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Tariff wars over electric cars

Two of our themes to help forecast the future – deglobalisation and the green transition – remain big changes facing the world. On this occasion they are fighting each other in an unhelpful way.

| 7 min read

The West is wrestling with a cruel green dilemma. On the one hand it wants to rush on to mass adoption of battery electric vehicles (EVs) as part of its wish to accelerate down the road to net zero. On the other, Western governments have promised voters there will be plenty of green jobs driving rising prosperity.

Creating many of these jobs in China is not what they had in mind. Whilst the Western advanced countries were legislating, negotiating international agreements and setting targets for the green transition, China was busy putting in capacity to make the green products. It wasn’t just electric cars, but also solar panels, large batteries, wind turbines and the raw materials to make these products. Closing down Western factories to import all these new necessities from China is not popular.

The Western car manufacturers have also complicated the position by establishing their own factories in China. Drawn there by cheaper energy and labour – and above all by the presence of good supply chains to provide batteries and other components – Tesla, BMW, Volkswagen, Mercedes and others are now substantial Chinese manufacturers. There is an irony that China has been adding more coal fired power to its own mix at the same time as building a substantial domestic presence in renewables, to have enough power for all these factories.

The Western car makers with Chinese capacity are none too keen to side with government plans to impose high tariffs. That will catch their vehicles for export from China. It also undermines their relations with the Chinese hosts of their factories. The US industry has not moved so far to make EVs or to add to capacity in China, apart from Tesla, and has been more hostile to Chinese imports. The Europeans include companies that argue against tariffs and in favour of free trade.

The battery car market

In 2023, China sold 8 million electric cars into its home market, 60% of total new electric car sales worldwide (International Energy Agency figures). China has designed and developed smaller, cheaper battery cars for home and has started to export these to some markets. They have been charging more for the export version than the home market price to provide them with a better margin and to leave some flexibility of pricing should tariffs be imposed.

They have not sold many into the US so far but sold 438,000 into the European Union (EU), including Western company exports from China last year. As much as 20% of European battery car purchases are Chinese imports with Chinese brands accounting for 8% (European Automobile Manufacturers Association figures). In both the US and the EU, battery cars have tended to be concentrated at the top end of the market, limiting sales volumes and leaving open the question of which manufacturers are going to develop the cheap attractive product that can turn battery cars into mass market items.

China has the pieces in place to become dominant in cheaper EVs. The US and the EU, worried about this competitive threat, have both taken retaliatory action through the imposition of tariffs. Out of a worldwide stock of vehicles approaching 1,500 million, electric cars were just 40 million in 2023. Some traditional manufacturers welcome the targets and penalties on petrol and diesel products as a necessary means of moving them on to all electric ranges, whilst others think this unrealistic and damaging to their businesses. If people will not buy enough battery cars the manufacturers who have done most to switch suffer from the situation.

EU tariffs vary by company

The EU has been charging a 10% tariff on cars coming in. Following a competition review they are proposing substantial rises in these levels. They found that China has been using subsidies, grants, regulations and other devices to give the domestic production a good advantage. State aid has created significant industrial mass and control over the materials and supplies, giving producers a further advantage from economies of scale. The planned EU tariff increases to be introduced in July if no other agreement is reached include (by manufacturer)@

  • BYD + 17.4%
  • Geely + 20%
  • SAIC + 38%

Tesla is negotiating its own tariff. Other Chinese makers face 21% if they co-operated with the EU enquiry, and 38% if they did not. China is expected to retaliate.

China, as a dominant exporter, has much to lose from a trade war, but cannot allow these changes to go without counter. China could impose tariffs on EU food and aviation where the EU is alleged to have adopted anti-competitive practises to protect its farmers and carriers, or on luxury European exports.

China has form at targeting retaliation for political effect. Both sides will claim to be operating within WTO rules, with potential cases stretching forwards as the claims are examined. China may also press ahead with building more assembly capacity for its manufacturers within the EU, intensifying competitive pressures against EU domestic car producers.

The troubles of the battery car industry reflect a conflict between two policy aims of both the EU and the US.

The troubles of the battery car industry reflect a conflict between two policy aims of both the EU and the US. They both want to make faster progress towards ‘net zero’. They both wish to build and rebuild their domestic industries, capturing green jobs as they go.

The strong move of China into the major products and raw materials of the green revolution means the West could go faster to ‘net zero’ if they rely on abundant Chinese imports. The results in the car industry would be too many plant closures as they retreat from the successful diesel and petrol cars of the past, with too many imports. If they opt to await the growth of their domestic EV industry consumers face higher prices, less choice, and delayed introduction of affordable mass market products.

The decision in the US to impose a 100% tariff on cars showed a determination to keep out Chinese products. The Europeans set out a compromise with additional tariffs ranging from 27% to 38%, allowing some Chinese product in and hoping to protect their own car makers that have already set up factories in China and want to be able to export from there. This level of tariffs will still slow the progress to adopt battery cars and will pose issues for EU car companies about their future strategy for investing in factories. Meanwhile, there might be further damage done by retaliatory tariffs which may be targeted.

Two of our themes to help forecast the future – deglobalisation and the green transition – remain big changes facing the world. On this occasion they are fighting each other in an unhelpful way.

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Tariff wars over electric cars

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