U.S. raises tariffs on China's electric cars to 100 percent

On May 14, the U.S. White House issued a proclamation announcing tariffs on $18 billion in imports from China, with tariffs on electric cars set to rise from 25 percent to 100 percent.

During the Trump era, the U.S. has launched several rounds of trade wars, boosting tariffs on more than $300 billion in imports from China. When Biden took office, he largely kept those tariffs in place, exempting only some of those goods. Meanwhile Biden assigned U.S. Trade Representative David Dyche to conduct a review of the Trump-era tariffs, and after four years on Tuesday Dyche released a 193-page report on the review.

According to the report, the tariffs have been effective in encouraging China to take steps to eliminate a number of behaviors, policies, and practices related to technology transfer; however, China has not pursued fundamental reforms; the tariffs on China have had a slight negative impact on overall U.S. economic welfare; and they have helped the U.S. to reduce its imports from China and increase its imports from allies, increasing supply chain resilience.

Immediately after the release of the report, the White House announced a new round of tariffs on the aforementioned $18 billion, including 13 items, in addition to electric vehicles, as well as lithium-ion electric vehicle battery tariff rates from 7.5% to 25%; solar cells from 25% to 50%; syringes and needles from 0% to 50%, etc.

The White House announcement indicated that the move was aimed at protecting American workers and businesses. A spokesman for China's Ministry of Commerce said the U.S. side's politicization and instrumentalization of economic and trade issues is typical political manipulation, and China expressed strong dissatisfaction with it.

At the end of last year, there was already news that the Biden administration was considering raising tariffs on Chinese electric vehicles and other goods to bolster the U.S.'s own clean energy industry. Since then there has been a steady stream of U.S. lawmakers speaking out

Yellen raised the issue of "overcapacity" during her visit to China this year, naming Chinese electric cars, solar panels and other clean energy products. Xi's visit to Europe has since been followed by a confrontation with Von der Leyen about "overcapacity". The list of goods on which the tariffs will be imposed covers all of the items Yellen named.

Geometry of the impact

As far as electric cars are concerned, the new tariffs probably won't have much of an immediate impact on Chinese companies, since most Chinese-produced electric cars are shut out of the US market by auto tariffs.

China exports very few EVs to the US. Only Geely (NYSE: GEELY) exported 2,217 vehicles to the U.S. in the first quarter, according to data from the China Passenger Vehicle Association, making it the only Chinese automaker exporting to the U.S. And Geely doesn't export directly to the U.S., either.

And Geely doesn't export directly, but through its Polestar brand.

The brand is an electric car maker founded by Geely and Sweden's Volvo Cars (which Geely bought), and most of the cars are made in China, where Geely holds a controlling stake.

Polaris Chief Executive Thomas Ingenlath told Reuters last month that the company was accelerating the pace of producing more cars outside China. He said Pole Star was aiming for 40 percent of sales in Europe, 30 percent in the United States and 30 percent in the Asia-Pacific region.

Polaris will start producing cars for the U.S. and European markets in South Carolina starting in 2024, Inglater said.

Polestar, a popular electric car in Europe and the United States, is backed by China's Geely. On the right is the company's CEO Thomas Inglater. Image credit, GETTY IMAGE

Image with caption, Polestar, a popular electric car in Europe and the United States, is backed by China's Geely. On the right is the company's CEO Thomas Ingrath.

The impact of the US tariff hike on solar panels is likely to be greater than on electric cars.

Chain reaction

Although the number of Chinese electric vehicles exported to the U.S. is very small, the overseas market is of great significance to Chinese car companies.

Earlier this year, the fast-growing Chinese EV market, began to slow down, and a large number of car companies began to cut prices and layoffs, such as BYD's launch of the Qin PLUS DM-i and the Destroyer 05 models of the Glory Edition, which both start at 79,800 yuan, almost as much as a fuel car in the same class.

In a report sent to BBC Chinese by Beijing-based Anbang Think Tank, the company analyzed that this strategy of competing with price cuts could have a negative impact on the long-term development of the EV market. As prices fall, profit margins will also be squeezed, which will bring greater challenges to the development and production of EVs.

In the view of many car companies, the overseas market is still where the incremental growth lies. Zhang Yongwei, vice president and secretary-general of the China Electric Vehicle Association, said at a public event that there is a big difference between the Chinese auto market and overseas markets, and that some companies with poor performance in the Chinese market have been very successful in the overseas market, mainly due to the fact that the electrification transition of the Chinese auto market is early, and the transition of the overseas market is still relatively slow.

One of the top priorities is the European Union, according to the National Passenger Vehicle Market Information Association data, in 2023, China exported 1.203 million new energy vehicles, Europe accounted for 38%, far more than other regions.

In the face of the onslaught of Chinese electric vehicles, the EU also launched a trade investigation last October, which was opposed by China.

This month, European Commission Executive Vice President and Trade Commissioner Valdis Dombrovskis (Valdis Dombrovskis) hinted that the EU's countervailing investigation against Chinese electric vehicles is "moving forward" and that tariffs could be imposed on Chinese electric vehicles before the summer vacation.

A Rhodium Group research report estimated that the EU's upcoming temporary tariffs on Chinese EVs could range from 15% to 30%.

The organization believes that this is far from enough to stop Chinese EVs from competing with local vehicles in Europe. Even in the face of the EU's 30 percent tariff, BYD may still be able to attack the European market, the report noted. It's not until the tariffs reach around 45 percent or even 55 percent that it could make the business of exporting EVs to the European market unprofitable for a highly competitive car company like BYD.