The guidelines spell out which electric vehicles would qualify for a tax credit of up to $7,500 under President Joe Biden's landmark climate action plan, the Inflation Reduction Act.

Under the latest proposal released by the Treasury Department on Friday, an eligible clean vehicle cannot contain battery components made or assembled by a "foreign entity of concern" starting next year.

From 2025, a qualifying vehicle also cannot contain critical minerals extracted, processed or recycled by such entities.

This targets companies owned by, or subject to the jurisdiction of countries like China, Russia, North Korea and Iran. They would be barred from providing such materials to vehicles aiming to qualify for tax breaks.

A firm could be considered a foreign entity of concern if it were incorporated in one of these countries, or if it hit a 25 percent ownership threshold.

The rules have the effect of limiting Chinese companies' roles in the supply chain for US electric vehicles, as Washington aims to move more production into the United States.

Currently, the key electric vehicle industry is dominated by China.

The latest rules will likely reduce the number of vehicles eligible for tax credits while piling pressure on automakers as they grapple with the transition to producing electric cars.

The IRA funnels some $370 billion into subsidies for America's energy transition, including tax breaks for US-made electric vehicles and batteries.

It has attracted billions of investment into North American supply chains.

The proposed rules will see a public comment period before they are finalized.