Isabel Munilla
Yes.
David Roberts
And then the third danger is that China might do something aggressive, as you say, weaponize this dependence in a way that hurts us. I guess I understand the first two, although I think we could argue about how much of a domestic supply chain is required to address those dangers. It's the third one I'm a little iffy about, so I'd like to hear more about. Like when you say China weaponizes or might weaponize things, what do we mean by that? Like, concretely.
Isabel Munilla
So there's a couple of key examples that I think that policymakers have in their minds. You know, one from about 15 years ago and a more recent one. For example, the first one is in 2010, China cut off rare earth exports to Japan after they had a maritime dispute.
David Roberts
Yes, I hear this one cited quite frequently.
Isabel Munilla
It's pretty significant because what happened was that at the time, Japan was relying on China for about 90% of its rare earth supply. Obviously, the Japanese auto and tech sectors totally panicked. And then the government took action and sort of began a program of equity investment and general investment in rare earth production. They invested in a company called Lynas in Australia. And because of that investment, which what they did was unusual, is they stuck with that company over some pretty significant volatility in price on rare earths. And they stuck with that company until today. They're still sticking with them.
And it's quite unique actually. But the crisis also led them to a partnership, actually with the US, with the UK and then later with a few other EU countries and Australia. And this was a partnership that then my team at DOE managed, where we, over the course of 15 years, really examined what led to this shock and to the fact that China had this ability to do that. And all of the jurisdictions that worked with Japan to evaluate what the weaknesses in the supply chains were, the choke points. Exactly, as you said, they internalized a lot of that learning, including in the technical teams in DOE.
And then sort of more recently, we've seen that rare earth shock when China has used export controls, as we do. But in July 2023, they restricted gallium and germanium, sending a shock through the system.
David Roberts
But was that in retaliation for something we did? It takes two a little bit to tango here on some of these things.
Isabel Munilla
Look, I wouldn't disagree with you on that, but the fact remains this is an economic strategy that they use. And the question is, are we prepared to be resilient? And so in December last year, they banned exports of gallium and germanium to the US outright. Right. And that was obviously some retaliatory... And then just this year in April, they restricted rare earth elements and high-performance magnets. And again, that was in retaliation. So obviously they are retaliating against, you know, some behavior — however.
David Roberts
They have this power. You might think it would be in our best interest not to go poking them and putting giant tariffs on and like deliberately antagonizing. Like if we're really that scared that they're going to do this, perhaps we should stop deliberately antagonizing them.
Isabel Munilla
Yeah. A little later, I think in our conversation we are going to talk a little bit about coherence, right? Yes, policy coherence, which is obviously fundamental to this discussion. But I think these were the types of risks that the FEOC policy was trying to get at. I mean, but there's also, I would just give another example. CATL, a major Chinese battery producer, global leader, there are security concerns around CATL batteries that were found by DOD. And then that was just recently. So there are some concerns around Chinese technologies that are used.
David Roberts
Surveillance or like hacking, that kind of stuff?
Isabel Munilla
Those sorts of things. And that's something that the US has been studying in many ways across Chinese products. And so that's not to say that risk exists everywhere, but there are certainly some security risks that have raised some concerns over time. So when you add several of these instances together and some of the economic coercion practices, the non-market practices that China uses. When I was in government at DOE, and I ran the Office of International Market Development and Multilaterals, and we did a lot of work examining some of those non-market policies and sort of the types of tactics that we can take, including FEOC rules to begin to address that.
But for your listeners, the key point is that as a policy matter it makes sense to take a look at this because the Chinese state, they do look at ways to influence even their private companies.
David Roberts
This is my next question. Like in your assessment, is China making all this investment just because it wants to have its own domestic source of things so it's not vulnerable to these kinds of dangers? Or does it explicitly want to maintain dominance? Do you know what I mean? Like it doesn't want other countries to develop. Do you have a sense of that?
Isabel Munilla
I believe that they are protecting their competitive advantage because also it keeps costs low. Right. So you know, there's a reason for their advantage in clean energy technologies. One is that, you know, they've established it over time. I mean, this is a multi-decade project that they have. Right. And they have state subsidy. That means in some respects they operate in the red with the support of the state. They've perfected the mineral processing technologies. And they tested and tested and tested these in factories over and over and over again. They have massive economies of scale after all of these decades of vertical integration.
And so they can produce cheaper products and for their market, for the domestic market, for example, on EVs, which is massive there, this allows them to keep costs low, EVs cheaper for their citizens.
David Roberts
So when you sat down when Biden took office, they presumably set out some sort of vision. And I'd like to start this question too. In terms of how we address this. I want to start at the top level, which is, I mean, one thing you could say in response to these dangers is: well, the US needs to be self-sufficient in its supply chains. And obviously that would be a huge, a huge, huge, huge undertaking, monumental undertaking, to literally, you know, go from like 99 to 0 dependence on China. Or you could say we need, you know, 10% of our own supply chains, just enough for like a buffer, you know what I mean?
A little bit of like a, like a bumper just to absorb any of these shocks. We don't need to completely domesticate these supply chains, but we need a little buffer. What was the sort of big vision, the guiding vision, like what is the end state that the Biden administration saw as a goal for this policy?
Jake Higdon
The Biden administration was pursuing a policy to attempt to disentangle as much as possible from Chinese sources of these critical technologies, while recognizing that China is in a dominant position today. And so the idea is that you have to start to turn the valve off in terms of Chinese supply while simultaneously making investment in a new path for materials and inputs to flow. And that's going to be a combination of investment in domestic production, which, to Isabel's point earlier, has long lead times. We may not have the strategic advantage in certain technologies. And so that has to be coupled with working with our partners and allies overseas.
David Roberts
Also, we don't have the collective will or capacity to operate in the red as Isabel says China is. They can make long-term planning decisions and tolerate some red ink in the meantime; we have lashed ourselves to a purely market economy. And so in some sense, like we get what the market economy gives us, and this is what it gave us. So, you know what I mean. I'm wondering if there's any larger questioning about our economic system going on in the background here. But anyway, so you say "as much as possible," Jake, but that's vague. That's, you know what I mean?
That's a big possible range. Do you have any sense of how much we think we can disentangle, or whether we have any particular sort of target for how much to disentangle?
Jake Higdon
I think it varies by sector.
Isabel Munilla
It does, yeah. I would come in just with a couple points. I mean, maybe in terms of the vision. One key roadmap for the Biden administration was again built on the COVID-19 crisis, which, as we came in, the President put out in 2021 a supply chain executive order that was pretty clear in directing many of us. And I did a ton of work on that with EPA and a range of other agencies. Basically, our job was: "Okay, COVID-19 crisis. We had a huge problem, put our national security at risk, our economic security at risk. Everybody get out there and study these sectors like crazy, figure out the choke points. Let's come up with some strategies, some policies."
And what was really fantastic about that is that that was happening at the same time that the IRA was being negotiated. So at the same time we just — absolutely top priority, US climate policy, IRA, the Bipartisan Infrastructure Law, all of that was happening at the same time that the agencies were scrubbing supply chains. And so my assumption is that again, I was in some of the weeds here and there, some of the drafting weeds here and there.
But, you know, there was a lot of pollination between those two efforts. And what it meant was that we were guided by the supply chain EO really to prioritize diversification, firstly as an economic security, national security priority. And then that was matched with the policies that came out of IRA and BIL and CHIPS that was really about investing in manufacturing. And domestic manufacturing. So if we look at sort of the vision. The vision was crafted out of really the crisis that the Biden administration was coming into, Ukraine, Russia, where a lot of supply chains were thrown up in the air.
We were having to deal with the demand for gas from Europe and having, throwing some of our climate ideas out the window, so I think that's sort of the environment we were coming out of. And so this rule in particular was really built around some of the work that was done. And to your question, David, you know, are we going to do everything or what are we focusing on here? We focused on, for this rule, right? EVs, batteries, critical minerals. Certainly, there's risks of concentration of technologies and a range of other products.
But we focus there because of the strategic priority for our country and certainly for critical minerals that are fundamental to so many technologies. That's why we focus there.
David Roberts
EV manufacturing and battery manufacturing are relatively high on the value chain. And so it always sort of struck me at least as plausible that we could get into that. Like we still do some manufacturing here. We know admittedly China's like getting really, really good at it, really good at advanced manufacturing. But we're still in that game. And I can imagine us doing that, but digging up minerals out of the ground and processing them, doing that initial processing, that is the bottom of the value chain. It's big, it's ugly, like nobody wants it in their backyard.
Those jobs are not particularly good or high-end, you know what I mean? Like that's sort of like paradigmatically the kind of thing that's low on the value chain that an advanced, you know, sort of like knowledge-based economy doesn't do anymore. So I was always a little bit more skeptical about that side of things. And I wonder, Isabel, if you think it's a reasonable expectation that the US will actually get back into doing this sort of mining and processing and if so, like who, where, like who's going to, who wants that in their backyard?
Who's going to put up with that? Who's going to do those jobs? I guess. Do you know what I mean? Like this low on the value chain stuff, is it harder to move that back home?
Isabel Munilla
So a couple of reflections on this and it ties in actually to the distinction between the Biden approach on FEOC and the Trump approach on FEOC. So on critical minerals and on energy technology support in general, let's say our focus was really creating resilience of US supply chains, building out our domestic manufacturing base, but cooperating with allies and partners. So when you think about critical mineral supply chain and building out both a supply chain of raw material and processed material, the challenges are great. We didn't talk about the numbers in terms of the scale of concentration of processing power from China, but it's very, very significant.
David Roberts
Those are in the like the 98, 99% range.
Isabel Munilla
Yeah. Above 50. Yeah, exactly. So, however, if you're going to address that issue, you do that with trusted allies and partners. And that's fundamental to the strategy and it's core to the policy design. And the way that we designed the FEOC policy, at least for the 30D for the EV tax credit, it incorporated eligibility from companies that came from FTA countries. And then we worked on some supply chain agreements with Japan, and there was a number of countries that were also hoping to kind of get into that eligibility train as well.
David Roberts
Australia has a ton of those minerals. Are they in that game?
Isabel Munilla
Well, 30D is going away. So unfortunately, you know, there's a very short window. But, you know, we did have a very deep partnership with Australia. I do believe that the administration will hopefully continue that partnership. They certainly are, you know, number 1-2 in the top 10 of producers of many critical minerals. But the point is that when you design a strategy like this that's incentivizing the creation of, frankly, a brand new homegrown industry that hasn't existed before, the notion that you're going to be able to do it without allies and partners and that your, say, tariff strategy shouldn't complement that, I mean, that's where this becomes a little difficult.
And where I raised earlier the point that this policy that's being put together, it's not clear that it's totally coherent.
David Roberts
Yes, well, we'll get to that later. But Jake, I want to talk about, so you came in, everybody's concerned about China. There's this big climate bill being put together. The higher-ups in the Biden administration decide they want to include something like this, something designed to shift supply chains. So what did you... like when you were brought into this? What were sort of the guidelines you were given? I mean, were you specifically told, like there are these things, FEOCs, and we want to, you know, we want to discourage these particular... like how specific was it and how much was it just like a blank sheet of paper? What can I do here?
Jake Higdon
That's a great question. So the rule that we were given, and Isabel can speak to this as well, but we were given a rule that had a lot of ambiguity in terms of the definition of a foreign entity of concern. And our task was really to parse through that and provide additional guidance on which companies will run afoul of those rules because they have too close ties or are seemingly under too much control of China.
David Roberts
And we should just say right at the outset that's not super clear. This is not a case where there are Chinese companies over here and clearly American companies over here. Like every company has branches, places, they have sprawling international supply chains various places. It's not straightforward to identify these companies.
Jake Higdon
That's totally right. And one category of companies that is easy to identify are just the companies that are doing the operating in China. Like they're producing the critical mineral or the battery component in China. We said, "That's clearly, by the letter of the law, off limits if you're an automaker trying to get this reward at the end of the day." You know, because this is a carrot and stick approach, this $7,500 electric vehicle tax credit. You're going to have to figure out how to get your batteries from not China itself. So then there's this whole question of all of the other entities in the world that you are referring to, where you get into the minutia of percent ownership and control and licensing.
And so we're navigating all of those details. And I think you asked the question about the North Star, and the North Star is not simply to say, "We need to shut down these supply chains overnight and flip a switch and suddenly we'll be able to get, you know, domestic supply chains to surge right ahead in the EV transition." We need to make sure that there were a set of rules that provided a pathway for companies to begin shifting their investments away from China. And there were things like different timing considerations where there was a graduated implementation of the rules that rolled out in phases.
David Roberts
I mean, because obviously if you say you can't get the tax credit unless you buy minerals from someone other than China, and no one else but China is making the minerals, you're just saying no one can get the tax credit. So I clearly want to avoid that outcome. You wanted to avoid that outcome, I should say.
Jake Higdon
And companies are locked into long-term supply agreements. They might have to figure out how to break those contracts or make new ones. And so you need to set this very clear set of rules with clear bright lines that companies can follow. And we can argue about whether we did or didn't do a good enough job in doing that so that they can start to change up their investments in their supply chain so they can exert pressure on their suppliers to distance themselves from the Chinese government. And that a couple of years down the road, you have an opportunity to have a supply chain for domestic automakers, companies like GM and Ford and Tesla, that is not reliant on China in terms of Chinese-based companies, but also companies around the world where the Chinese government is playing an outsized role.
Isabel Munilla
And David, one thing I would flag is that while we were in the midst of working on these rules with the Treasury Department, I think what was really interesting is obviously it took us a long time, like 18 months, but it was really interesting to see how much the market was already moving, even though they didn't totally know what the end result was going to be. That statute was generally giving them a direction of travel, that ownership was an issue. We already had a CHIPS Act definition that was sort of out there.
David Roberts
Was that the first place where FEOC showed up in that bill?
Jake Higdon
So it actually showed up in the Bipartisan Infrastructure Law or the Infrastructure Investment and Jobs Act. It was included in the DOE battery grants program, about $7 billion for battery grants at DOE. And it was included as a consideration, something to take into account. It wasn't an outright restriction. And then we had CHIPS, and then we had the Inflation Reduction Act, which pointed back to that infrastructure law rule and said, "In the case of the 30D electric vehicle tax credit, you can't have any foreign entities of concern to qualify."
David Roberts
Right. And one of the dangers, as I said, is just kind of cutting off the tax credits by making these too strict. Another danger that I would imagine you want to avoid is these things can get pretty complicated. You know what I mean? If you're dealing with a company, you don't necessarily know if it's a big company, where all its supply chain is, or, like, or, you know, whether it's "influenced" by Chinese companies. Like, if I'm just, you know, a small to medium-sized company out there trying to make deals, trying to survive, that puts a very big administrative burden on me to sort of do this kind of thorough vetting of every single person or company that I buy anything from.
I'm imagining you had that in the back of your mind. How did you think about how to balance that concern?
Jake Higdon
It's absolutely the case that this introduced a lot of new burden in terms of the supply chain diligence that companies were doing for the electric vehicle tax credit. And I think that's part of the goal of the policy as well. So we shouldn't underrate the potential benefits that I think we, as an administration, were trying to pursue in getting folks to really dig into their supply chains and go through that work and bring some transparency. And Isabel can likely talk to how that relates to other kinds of similar efforts going on around the world on supply chain transparency.
But I hope to stand up the compliance program for the 30D tax credit. We were working very closely, hand in hand with automakers. This was a ton of work. I mean, hundreds or thousands of pages with signed letters from suppliers and information on board seats and ownership stakes, things that they in many cases had never been able to collect before from their suppliers that they were now handing over to the federal government to prove that they were able to qualify for the credit. And I think the thing that I want to just emphasize, especially as we shift to talking a little bit more about the new set of rules, is that that was only possible; all of that work was only possible because the carrot at the end of the day was strong enough to drive folks to make the work worth it.
So $7,500 for every vehicle in terms of a discount that you can offer a consumer. And so you have to really think about how you right-size restrictions with the benefits that someone is getting by complying.
David Roberts
Right, right, right. And this, all this complexity, this ended up in the IRS guidance. I mean, that's where all this finally got written down.
Jake Higdon
That's right.
David Roberts
I'm sort of curious, like, the IRA passed. There wasn't at the time a particularly big backlash about it. And it didn't really seem to play that big of a role in the election either. Like, I guess, unusually, like, compared to, you know, Obama's healthcare bill or something like that. But I'm just curious, like, in that time between when you passed it and when Trump won, were conservatives complaining about the way you had done this? Like, was this a, a common critique you heard that they were unsatisfied with the strength of these rules, or is this anything that you had?
I mean, did you have advance reason to think they were gonna go nuts on this stuff when they took power? Did you hear anything about this in advance?
Jake Higdon
Yes, we had some early indications, David, that conservatives, and particularly, you know, certain Republicans in Congress, felt that this was not a stringent enough approach or potentially not punitive enough on China or Chinese companies. I think a couple of news bites that listeners might remember are, you know, a big news storm back in 2023 around the Ford CATL arrangement for their battery manufacturing facility. So Ford entered into a licensing agreement with CATL, the Chinese battery producer, to leverage some of their battery technology, which is lithium iron phosphate technology, technology that we don't know how to make in the United States, to be able to produce batteries for Ford electric vehicles. And the idea is that we can't make this technology in the US with our current know-how, but we can do all of the work in terms of the actual manufacturing jobs and building out the supply chain if we can just license some of their technology and start to bring this information and this know-how back to the United States and scale up LFP here.
David Roberts
It's worth asking, how do you expect American companies to learn how to do these things except by learning from the people who are doing them? Like, if Republicans don't want us to learn this from China, where else are we gonna learn it? Like, what, what, what do they think? Do they think this is just like people sitting down and thinking real hard in a room? Like, where do they think this kind of knowledge comes from? If not from the people who are expert at it.
Isabel Munilla
David, I mean, this is again, one of the coherence questions of this policy, right? Is that what we have is sort of one piece of the puzzle, right? We know that we don't want these materials, but we also know that we compete on a global basis with a country that has used a technology and innovation framework, an investment framework that right now this law is not going to match — let's just be clear. We either are going to compete with them or we're not going to compete. We've already decided that even though they have prioritized clean energy technologies and they prioritize their dominance in clean energy technologies, we have decided with this bill that we are not. We're not going to compete, at least on that.
David Roberts
Well, that's not what they're saying. I mean, they're saying, they're saying this is about competition. They're saying, I mean, they're sort of like, I guess the top-line pretense is still roughly the same as what Biden said. Right. They're still saying the same things.
Isabel Munilla
It's true. But again, the question is in the mechanics. It's in the project economics. It's exactly as Jake said, this tension, this tension of needing to allow the financing for firms that were still using some Chinese technology and materials while allowing them to ramp their investments to learn so that we can accelerate domestically produced technologies and materials, et cetera. But the question is, what's the balance in this bill? Does that balance get us there? And all we've been seeing, when you read the news about this bill, what you've been seeing is the concern around the freezing of investment.
David Roberts
Yeah. So let's talk a little bit about what they've done here. So, you know, Republicans decided your FEOC rules were not sufficiently punitive. And like, I don't know, even that seems to lend them more, more genuine interest in policy than they seem to have. I think they just, like a bunch of them just wanted to signal we're tougher on China than they are. So, and I'll just say one other thing by way of preface, all these very elaborate rules about sourcing that regard clean energy in the recent Republican bill, like those rules about sourcing from foreign countries, they don't apply to other technologies.
Like they don't apply to oil and gas. Like there are parts, I was just reading about this yesterday. Like there's a certain part of natural gas drill bits that we only get from China. China has like 99% of the supply chain for this particular kind of drill bit. You know, the Trump people did not apply these standards across the board or even to other energy technologies. They're applying entirely to clean energy technologies, which sort of makes you raise your eyebrow a little bit right at the beginning or at least makes me raise my eyebrow. But, but Jake, talk a little bit about just concretely how they changed your FEOC rules.
Jake Higdon
So the new Republican law that passed in early July dramatically expands the scope of the foreign entity restrictions in the energy portions of our tax code, which, as a reminder, the tax code is how we do energy policy in this country. And it's where the vast majority of investment in manufacturing, of clean energy technology and deployment is coming from. And so the new set of rules are expanded in scope to virtually all advanced manufacturing and electricity generation incentives as well as to every part of the supply chain, not just the most critical segments. So at least as of now, and you know, subsequent guidance may clarify this, companies don't know whether they have to worry about every nut, bolt, or screw that is in their facility potentially coming from a foreign entity of concern.
David Roberts
I mean, that's what the, the language as it stands seems to indicate, doesn't it? I mean, that's kind of what it sounds like.
Jake Higdon
That is what it sounds like. And so it's a dramatic expansion in scope to sectors and technologies that haven't previously been subject to foreign entity restrictions, to a whole host of new potential suppliers that might be covered. So we're talking many multiples of the number of entities that will have to do this sort of diligence under the new rules versus the old rules. And then it introduces a bunch of new tests. It introduces terminology and concepts like "foreign-influenced entities," "material assistance," control on the basis of how much debt is held by Chinese shareholders. So these are new, totally untested concepts that will make or break whether technologies can or can't get tax credits.
David Roberts
Yes. And you can just hear in the words themselves that they're vague, like "foreign-influenced entity." I defy you to give me a concrete objective metric for what a "foreign-influenced..." or "material assistance." Like how much? Based on what, measured by what? Like, is there any guidance in nailing down what these things mean?
Jake Higdon
Yeah. So the rule has percentages on the material assistance front where companies, to be eligible for tax credits, will have to ratchet up the amount of, you know, the material that they use in the production of their equipment that is affirmatively determined to not have foreign entities in it. So it's really an affirmative test. It's going to be very hard to meet those thresholds. But also, to your point, there's a lot of uncertainty as to how you actually do those calculations. And there's a lot of discretion in the bill that's given to the Treasury Secretary and the IRS to interpret these rules.
And I will say, to your point, on whether or not this is a good faith effort, the Trump administration, right after the passage of this bill, turned around and issued an executive order that was essentially directing the Treasury Department to take a maximal position on foreign entity restrictions.
David Roberts
That's supposedly how he talked the Freedom Caucus into signing on to this, is promising them that he would follow it up with something that basically violated, basically put a lie to what he promised to Murkowski and the moderates to get the bill through.
Jake Higdon
That's right. And then I wanted to hit one other piece of this as well that's new, which is the new rules have a long recapture period for the IRS to claw back tax credits that were already issued because a company has run afoul of the rules.
David Roberts
No kidding. They're retrospective?
Jake Higdon
Exactly. So in the case of licenses and contracts, for instance, there's a whole set of rules that, again, need clarification around whether there's "effective control" in licenses and contracts. And we dealt with this a little bit in our rules as well. There's a 10-year recapture period on violations of those rules. And so it's going to be, I mean, if you're a solar company, good luck going to someone to get financing and saying that not only am I confident that there are no foreign entities in my supply chain right now, but for the next 10 years, nothing is going to change or come to light that would make anything become a foreign entity of concern.
David Roberts
And if it happens, a substantial chunk of our revenue will get yanked back by the government.
Jake Higdon
Exactly.
David Roberts
It's not a stable investment proposition.
Jake Higdon
It makes for a very uncertain environment and a pretty hard investment environment for domestic manufacturers and the electricity generation developers as well.
David Roberts
Yeah. So it seems like this is requiring taxpayers and developers to understand a lot of relationships that are not sort of like first-order relationships. These are like second-order, third-order relationships that they might not be able to understand or might not even be able to have access to. I mean, some of this stuff is like...
If you're dealing with a company, I can't imagine that every company wants to be completely transparent to a possible foreign buyer about all of its supply chains. I mean, it seems to me like some of this information is just not even going to be accessible at all, right?
Jake Higdon
That's right. And we actually had problems with that even in the electric vehicle context, where there were often, you know, back-and-forths between automakers and suppliers about giving information over that might be proprietary about, you know, privately owned companies.
David Roberts
Right.
Jake Higdon
And that was a handful of automakers with, you know, battery supply chains that were also, you know, relatively well understood or with a few major foreign battery producers. The companies like that folks know: LG, Samsung, Panasonic. Now we're talking about solar, wind, geothermal, natural gas with carbon capture. A number of technologies that are now covered by the new rules that haven't done this sort of supply chain diligence and are almost certainly going to run into these issues with information availability.
David Roberts
One of the specific things I wanted to mention is this notion of "effective control." So it's not just direct Chinese control over the company that you're dealing with. That's out of bounds, it's effective control. So what does that mean? So it says that effective control is triggered by any agreement with a specified foreign entity that "relates to" one of these technologies. No one knows what that means, but it could potentially apply to everything. Like "relates to..." that could apply to anything. I mean, it's difficult. And this, I guess, is the conclusion that a lot of think tanks and etc. who have read this bill have come to. It just looks like this is going to be impossible. Like in a lot of cases, you're trying to sort of prove a negative here too, right? I mean, which is notoriously impossible.
So I'm sort of wondering, in your final judgment, is there... like if I'm a solar company or an EV company, is there a supply chain available to me at the moment that could satisfy all these requirements? Is there room to move forward for these companies and industries at all, or is this just tantamount to shutting off the tap of tax credits?
Jake Higdon
I think there are a few different possible paths through. So one is you just get your project done before these rules go into place. So if you can commence construction this year before 2026 and the foreign entity restrictions fully kick in, then you dodge this whole...
David Roberts
But isn't that what the executive order tried to thwart? That's what the executive order is aimed at, right?
Jake Higdon
That's right. So the executive order is also trying to modify the rules around commencing construction and, potentially, or as they in their words, try to avoid circumvention of the commence construction rules so as to catch more projects in this net. So that's one path: you just get the project done sooner. I think some sectors and technologies may be better off than others. So because in the battery space folks have been doing this for the electric vehicle tax credit, even though the EV tax credit is going away, you can still get the ITC or the PTC for energy storage.
And so folks who are now subject to foreign entity restrictions on the electricity generation side for stationary battery storage might be able to navigate some of these rules because they did some diligence. I think for almost everyone else, it's really just going to depend on whether there is a really high risk appetite to make these claims in a situation where there is not total certainty about exactly how these rules will be implemented or applied. And my best guess is that very few projects will be able to do that. So these rules may amount to a bit of a shadow repeal of the tax credit, where, you know, you might in an ideal world have some foreign entity restrictions as the stick alongside the carrot, but these new rules just sort of hit the clean-energy industry over the head with a stick and make it impossible to comply.
David Roberts
Yeah, kind of a little bit feels like that's the purpose. I mean, it's like not only you're going to a financier, not only the uncertainty that exists in the text, but the additional uncertainty that the text is going to be interpreted by an administration with an explicit expressed hostility to the industry that you're involved in. So, like, you're not going to get any wiggle room either. You're not going to get a friendly hearing either. So I'm a little curious where we go from here. If there is a new administration, what of the FEOC rules, the sort of draconian FEOC rules that have been implemented via this legislation?
What requires new legislation to undo versus what can be done with executive action?
Jake Higdon
I think there is an opportunity within the letter of the law here to interpret the rules in a way that is not the maximum stringency with designs to make very few, if any, projects eligible. Now, I don't think, based on the executive order that we talked about, that this administration is going to do that, but I think that there is latitude under the letter of the law to provide guidance around what is included in the material assistance calculations, what types of licenses and contracts might be permissible. That would allow for more clarity for industry to feel confident that they can make investment decisions and that they can go to financiers and finance their projects. I think a couple areas or dimensions of that that I would urge policymakers to think about: One is just remember that we're going to need supreme focus to be able to compete with China in these supply chains. And so, we need to focus on the critical elements of supply chains and leave the rest alone. Like I was saying before, it's not feasible, and it's also not in America's energy or economic security interest to ensure every nut, bolt, or screw that goes into an energy technology —
David Roberts
It's not a problem if we buy some nuts and bolts from China.
Jake Higdon
That's right. And so I think there's latitude to make it clear, "Okay, these are the critical things we actually want you to put into your calculation and make sure are not foreign entities. Outside of that, good to go." I also think that just in general, providing very clear bright-line rules that allow folks to feel some sort of certainty around what is or is not permissible. Very key to allow companies to be able to make investment decisions and not seem like their projects are too risky to finance. And then I think the last thing is just on the licensing point, to your point, David.
We are behind, and we have to accept that reality. And if we want to catch up on the technological frontier for electric vehicles, for solar, for wind, we will need to work with foreign partners and learn from foreign partners. And it's a little incoherent, in my view, for the same folks who are bemoaning the fact that China took US inventions and scaled them up over there to then say that it wouldn't be effective for us to learn from the Chinese and try to scale up over here. We can run that playbook in reverse.
David Roberts
As though we'll get some sort of, like, we'll get some China on us if we...
Jake Higdon
Yeah, exactly. Why not run that playbook in reverse? And make it so that we're learning from them, but then we can run ahead and reclaim the technological frontier. That's really the only path forward that I see in some of these technologies with a realistic view of where we are relative to China. And so, I think there's room in the rules or in a future law to provide some pathways for US companies to learn from foreign firms.
David Roberts
Isabel, any thoughts about how to do this right?
Isabel Munilla
Yeah, I think again, I would agree with everything that Jake just said, but I think there's the bigger question about strategy and priority and coherence. I think for me it's fundamental. And the other question is, when a new administration comes in in the future, no matter the administration, what does this uncertain investment environment get us? Where will we be when we're there? I mean, right now, as I said earlier, we're sunsetting financial support to really important clean energy sectors. Right. EVs, wind, solar, and on critical minerals manufacturing. We're sunsetting those benefits.
David Roberts
Which is a weird way to recapture those supply chains. I mean, talk about incoherence. It's just right on the surface like they're saying, "the whole point of these is that we want to do them ourselves," but then we're removing all the supports for doing them ourselves. It just makes no sense on the surface.
Isabel Munilla
Right. And I think exactly what Jake said is that we need to live in reality a little bit. And there are certain areas where we are going to be able to compete, certainly assuming that we invest big. But if we're not willing to make those investments, we need to recalibrate what we think we can actually do in the global marketplace. And that's going to be fundamental to the policy design, but also to what we prioritize. I worry that in the future, currently, the incoherence in our tariff policy, in the tax policy, in the domestic investment policy, in our China policy, where that's going to leave us is much further behind than we were before. So I do think that moving forward, any new future administration is going to have to grapple with the lack of momentum or the slowing in momentum that we have already seen in 2025.
David Roberts
Well, I wonder if there aren't some people in the Trump administration who think that's fine. "I don't want momentum in this direction. We have gas, we have oil. Let's double down on what we have and just let China take these other industries." I mean, I think that would be obviously like a disastrous way to think, but I sort of wonder, like, that sentiment would make more sense of the policy that's been passed so far. You know what I mean? Do you have any sense of how committed the conservatives are, the Republican Party is, to these industries at all?
Jake Higdon
I mean, I think that is a mentality that we see in Washington. I also think it's not trying to compete on the industries of the future, like to maybe be sort of lofty. When we saw Sputnik streak across the sky in 1957, did we say, "Ah, the Russians got there first? Let's pack up shop on the space race."
David Roberts
I guess they got space.
Jake Higdon
Yeah. So we're just going to double down on land technology and not try to go to space. And then, you know, a few years later, JFK would say, "We aim to put a man on the moon, not because it's easy, but because it is hard." Competing with China is going to be hard. It's going to require some big bets. But the alternative, the doubling down on 20th-century technology, is not actually trying to compete. It's just throwing in the towel. And I think they're hiding behind this tough-on-China posture, but it's essentially throwing in the towel.
David Roberts
Okay, so I guess I'd like to kind of return to the question of, like, what would be, you know, in 10 years' time, whatever, 15 years' time, the outcome we want to see here? Is it something like the US and allied democratic nations form a kind of counter-China bloc that is capable of manufacturing its own stuff, its own chips, its own batteries, its own cars, that effectively serves as a counterbalance to the China bloc? Is that the vision?
Isabel Munilla
That's a vision that I think we had in the Biden administration. Certainly my office, we worked on a whole host of bilateral, multilateral arrangements, an arrangement with the G7 which the Canadians continue taking on and announced. So they announced a standards-based partnership on critical minerals. And that was coming from a few years of G7 conversations where, for example, in 2023, I negotiated the G7 five-point plan on critical mineral security that Japan led. And that was all building from that. And there was agreement across trading partners and not just that we would diversify, but that we would diversify in a way that aligned with our values, high standards, low emissions, and that we would do whatever we could together to address the price volatility and all of the market concentration challenges that were keeping us from investing in our domestic industries.
But I think you're right. In 10 years, that is the only way. Working with our allies and partners, and far beyond the G7, frankly, working with allies and partners to create these supply chains to diversify in many, many ways. And I think that's really the only way to go. And frankly, our financial incentives, our public investment has to be aligned with that and our trade policy. So I think until we have that alignment, it's going to be very difficult. But that's the vision. Trade policy, financial policy, economic policy, domestic investment is aligned with our partners and a range of partners across technologies, across minerals and materials that allow us to access these resources at a good price and then provide products that the world needs and our citizens need.
David Roberts
With some resilience.
Isabel Munilla
With some resilience. Hopefully, a lot.
David Roberts
All right, well, that's well put. Thank you all. This is really interesting. I know this... we didn't even really dip very deeply into the complexities. But suffice to say, anybody who's interested in the subject, there's an endless sea of acronyms for you if you choose to pursue this further. But thank you for coming and walking through those sort of high-level considerations. This is really interesting and something for the next administration to keep in mind. So, thanks for coming.
Jake Higdon
Thanks for having us.
Isabel Munilla
Great. Thanks, David.
David Roberts
Thank you for listening to Volts. It takes a village to make this podcast work. Shout out, especially, to my super producer, Kyle McDonald, who makes me and my guests sound smart every week. And it is all supported entirely by listeners like you. So, if you value conversations like this, please consider joining our community of paid subscribers at volts.wtf. Or, leaving a nice review, or telling a friend about Volts. Or all three. Thanks so much, and I'll see you next time.
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