A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. To subscribe and/or view previous editions just google ‘Deloitte Monday Briefing’.

Last week, the Biden administration announced that the US would impose 100 per cent tariffs on imports of Chinese electric vehicles (EVs). In terms of trade policy, a 100 per cent tariff is shock and awe stuff. It is a landmark decision in the competition to dominate the global EV market.

At first glance, this looks like an empty gesture. Vanishingly few Chinese EVs are sold in the US because the vehicles are already subject to 25 per cent duties. The US market is dominated by home-grown producers like Tesla and imports from South Korea, Germany, Japan and Mexico. But this is about the future, not the present shape, of the US car market.

With the US elections in less than six months, politics is also at work. The decision seems designed to win votes in key battleground states. But it is of a piece with an increasingly protectionist US approach to trade. In a speech last year, United States Trade Representative Katherine Tai argued that trade policy must switch from what she described as a focus on “artificially” low costs for consumers and the interests of big companies to prioritising national security, workers interests and small businesses. 

Gone, it seems, are the days when US policymakers lauded the benefits of free trade. On this, the Democrats and Republicans appear to agree. Mr Trump kicked off the current US-China trade war in 2018 with the imposition of new tariffs on a wide range of Chinese products. At the time Mr Biden pledged to reverse the tariffs, saying, “Trump doesn’t get the basics. He thinks his tariffs are being paid by China…any freshman econ student could tell you that the American people are paying his tariffs.” In office President Biden has kept the Trump tariffs and is now building on them.

In the competition to show who is tougher on China, Mr Trump has said that he would levy even higher tariffs on Chinese imports than proposed by Mr Biden.

Chinese EVs are cheap and offer increasingly advanced features. You get a sense of the break-neck speed of evolution that Xiaomi, a smartphone maker, is entering the EV market and plans to deliver 100,000 cars in its first full year of production. (The Beijing auto show, which ended earlier this month, seems to have left Western journalists awe struck. EV Insider motoring correspondent Kevin William’s piece was titled, “I went to China and drove a dozen electric cars. Western automakers are cooked”. In a similar vein, The Economist opined that “Chinese carmakers are leaving Western rivals in the dust”.) 

Chinese exports of cars (few of which go to the US) have risen five-fold over the last three years to about five million vehicles in 2023. Most are internal combustion engine cars, though EV shipments have also surged. Chinese capacity in car production is staggering. The Wall Street Journal reports that China has the capacity to produce some 40m vehicles a year, far in excess of current output of 30m. Western policymakers are all too aware that China’s excess capacity of 10m units is close to the US output of 12m cars (in 2023) and two-thirds of the EU output of 15m.  Overcapacity has led to a price war in China and is driving Chinese exports.

The Biden administration’s response is to protect the US auto industry behind a tariff wall. As Mr Biden acknowledged in 2019, tariffs will raise prices for US consumers. They will also reduce choice and, by slowing the adoption of electric vehicles, keep carbon emissions higher for longer. As the FT reported last week: “EV penetration of the US car market is miles behind that of China, and indeed the EU. Sales of EVs in the US are slowing and US manufacturers are switching to hybrids”.

As president, Mr Biden has made climate change a priority, rejoining the Paris Agreement and spending vast sums through the Inflation Reduction Act to speed the energy transition. Last week’s decision on tariffs shows that Mr Biden also wants a ‘Made in America’ energy transition – even if, by excluding Chinese EVs, it risks a slower one.

In the short term the Chinese car industry will continue to focus on selling vehicles in emerging markets, Europe and the Middle East where tariffs are relatively low. Imports of Chinese cars into Europe have surged in the last three years. Almost a quarter of EVs sold in Europe this year are likely to be Chinese.

European Commission president Ursula von der Leyen has talked of global markets “being flooded with cheaper Chinese electric cars” and “huge state subsidies” keeping prices artificially low. Last September the EU Commission opened an investigation into whether to apply punitive tariffs on Chinese EV imports to the region. That the investigation is not universally popular among European carmakers illustrates the global nature of the car industry. VW and Mercedes-Benz manufacture in China at scale and have warned that any EU action against Chinese EV imports risks retaliation. (In the first four months of this year foreign marques, principally Japanese, German and US automakers, accounted for 40 per cent of Chinese car sales.)

To avoid paying tariffs Chinese producers seem likely, in time, to shift production closer to the markets they serve in order, much as the Japanese auto industry did in the 1980s and 1990s.

Given the political climate it is hard to see Chinese automakers setting up shop in the US. But manufacturing cars in Mexico for the US market would, under the US-Mexico-Canada Agreement, allow Chinese carmakers to avoid US tariffs (Mr Trump has already said he would introduce 200 per cent tariffs on such cars and Bloomberg reports that the Biden administration is seeking ways to counter Mexican-made Chinese imports). Europe seems likely to be more receptive to Chinese inward investment. France’s finance minister has said that Chinese carmakers are welcome to open plants in France. Earlier this year China’s BYD, the world’s biggest EV maker, announced it would build an assembly plant in Hungary. 

Electric vehicles and China are remaking the auto industry. Governments are determined that they, at least as much as consumers, will shape the outcome of this contest.

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