Major Trade-War Escalation as the West Piles on Tariffs Against Chinese EVs

China’s electric vehicle (EV) sector is booming, so much so that it helped drive the country to the top of the world’s list of automobile exporters in 2023, taking over from Japan, the previous leader. Recent data also suggests that China is experiencing a whopping 28-percent year-on-year growth in EV sales, easily outpacing all other nations, and that six out of every ten EVs sold around the world are manufactured in China. For many, these are exceptional feats, not only in terms of the sheer commanding numbers of EVs that China is exporting but also for the positive implications that so many EVs on the roads across the world will have for greening the planet. That said, not everyone has warmed to China’s global EV-market dominance.

On May 14, US President Joe Biden announced that the United States would slap a 100-percent tariff on imports of Chinese-made electric vehicles. “The tariff rate on electric vehicles under Section 301 will increase from 25 percent to 100 percent in 2024,” an official White House briefing at the time stated, justifying the move by pointing to the “extensive subsidies and non-market practices leading to substantial risks of overcapacity” that propelled China’s exports of EVs by 70 percent from 2022 to 2023 and that are thus ostensibly “jeopardizing productive investments elsewhere”. The tariff rate on lithium-ion EV batteries and battery parts, meanwhile, will increase from 7.5 percent to 25 percent this year, while the tariff rate on lithium-ion non-EV batteries will increase from 7.5 percent to 25 percent in 2026.

The Biden Administration insists that tariffs on EVs are designed to protect American EV manufacturers from cheaper Chinese imports, such that US autos “will be made in America by American workers”, the briefing noted, acknowledging that China currently controls more than 80 percent of certain segments of the EV battery supply chain, particularly upstream nodes, such as critical minerals mining, processing and refining. “The increase in the tariff rate on electric vehicles will protect these investments and jobs from unfairly priced Chinese imports.”

“American workers can outwork and outcompete anyone as long as the competition is fair,” Biden said separately at the time. “But for too long, it hasn’t been fair. For years, the Chinese government has poured state money into Chinese companies…it’s not competition, it’s cheating.” And, yet, the White House also confirmed that, as part of the president’s Investing in America agenda, the Biden Administration was committed to “incentivising the development of a robust EV market through business tax credits for manufacturing of batteries and production of critical minerals, consumer tax credits for EV adoption, smart standards, federal investments in EV charging infrastructure, and grants to supply EV and battery manufacturing”.

In response, China’s state media outlet, Global Times, described the additional tariffs as “another significant escalation in Washington’s multi-year, ill-conceived campaign to crack down on emerging Chinese industries that are gaining global prominence” and that “the politically motivated move won’t stop the rise of relevant Chinese industries, due to their small presence in the US market”. The Global Times also reported that China’s Ministry of Commerce (MOFCOM) condemned the US’ actions as “politicisation and weaponisation of trade issues and a typical case of political manipulation that will seriously impact the atmosphere for bilateral cooperation”.

Nonetheless, the European Union (EU) has since followed in the US’ footsteps, underscoring how wedded Europe remains to US economic policies. About a month after Biden’s tariff announcement, the result of an EU investigation that began in October was published, with the European Commission (EC) concluding that “the battery electric vehicles (BEV) value chain in China benefits from unfair subsidisation, which is causing a threat of economic injury to EU BEV producers”. And despite talks being held between the two sides to discuss the EU probe, with an online virtual meeting staged between China’s Minister of Commerce Wang Wentao and European Commissioner for Trade Valdis Dombrovskis on June 22, the EU proceeded to place tariffs on China’s EV imports that came into effect on July 4.

Brussels’ tariffs on individual manufacturers range from 17.4 percent to 37.6 percent, in addition to an already existing 10-percent duty for all EVs imported from China. “Definitive measures are to be imposed within 4 months after [the] imposition of the provisional duties,” the EC also confirmed. In particular, three specific brands have been impacted. State-owned SAIC Motor, which is the Chinese partner of Volkswagen and General Motors and owns the British brand MG (which manufactures one of Europe’s top-selling EVs in Europe, the MG4), faces the highest levy of 37.6 percent. “The price for not cooperating is a severe blow to SAIC, which gets 15.4 percent of its global revenues from EV sales in Europe,” Rhodium Group, an independent research firm, told UK state-backed media, the British Broadcasting Corporation (BBC).

While the West insists that China’s EV trade policies are unfair, with accusations of overproduction and “overcapacity” now increasingly common, Beijing argues that its growing exports are the result of fair competition, that demand is soaring for its high-quality products and that its green products are essential for combatting global climate change. “It is a fake concept,” Parker Shi, who leads international operations for Great Wall Motor (GWM), explained to the Financial Times in reference to the “overcapacity” accusation being levied by the West. “I don’t like that kind of judgment from the third party—they don’t know what is happening in my house.”

Reports also emerged that during his visit to France in early May, Chinese President Xi Jinping told French President Emmanuel Macron and European Commission President Ursula von der Leyen that there was no overcapacity problem in China and that the issue “does not exist either from the perspective of comparative advantage or in light of global demand”. In particular, the Chinese president highlighted that China’s clean-energy industry dominance—largely represented by EVs, solar energy and wind technology—will not only increase global supply and ease the pressure of global inflation but will also do much to support the planet’s green transition, according to Chinese media outlets.

A modicum of good news for China is that the United Kingdom is not looking to place such harsh protectionist measures on Chinese EV imports imminently. The UK’s secretary of state for business and trade, Jonathan Reynolds, has indicated that he will not follow the US’ and the EU’s leads in imposing exorbitant tariffs on Chinese EVs. However, he did acknowledge that he was remaining “vigilant”. Although Reynolds has discussed the imposition of tariffs on Chinese EVs, the new Labour minister has signalled that, while he remains concerned, he will not launch any immediate investigations into Chinese EV imports. Of the 700,000 cars the UK exported in 2023, just 7 percent went to China. This suggests that the UK is not significantly exposed to retaliation by Beijing; nonetheless, the UK’s domestic EV market remains dominated by brands that also manufacture EVs in China, including Tesla, BMW and MG.

According to Goldman Sachs, China will manufacture 27 million passenger vehicles in 2024, driven by a major structural shift in car sales that continues to see EVs booming and internal combustion engine (ICE) cars declining. Exports are also projected to surge this year by 25 percent to more than 5.3 million cars. Goldman Sachs forecasted the capacity-utilisation rate for factories producing ICE cars in China to shrink from 54 percent this year to 48 percent by 2030, further underscoring the terminal decline the ICE segment is now suffering. In contrast, capacity utilisation for EVs will soar from 58 percent to about 80 percent over the same period.

With such exponential growth being predicted for China’s EV industry, then, many are questioning the logic behind the tariffs, arguing that they are the antithesis of the kind of free trade the West used to champion and will deny Americans opportunities to purchase affordable green products. Indeed, critics of Biden’s policy have even emerged from within the US itself. “The Biden administration, which for three years demanded everyday Americans move toward the use of renewable energy, is now criticizing China for providing those same Americans [with] options to purchase affordable green energy technology,” Kentucky Republican Senator Rand Paul recently posited. “If we are to believe the scores of climate alarmists within the Biden administration that without immediate action the planet will undergo irreparable harm, then what difference does it make where our salvation, i.e., green technology, originates from?”

According to the Center for Strategic and International Studies (CSIS), meanwhile, the West should do more to promote its own domestic EV industry rather than focus on trying to slow down others. “Even if the sense of unfairness over Chinese industrial policy and national security fears are justified, Western countries need to determine whether the goal is to shut Chinese producers out of Western markets entirely or to maintain some sort of a global industry, with Chinese and Western producers having access to each other’s markets as long as they meet certain standards regarding fair competition and national security,” the US think tank noted in an analysis published on June 28. “If the answer is not outright separation, then Western countries will not only need to set common standards but, at some point, negotiate a sustainable framework with China.”

The CSIS analysis also acknowledged that the United States and other countries should concentrate more aggressively on developing their own industries “by fostering high-quality, affordable EVs that can access a ubiquitous and dependable charging infrastructure”.

Source: International Banker