The Actual Benefit of High Tariffs on Chinese Electric Cars in Europe & USA
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There has been a vast amount of discussion on Chinese electric cars making their way to European and US markets, and the European Union and USA putting high tariffs on these electric cars based on the assumption that production of these electric cars is being unfairly subsidized, overproduced, and then “dumped” in Europe and the US at distorted low prices. The counter-argument is that China is just producing EVs better, cheaper, and in higher volume — actually making notable progress to combat our climate crisis — and shouldn’t be penalized for that. Those who are most against the tariffs call these measures and the discussions around them unfair and counterproductive protectionism, and even pure racism and xenophobia.
However you view the matter, I think we can all agree on one thing (or most of us can, I should say, as it seems that there’s nothing 100% of people agree on — not even whether the Earth is round or flat). That one thing is that several Chinese automakers are now able to produce more electric cars than they can sell at home, domestically in China. And this is where a rather interesting matter comes into play, one clear global benefit of high US and European tariffs on Chinese EVs.
But it wasn’t my idea, so giving credit where credit is due, the light bulb moment came to Geoff Willingham first. Here’s what he commented under my article two days ago about BYD sponsoring Euro 2024:
“I’ve said this on several posts — but whilst the world does need ‘cheap’ EVs, there aren’t enough to supply world demand at the moment.
“As such, the tariffs merely move the current supply away from EU/US and towards ‘rest of world’ markets — and this is a good thing, as those markets being electrified means there is no market for second-hand ICE exports from the US/EU…. It will result in more ICE ending up taken off the road, rather than continuing to pollute in one of the ‘export markets’, etc.
“At the same time, automakers have to know (surely they must know?) the tariffs are short-term band-aid, but it gives them a few more years to finish getting their battery plants and supply chains built in the US/EU — which will both help increase the production capacity for EVs, and ensure that we don’t end up with all the production concentrated in one country.
“After all, as we saw with Covid, and the subsequent supply-chain disruptions, having too much dependent on a single country can shaft the global economy…. Better to have multiple independent production nodes/supply chains, to try and limit the impact of a regional shutdown, etc.”
Actually, there are potentially two big benefits highlighted here, or three if we’re looking at further ramifications down the line.
Electrifying the World Faster
The first one is the most interesting and exciting one for me. Europe and the US are richer markets — large car markets — where Chinese EV producers can, theoretically, sell their EVs at higher prices to more people. That is, compared to the many developing country markets around the world where not so many new cars are sold. In those markets, buyers who are buying cars rather than two-wheelers and three-wheelers often buy used cars. One of the problems with these used cars is they often don’t meet the new, stricter fuel efficiency requirements of the European and North American countries they are coming from. They are dirtier.
The benefit Geoff is highlighting is that, if Chinese EV producers can’t sell their EVs as easily in the US and Europe as they had hoped, they will probably be pushed to pursue a larger geography of markets around the world. And if they do that, some buyers are going to buy those new electric cars (with lower fueling costs) instead of old ICE (internal combustion engine) cars from Europe, the US, and Japan.
And that should help the electrify the whole world and cut carbon emissions faster than if Chinese EV producers could more easily enter the US and Europe with lower tariffs.
(There’s a side effect, too. If those used ICE cars can’t find as many buyers in export markets, resale value and depreciation on ICE vehicles will be worse in their home markets. That will raise leasing costs and make people less inclined to buy new ICEVs in these “Western” markets. In other words, that will just electrify the market faster as well.)
Broader, Faster, More Sustainable Electrification in USA & Europe
It has always been the case that legacy automakers need some length of transition to fully electrify their lineups. If they had to go 100% electric tomorrow, they’d go bankrupt, because they have too many sunk costs dedicated to manufacturing non-electric cars. Also, there’s too much cultural inertia in their customer base for them to all switch to electric vehicles tomorrow. Automakers wouldn’t be able to make enough revenue to cover all of their costs, many of which would still be tied to legacy (and useless) ICE powertrains and vehicles.
I think it’s safe to say that all legacy automakers see by now that they have to electrify more and more over time. However, I think many of them are also finding it difficult to electrify quickly — for the reasons noted above. If they get a little more time to develop compelling EVs, bring down costs, and transition the expectations and desires of their customers, you might say they have a better chance of effectively and sustainably switching to EVs (in this case, when I say “sustainably,” I mean in a financially sustainable way that doesn’t lead to the automakers going bankrupt). Holding off a surge of highly attractive, super compelling, lower cost EVs from China may give these automakers the breathing room they need in order to evolve rather than die. As Geoff aptly points out, this “will both help increase the production capacity for EVs, and ensure that we don’t end up with all the production concentrated in one country.”
In other words, in the medium term and long term, providing this breathing room for legacy automakers could lead to a broader, bigger, more robust EV market in time, and one that is more flexible and resilient in the face of economic and supply chain crises. So, again, this could really help to get the world to 100% EVs (or 70% EVs, 80% EVs, 90% EVs) quicker than just allowing Chinese companies to sell their extra electric cars easily in Europe and the US.
I’m not saying Geoff or I have run a thorough analysis on this and proven that there’s a strong net benefit to the tariffs. However, just looking at these points logically, I think there’s a strong case for that. What do you think?
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