The US-Chinese Electric Vehicle Trade War

GeoCompass predicts that US-China trade tensions over electric vehicle exports will lead to higher tariffs on exports of Chinese electric vehicles to the United States before the 2024 US Presidential election, which will incentivise a softer Chinese approach to an ongoing trade dispute over EV exports to the EU.

US-China Tensions over Electric Vehicles

Most of the headlines around Anthony Blinken’s visit to China this week have focussed on the US Secretary of State calling out Chinese leaders over their material support for Russia’s war in Ukraine. However, Blinken and Chinese officials also discussed another problem in US-Chinese relations that has been bubbling under for several months and shows no signs of going away: US criticism of “unfair trade practices” by China that American officials say threaten US jobs and companies.

US officials have recently criticised China for the overproduction of green technology products such as electric vehicles, which they argue could lead to a flood of cheap exports that damage the US electric vehicle industry. At the heart of this US complaint is the argument that the state subsidies which the Chinese government has used to support the growth of strategic economic sectors, such as EV production, represent unfair competition distorting free markets.

The US market is an important prize for Chinese EV companies: 1.2 million EVs were sold in the USA in the first 11 months of 2023. Nevertheless, Chinese EVs already face tough barriers in the US market, such as tariffs of 27.5% set by Donald Trump and tough rule of origin for battery components and minerals, which disqualify them from tax credits available under the Inflation Reduction Act of 2022.

While these measures have so far placed limits on the penetration of Chinese EVs into the US market, US domestic interest groups fear that ?Chinese EV firms are planning to avoid the “Trump tariff” by setting up EV manufacturing plants in Mexico. This would allow them to export EVs to the US over the US-Mexico land border, rather than from China, incurring a much smaller tariff of 2.5%, levied under USMCA rules.

Treasury Secretary Janet Yellen attempted to reach an agreement which would defuse these issues during talks with Chinese officials several weeks before Blinken’s visit. ?Yellen argued that China should institute domestic policy changes to strengthen its domestic demand for products such as EVs and so reduce the need for exports to support its economic growth. While she did not explicitly take aim at the Chinese government subsidies that have supported Chinese electric vehicle companies such as BYD, she did call for a ?“level playing field for US companies and workers”, while refusing to rule out tougher tariffs in comments to the US media. The outcome of Yellen’s visit was an agreement with the Chinese leadership to continue talks on “balanced growth” in lower-level working groups.

The Prospects for De-escalation

Yellen’s agreement was aimed at seizing the issue from Congress and depoliticizing it by casting it as a technocratic matter. This would lower the domestic pressure on the Biden Administration and make the issue less salient in the 2024 Presidential election. However, this process will not produce tangible results and will run aground before the election in November.

On the Chinese side, the CCP is unlikely to change its economic strategy due to external pressure. Yellen’s call for Chinese leaders to reduce exports by supporting domestic demand would mean redistributing resources from the state to Chinese households. This, in turn, would mean China’s government reorienting its whole economic strategy.

However, the CCP’s work plan for 2024 explicitly calls for the government to support green technology sectors such as EVs, to consolidate and grow China’s leadership in these areas. At the same time, it has no plans for any transfer of resource that could increase demand for these products in China. Therefore, the root cause of trade tensions with the US over electric vehicles and other greentech on the Chinese side won’t be resolved.

US domestic politics will also raise tensions and frustrate any attempt at an agreement, as there are strong domestic lobbies which will call for more rapid progress or a tougher approach to China on the EV issue. Domestic industrial lobby groups such as the Alliance for American Manufacturing have argued that Chinese EVs are a threat to American jobs and industry. Both Democrats and Republicans in Congress, impelled by their own electoral calculations, have called for more restrictions on Chinese EVs.

These dynamics will be exacerbated by the 2024 Presidential election campaign. Both Joe Biden and Donald Trump have advocated tougher action against imports of Chinese EVs to gain the votes of blue collar American workers and so win the Presidency. The longer the situation continues, even if punctuated by trips by Biden Administration officials to China to wag their fingers at Chinese officials, the more the Biden Administration will face harsh criticism from Donald Trump and MAGA Republicans, and even some Democrat politicians who need blue collar votes to stay in office, for not delivering tangible changes that favour US producers.

Future Developments: Tougher Tariffs and Closing the "Mexico loophole"

This combination of pressures will incentivise the Biden Administration to raise tariffs on Chinese EVs beyond 27.5% before the 2024 election. The Biden Administration is likely to modify its existing Section 301 tariffs, which can be set at a higher level without a further Section 301 trade investigation, under Section 307 of the Trade Act of 1974.

The amount of any future tariff hike is unclear. However, Trump has promised increases of up to 60% or 100% in public remarks, which could set a benchmark for the Biden Administration’s thinking. Such a rise could be instituted rapidly. A new tariff would require consultation with US domestic industry and Congress, but in 2019 Trump instituted a hike on exisitng tariffs on Chinese goods after a consultation of only three months.

The Biden Administration would also move to close the “Mexico loophole” and so ensure that Chinese EVs produced in Mexico could not be exported to the US at a lower tariff level. One blueprint for such a move is the Level the Playing Field Act 2.0, which has already been introduced into Congress. The act would give the Department of Commerce greater powers to investigate and punish cross-border subsidies and impose Section 301 tariffs more rapidly on violators. Thus, a Chinese company receiving Chinese government subsidies while manufacturing in another state, such as Mexico, could be penalized.

Legislation along these lines would likely pass Congress easily. The current act has 52 co-sponsors in the House and 17 in the Senate. Its supporters are bipartisan and range from Trumpist Republicans such as JD Vance to progressive Democrats such as Elizabeth Warren.

The appearance of even tougher barriers to penetration of the US market by Chinese EV companies means that they will need to redouble their efforts to export to other markets. The highest-performing market for Chinese EVs so far has been the European Union. However, these companies face the prospect of increased tariffs in this market also, due to an anti-dumping investigation begun by the European Commission in October 2023. Although this investigation still has several months to run, the EU could impose higher tariffs as an interim measure as early as July 2024, at an equivalent level to existing US tariffs – and it is likely to do so.

If US tariffs increase, Chinese EV companies would likely seek to increase exports to the EU while swallowing any EU tariff increase, or reaching an agreement with the EU over a minimum price for EVs that would protects the bloc’s own domestic producers while avoiding higher tariffs on Chinese products.

The Bottom Line

During the next 6 months, tough election rhetoric within the US over Chinese EVs will be in the foreground and political pressures will lead the Biden Administration to impose tougher measures to keep them out of the US market, contributing to an increase in US-China tensions. In the background, China will be negotiating with the EU to preserve and expand the key EV market it has already penetrated.