Source: Bruegel Think Tank Report Homepage
On May 14, 2024, U.S. President Joe Biden announced new tariffs on China under Section 301 (Unfair Trade) of the Trade Act of 1974. These additional tariffs are in addition to previous tariffs, including those imposed by President Trump, and cover a wide range of Chinese imports, including:
- Semiconductors: Tariffs increased from 25% to 50%
- Solar cells: from 25% to 50%
- EV battery: from 7.5% to 25%
- Electric vehicles: from 25% to 100%
Since most of these products are already facing high tariffs or extensive trade remedy measures, the new tariffs cover a modest scale of Chinese imports, at just $18 billion. In fact, the U.S. basically doesn't import any electric vehicles from China. However, this is an industry of great concern for the EU, which launched a countervailing investigation into Chinese electric vehicles in October 2023, which could incur countervailing duties.
As a result, the U.S. move could have an impact on the EU's upcoming countervailing duty decision on China.
1. Politically motivated taxation is extraordinary
There are four unusual features of the U.S. decision to tax Chinese electric vehicles:
- Inconsistent with Chinese subsidy estimates: 100% tariffs are a staggering number. On the surface, the tariffs appear to be generated by Chinese government subsidies, but 100% tariffs mean that half of the cost of electric vehicles in China is covered by government funds, which is far beyond the study's estimates;
- Inconsistent with U.S. real interests: Unlike the protectionism of the U.S. when it responded to the threat from Japanese automakers, the U.S. imports almost no Chinese cars today, and U.S. manufacturers already have significant operations in China. For example, China has been GM's profit engine and largest sales market;
- Inconsistent with national security policy: The electric vehicle tariff policy is a direct anti-China measure, which is inconsistent with the U.S. emphasis on national security;
- Inconsistent with green transition goals: The measure runs counter to the Biden administration's green transition goals – including a significant tax break for electric vehicles aimed at reducing costs for consumers of green alternatives.
The decision on electric vehicles and its timing are entirely political, reflecting the extraordinary influence of the United Auto Workers in swing states on the eve of the U.S. presidential election.
However, given the recent efforts between the United States and China to improve relations on issues such as high-level military exchanges, artificial intelligence and climate change negotiations, the decision remains a surprise and a disappointment for many American companies that rely on China. However, this decision is in line with U.S. Trade Representative Katherine Tai's "worker-centered" trade policy, which asserts that the interests of U.S. workers should be put ahead of corporate interests.
2. The global impact of U.S. taxation
Whether it is volume, price, or exchange rate, the direct macroeconomic impact of tariffs will be minimal; $18 billion is insignificant relative to the size of the two countries' economies, and even to the $500 billion in Chinese exports to the United States in 2023. Even so, the tariffs will hurt some Chinese companies and U.S. importers. The impact on U.S. consumers and prices will come in the form of lost future opportunities, not direct costs, especially when it comes to electric vehicles.
More worryingly, the tariffs could lead to a further escalation of tensions between China and the United States. On the one hand, this could undermine China's willingness to play a de-escalating role in the conflict in Ukraine, and on the other hand, the US move means that it does not intend to abide by World Trade Organization rules. These two points increase global policy uncertainty and inevitably have a dampening effect on international trade and investment.
But politically, the high tariffs in the United States have put enormous pressure on the European Union to impose tariffs as well. EU companies such as Stellantis and trade unions lobbying for tariffs argue that Chinese EV exporters, cut off from the US market, will instead focus on the huge EU market, where the share of EVs exported by local Chinese manufacturers is rising rapidly.
The negative impact of the new tariffs on trade relations will go beyond trade under the WTO, adding more trade frictions. This is because U.S. politicians are determined to prevent Chinese products from entering the U.S. through the back door and to prevent products from Chinese companies from entering the U.S. Even if batteries, electric vehicles, and semiconductors are produced by Chinese companies in U.S. trading partner countries and are entitled to tariff-free treatment under regional agreements, they will be blocked by the United States. For example, Mexico and Morocco, which are U.S. regional trade agreement (RTA) partners, have Chinese battery manufacturers and soon electric vehicle manufacturers, and trade frictions in these countries are bound to increase.
Although the EU is still more open to Chinese producers than the US (e.g. BYD in Hungary, CATL in Germany and Hungary), if the EU imposes tariffs on Chinese EVs as expected, the EU will face similar challenges as RTA partners, and protectionism could spread further.
3. What is the possibility of the separation of the value chain between China and the United States?
The importance of the EV value chain in mitigating climate change is destined to increase significantly. From a U.S. industrial policy perspective, the high tariffs on Chinese EVs and the consequent boycott of Chinese producers raise a big question:
Is the U.S. EV/battery value chain completely independent of China sustainable and realistic? The United States is undoubtedly capable of developing such a chain, but will it be able to do this at a reasonable cost, and at the same time not lag behind in quality and efficiency?
The answer to this question depends on the calculation of the following key elements:
- long-term consumer losses due to tariffs;
- the speed of the U.S. green transition;
- the burden of more subsidies on the U.S. treasury;
- solvency of U.S. auto companies, etc.
Even a cursory look at China's current competitive advantage in the field of electric vehicles reveals that the answer is no. China produces almost twice as many electric vehicles as the European Union and the United States combined, and the share of electric vehicles in new car registrations is rising rapidly, and China is already far ahead in terms of comprehensive quality, price, and technology. Elon Musk, the founder of Tesla, has publicly stated that he is pessimistic about the West's ability to compete with Chinese cars.
China's cost advantage stems from scale, advanced and lower-cost battery technology, availability of IT and AI expertise, lower labor costs, and fierce competition in the market of dozens of domestic and foreign producers in China.
Source: Free Image Library on the Web
In 2023, China's EV exports will increase by more than 60% to 1.2 million units, mainly to Europe, Mexico and several emerging markets in Asia. As China's largest EV manufacturer and its battery suppliers have developed unique brands, technologies and designs, they have been able to establish manufacturing and distribution channels in markets such as Thailand, Indonesia, Australia, Morocco, Mexico and Hungary. Chinese EV makers are also rapidly expanding their market share in China, while competitors are getting tougher in China.
As EVs become more popular around the world, the most successful Chinese manufacturers will only gain a greater advantage of scale over their U.S. counterparts, and their ability to target individual markets with customized products on a common platform will grow.
It is important to note that Ford and General Motors, the largest car companies in the United States, are not in a good position to compete in the increasingly fierce electric vehicle market. China's two largest electric car makers, BYD and Xiaomi, have market capitalizations of $86 billion and $62 billion, respectively, while General Motors and Ford both have market capitalizations of around $50 billion.
4. What will be the EU's electric vehicle strategy?
Should the EU adjust its policy in line with the new US tariffs? If so, how? Note that since Chinese EVs will not be massively diverted from the US market, the EU does not necessarily need to change its policy and development course.
The EU's EV trade strategy must pursue six main objectives:
- fair treatment for EU manufacturers affected by Chinese subsidies and in accordance with WTO rules;
- Defend the interests of EU car exporters and Chinese manufacturers, who are also recipients of various subsidies;
- the long-term health and competitiveness of the EU automotive industry;
- protect the interests of EU consumers, especially low-income consumers, who will benefit greatly from cheaper cars;
- ensuring the speed of the EU's green transition;
- Maintain cooperative and constructive relations with China for economic and geopolitical reasons.
Source: Free Image Library on the Web
Achieving all six goals at the same time is a difficult challenge for the EU, but it is not impossible.
The stated goal of the EU should be to achieve competitive neutrality in the field of electric vehicles, reinforcing rather than hindering fair competition, thereby promoting productivity growth and innovation.
Therefore, the EU's countervailing duty on China's electric vehicles should be calculated objectively and realistically, and its definition and recording should be fully able to withstand the WTO's legal challenge. Domestic subsidies should also be considered to reduce the EU's vulnerability to the impact of China's countervailing duties: if the net subsidy is found to be zero, the countervailing duty margin should be zero; If there is a countervailing duty, it should be set at a minimum level consistent with the findings; The countervailing duties should be accompanied by a proposal to establish a EU-China working group to identify and monitor subsidies for electric vehicles, and to reduce them, with a view to removing the tax range within a specified time frame.
In order to ensure the long-term viability and competitiveness of the automotive industry, safeguard the interests of consumers, sustain the green transition, and maintain good relations with China, the EU should adopt an open policy for Chinese investment in its electric vehicle and battery sectors, while insisting on continuing to treat companies that have established themselves in the Chinese market fairly. The EU may eventually need to prepare for U.S. restrictions on Chinese investment in cars produced in Europe, such as Geely's Volvo Cars.
The EU may still face the problem of too rapid penetration of imported electric vehicles by China at some point in the future. If this happens, the EU may resort to WTO-compliant safeguards. The advantage of the safeguard measure is that the increase in tariffs is time-limited (three years). However, safeguard duties must apply to all imports, not just those from China.
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By Uri Dadush, nonresident fellow at the Washington office of the Bruegel think tank and research professor at the University of Maryland's School of Public Policy, where he teaches courses on trade policy and macroeconomic analysis and policy. He has served as Co-Chair of the G20 Working Group on Trade, Investment, and Globalization, Vice Chair of the World Economic Forum's Trade and Investment Global Agenda Council, Director of the International Economics Program at the Carnegie Endowment for International Peace, Director of the International Trade Bureau, Director of the Bureau of Economic Policy, and Director of the Bureau of Development Prospects at the World Bank. He has also served as President of the Economist Intelligence Unit, Vice President of the Data Resources Group and Advisor to McKinsey & Company.
Compiler: Internet Law Review
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