Biden To Set 100% Tariff On Electric Cars Made In China — Solar Panels May Be Next

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It’s not official yet, but the Wall Street Journal says the Biden administration this week is expected to increase the import tariffs on electric cars made in China from 25% to 100%, a move that may embolden regulators in the European Union to do likewise. The US also adds 2.5% on top of the base tariff just for good measure.

According to The Verge, the Biden administration is worried that electric cars from China are so cheap that if allowed to be sold in the US, they would collapse America’s auto manufacturing industry and put hundreds of thousands of US workers out of a job. The example typically cited is the BYD Seagull, a fairly competent compact SUV-like car that sells for under $10,000 in China. If it were let loose on American shores, it could quickly become a best seller and steal sales away from the gargantuan SUVs and pickup trucks Americans have been taught to desire by a constant onslaught of advertising from US automakers.

Those who remember the roaring success of the Yugo in America will realize why those concerns have some merit. Elon Musk, who knows a thing or two about electric cars in China, warned earlier this year that Chinese manufacturers would “demolish” domestic rivals without trade barriers. But what policymakers don’t seem to understand is that the Seagull, as nice as it is, does not in any way, shape, or form meet the expectations of American drivers. It’s small, does not have 47 speakers, and has a relatively short range. Low price is one thing, but insect-based food is cheap, too. That doesn’t mean people want to buy it.

International trade is a complex business. Volvo is set to introduce its EX30 battery electric small SUV to America later this year, starting at under $35,000. The EX30 is manufactured in factories owned by Geely in China, which means it should be subject to the current 27.5% tariff, and it is. But … US law permits those tariffs to be refunded if a company also manufactures products in America that are exported to other countries, which Volvo does. The net result is that the EX30 will in effect avoid the import tariff altogether, which is likely a big factor in how Volvo can sell it in America at such a relatively low starting price. It is, after all, a Volvo — a brand not known for selling inexpensive vehicles.

The Verge notes that fear of Chinese made electric cars has guided much of the Biden administration’s consumer and manufacturing policies over the past three years. The $7,500 EV tax credit in the Inflation Reduction Act is structured to encourage automakers to source their batteries from within the US or from acceptable trade partners. Vehicles, batteries, and other components from “foreign entities of concern,” which includes China, are ineligible for the credit. Earlier this year, the administration launched an investigation into the potential security risks posed by smart car technology produced in China.

Despite these policies, Republicans, led by former President Donald Trump, have criticized Biden’s EV policies as setting the stage for a takeover by Chinese companies. In fact, Biden has kept many of the trade restrictions on China imposed by Trump — and introduced a few new ones of his own. The new tariffs are also expected to apply to other clean energy goods, like solar panels and critical minerals, the Wall Street Journal reports. This comes amid reports that China is preparing to flood the global market with less expensive products amid its own flagging domestic economy.

China Policies Are A Double Edged Sword

There is an enormous conundrum for the US here. On one hand, the government wants to dramatically reduce carbon emissions as quickly as possible. Affordable electric cars and solar panels can play a major role in accomplishing that goal. We don’t know yet what the proposed tariff on Chinese made solar panels will be, but at the present moment, they are not subject to the existing tariff because the administration made a decision to give them a two-year exemption in 2022 in order to not shut down the transition to renewable energy in then US. That pause was intended in part to allow domestic solar panel manufacturing in America to ramp up before slamming the door on cheap panels from China. That process has begun, but it will be years before the US will be able to produce all the solar panels it needs at a competitive price.

If the US is serious about a transition to electric cars, it seems illogical to essentially ban the lowest cost models that could potentially move the needle as rapidly as possible toward low-emissions transportation. That leaves the US (and the EU) with a Hobson’s choice in which both available paths forward come with negative consequences.

Understanding The Economic Realities In China

The New York Times on May 11, 2024, published an article by Anne Stevenson-Yang, a co-founder of J Capital Research and author of Wild Ride: A Short History of the Opening and Closing of the Chinese Economy. She has some interesting insights into the economic realities in China which she believes will bring about social upheaval in that country in the near future. She wrote:

Years of erratic and irresponsible policies, excessive Communist Party control, and undelivered promises of reform have created a dead-end Chinese economy of weak domestic consumer demand and slowing growth. The only way that China’s leaders can see to pull themselves out of this hole is to fall back on pumping out exports.

That means a number of things are likely to happen, none of them good. The tide of Chinese exports will continue, tensions with the United States and other trading partners will grow, China’s people will become increasingly unhappy with their gloomy economic prospects, and anxious Communist Party leaders will respond with more repression.

The root of the problem is the Communist Party’s excessive control of the economy, but that’s not going to change. It is baked into China’s political system and has only worsened during President Xi Jinping’s decade in power. New strategies for fixing the economy always rely on counterproductive mandates set by the government: Create new companies, build more industrial capacity. The strategy that most economists actually recommend to drive growth — freeing up the private sector and empowering Chinese consumers to spend more — would mean overhauling the way the government works, and that is unacceptable.

Yang adds that when economic or social threats such as the worldwide financial turmoil in 1997 and again in 2007 occurred, China poured money into industry and the real estate sector to pacify the people. The investment-driven growth felt good, but it was much more than the country could digest and left China’s landscape scarred with empty cities and industrial parks, unfinished bridges to nowhere, abandoned highways and amusement parks, and airports with few flights.

The investment in industrial capacity also generated an explosion in exports as China captured industries previously dominated by foreign manufacturers — mobile phones, televisions, solar panels, wind turbines, lithium-ion batteries, and electric vehicles. Much of the Chinese economic “miracle” was powered by American, European, and Japanese companies that willingly transferred their technical know-how to their Chinese partners in exchange for what they thought would be access to a permanently growing China market, Yang says.

This decimated manufacturing in the West, even as China protected its own markets, but the West let it slide. The cheap products emanating from China kept US inflation at bay for a generation, and the West clung to the hope that China’s economic expansion would eventually lead to a political liberalization that never came. Here’s what Yang sees happening in China next:

The era when China was able to take over whole industries without foreign pushback is over. Many countries are now taking steps to protect their markets from Chinese-made goods. Under U.S. pressure, Mexico’s government last month reportedly decided it would not award subsidies to Chinese electric vehicle makers seeking to manufacture in Mexico for export to the U.S. market; the European Union is considering action to prevent Chinese electric vehicles from swamping its market; and the Biden administration has moved to encourage semiconductor manufacturing in the United States and limit Chinese access to chip technologies, and has promised more actions to thwart China.

China won’t be able to innovate its way out of this. Its economic model still largely focuses on cheaply replicating existing technologies, not on the long-term research that results in industry-leading commercial breakthroughs. All that leaves is manufacturing in volume.

China’s leaders will face rising economic pressure to lower the value of the renminbi, which will make Chinese-made goods even cheaper in U.S. dollar terms, further boosting export volume and upsetting trading partners even more. But a devaluation will also make imports of foreign products and raw materials more expensive, squeezing Chinese consumers and businesses while encouraging wealthier people to get their money out of China. The government can’t turn to economic stimulus measures to revive growth — pouring more renminbi into the economy would risk crushing the currency’s value.

All of this means that the “reform and opening” era, which has transformed China and captivated the world since it began in the late 1970s, has ended with a whimper, Yang said, before closing with this thought: “Mao Zedong once said that in an uncertain world, the Chinese must ‘Dig tunnels deep, store grain everywhere, and never seek hegemony.’ That sort of siege mentality is coming back.”

The Takeaway

The new tariffs against electric cars made in China may be good politics in an election year, but may have long-term consequences as yet only dimly understood. Higher prices for cars and solar panels in America will slow the transition to lower emissions in the transportation and energy sectors. The new tariffs may also contribute to a social earthquake in China that could destabilize the world economy in ways that simply cannot be predicted.

The one thing the world needs to address the crisis of an overheating planet is close cooperation between all nations. What we are getting is the exact opposite. We have taken our eyes off the big picture to focus on minutiae, and that may ultimately be our undoing.