The Big Tariff Era Is Here

(MENAFN- Asia Times) Joe Biden is about to slap 100% tariffs on Chinese-made electric vehicles. A 100% tariff is an absolutely huge tariff. It means that Chinese EV makers would have to sell their EVs in the US at half the price of EVs manufactured elsewhere in order to be competitive. That just isn't going to happen.

A 100% tariff will probably be enough to keep essentially all made-in-China EVs out of the US. The Rhodium Group recently came out with a report called“Ain't No Duty High Enough”, arguing that Europe would need 40-50% tariffs to keep Chinese EVs out:

Well, Rhodium is right that non-tariff barriers - basically, sneakily crafted regulation that foreign products can't satisfy but domestic products can - are pretty effective in shutting out imports. And they may be right that 40-50% tariffs will be politically impossible in Europe. But Biden's new tariff is double the rate Rhodium mentions. That's just going to nuke all Chinese EV exports to the US.

Now, nuking all Chinese EV exports to the US will result in essentially zero change to anyone's life. The reason is that China currently sells almost zero EVs to the United States:

The Big Tariff Era Is Here Image

Source: CSIS

So if you're an American, you weren't buying a Chinese EV yesterday, and now you're not going to buy one tomorrow either. Nothing will change for you.

But that doesn't mean these tariffs are performative. They're preventative. In the past we've seen examples of where China suddenly floods the US or other countries with a massive amount of a certain export product - for example, excavators . Biden's tariff will ensure that this doesn't happen with EVs.

So is that good or bad? Are tariffs going to make life more expensive for Americans? Will Biden's move give a boost to the US auto industry? Will it slow down the green transition? What does this mean for US trade policy going forward?

I shall try to answer those questions.

Will the tariffs on Chinese EVs make life more expensive for Americans?

The short answer to this question is“No”, and the reason is just the chart above. Americans weren't buying any Chinese EVs, so doubling the price of Chinese EVs isn't going to make Americans pay more for anything.

Now, what the tariff
do is prevent a future cheap EV bonanza from reaching America's shores. It's possible that if Biden had done nothing, China would have flooded the US with bargain-price high-quality EVs.

And then a bunch of Americans who are feeling stressed about high interest rates and the price of groceries might have been able to get a bit of relief by buying a cheap high-quality Chinese-made electric car.

And Chinese EVs are
good. China has struggled to make good internal combustion engines, but the shift to EVs has allowed them to leapfrog ICE vehicles entirely. Since China dominates the battery industry, mastering EVs was easy.

Kevin Williams has a long article about the high quality of Chinese electric cars, which you should read despite the fact that it contains a fair share of histrionic hand-wringing“We're cooked”, etc.). Williams' conclusion is spot on:

This is correct. And it's reasonable to worry that without the competitive pressure from Chinese imports, stodgy old companies like GM and Ford - and even Tesla - will have far less reason to copy innovative Chinese features like screen-based controls. American consumers could end up with a dowdier, lower-quality selection of vehicles.

But I don't think that'll happen, for one simple reason:
Chinese car companies don't have to make their cars in China.

Tariffs are applied based on where final assembly for a good takes place. So if BYD or other Chinese carmakers put their factories in America - or in Mexico, or Canada, or any place other than China - they will still be able to sell EVs to the US without getting hit by Biden's new tariff. This is already in progress :

Chinese-owned car factories in Mexico will be able to take advantage of Chinese supply chains (especially batteries), driving down their cost. They will make innovative Chinese designs, with those big screen interfaces that Kevin Williams loves so much. And they will incorporate whatever assembly-line innovations Chinese factories have discovered, driving costs down even further.

So Americans will still be able to get“Chinese” EVs, just not from Chinese factories. That's fine. Mexico needs the jobs and income, American consumers could use some cheap futuristic cars, and American car companies could use the competition.

An open question is to what degree China's government will decide to subsidize Chinese-owned factories in Mexico. Theoretically, China could deploy all the same policy tools that it uses to subsidize domestic production - tax credits, cheap loans, direct payments, etc - to help Chinese companies pump out cheap cars from Mexican factories.

Whether it'll actually do that is another question entirely - China's government may want to keep manufacturing jobs in the country, and thus be leery of subsidizing FDI. So we'll see.

But even without subsidies, Chinese companies do indeed make cheap good EVs, and Americans will still be able to get their hands on them under the new tariff regime.

This gets a lot harder, of course, if we also put tariffs on EVs made in Mexico and other third countries. In fact, Trump is already threatening this :

If the tariffs are expanded to include third countries like Mexico, then American consumers really
be locked out of the market for cutting-edge EVs. At that point, the only way for Chinese car companies to avoid the tariffs would be to make their cars in the United States.

Japanese brands
did that quite successfully . But Chinese companies might be
reluctant to do that , or their government might stop them from doing it. So we'll see.

What do the tariffs mean for the US auto industry?

Asia Times

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