How will EU tariffs on Chinese electric vehicles affect global markets?
On June 12, 2024, the European Union announced "temporary" tariffs on China's pure electric vehicles based on its estimate of subsidies for China's electric vehicles. The tariffs were determined after months of EU investigations and will be added to the current 10% tariff. They are called a "temporary" subsidy because tariffs may be lowered if Chinese producers can produce evidence that the actual subsidy is lower. In addition, if the EU can reach an agreement with the Chinese government to somehow reduce China's electric vehicle exports to Europe, these tariffs may not be implemented.
The specific amount of the tariff reflects the upper limit used by EU experts on the total government subsidies received by Chinese automakers at all levels throughout the supply chain. The EU investigation team first issued a request for cooperation to all Chinese electric vehicle manufacturers. Among those companies that promised to cooperate, the investigation team selected three companies for in-depth analysis: Shenzhen-based BYD, Hangzhou-based Geely and Shanghai-based SAIC Motor Group. They extensively reviewed the company's records and interviewed company insiders and industry experts. Subsequently, the investigation team concluded that BYD's subsidy rate was 17.4%, Geely's was 20.0%, and SAIC Motor's was 38.1%, and announced the corresponding tariffs accordingly. For those electric vehicle manufacturers that have committed to cooperation but have not been selected as a sample, the temporary tariff is set at the weighted average of the subsidy rates of the three companies, which is 21%. For those pure electric vehicle companies that have not committed to cooperation, tariffs will be levied at a maximum rate of 38.1%.
The results of the EU's investigation into subsidies have drawn attention to the absurdity of the U.S. government's announcement a month ago that it would impose 100%"countervailing" tariffs on Chinese electric vehicles. The U.S. decision has not been thoroughly investigated, but its tariff levels far exceed reasonable subsidy estimates. U.S. policymakers chose this three-digit integer out of thin air, indicating that it was not even trying to disguise its protectionist nature.
Even before President Biden announced the 100% tariff, U.S. tariffs on various Chinese goods were already quite high, basically similar to the infamous U.S. Smoot-Hawley tariffs of the 1930s. Although these tariffs were established during President Trump's term, the Biden administration has largely maintained the policy. A World Trade Organization panel of non-U.S. and non-Chinese trade experts ruled in 2020 that the tariffs did not comply with WTO rules. However, both the Trump administration and the Biden administration chose to ignore this WTO ruling.
Most other governments have chosen to remain silent in public, in part because U.S. tariffs have indirectly enhanced the relative competitiveness of these countries 'products in the same market by making Chinese products less competitive in the U.S. market. In fact, after Trump imposed additional tariffs, U.S. direct imports from China fell sharply, while imports from many countries such as Mexico, India, and Vietnam increased accordingly. In addition to Chinese exporters and U.S. consumers, the main victims of U.S. tariffs are producers in small countries. They are now facing the growing risk that major powers seem to pursue protectionist policies with impunity.
Source: BYD Automobile Official Public Account
There is a view that given China's huge cost advantage, a 30% tariff gap is not enough to curb China's electric vehicle exports to these markets. However, this view ignores two key factors. First, due to differences in safety and other standards among markets, automakers often need to adjust models to sell to a new market, which limits global sales of a single model. For example, China's automobile safety standards focus on the protection of pedestrians and people outside the vehicle in the event of a car accident, while the United States focuses more on ensuring the safety of drivers and passengers inside the vehicle in the event of a car accident. This means that there are enough differences between electric vehicles designed for the U.S. market and versions in the Chinese market. Second, the profitability of a car depends on a certain amount of sales. Therefore, if the new tariffs significantly reduce expected sales, Chinese car companies may give up the idea of exporting to this market.
Some Chinese electric vehicle manufacturers are considering setting up factories in the United States, a move that could bring jobs and increase tax revenue to the United States. However, the U.S. government's Foreign Investment Review Process (CFIUS) is considered by many Chinese companies to be discriminatory against Chinese investment and may cause many Chinese producers to abandon the U.S. market entirely.
As a key tool in promoting the global transition to a low-carbon lifestyle, electric vehicles are better with certain subsidies than no subsidies. Assuming that a sufficiently high global carbon tax cannot be implemented, the optimal subsidy for new energy vehicles should be higher. The EU and the United States tend to use tariffs on imported goods rather than increasing subsidies for their own new energy vehicles, in part because both governments face fiscal pressure from high debt.
The newly implemented tariffs will undoubtedly have an impact on the profits and employment of Chinese companies. However, the policy has also had a negative impact on the EU and the United States, not only pushing up the cost of living for domestic households-as domestic competitors no longer face equal pressure to cut prices-but also slowing the transition from high-carbon-emitting traditional cars to greener alternatives in these regions.
The new tariffs have formed two competing forces on a global scale. On the one hand, blocking China's electric vehicles out of U.S. and EU markets may prompt China to increase exports to other regions. This is good news for consumers in third countries and will help them accelerate the transition from traditional vehicles to electric vehicles. In countries without a homegrown auto industry, such as Australia and new Zealand, there appear to be no obvious losers from this change. However, for those countries with mature automobile industries, the new tariffs in Europe and the United States mean that they will face more intense market competition. Governments in these countries may feel political pressure to follow U.S. and EU measures.
If the world's major countries can negotiate coordinated subsidies and carbon emissions taxes on the production of electric vehicles from the perspective of managing climate change, the world will be a better place.
(Wei Shangjin is an academic visiting professor at the School of International Finance of Fudan University, a tenured professor at Colombia University, and former chief economist of the Asian Development Bank)
