Tariffs seem like an obvious win. You tax imports, stunting a rival's growth while protecting your own industry. So when then-President Donald Trump levied harsh tariffs on Chinese goods, including cars, in 2018, protectionists expected it to help the U.S. economy. The reality was far different. Retaliation struck, American jobs left and U.S. consumers were left with fewer choices.
Yet President Joe Biden isn't rolling back Chinese auto tariffs; he's increasing them. Citing fears that China's rising auto industry could flood our market with cheap imported EVs priced at levels U.S. automakers cannot compete with, Biden announced this week that Chinese EVs would face a new 100% tariff, making their expansion into America all but impossible. And despite the original tariffs failing, these might succeed—for now.
Get Fully Charged
A Renewed EV Trade War
The Chinese EV market is the biggest in the world, stirring fear that its cheaper, high-tech, highly subsidized domestic EVs could flood the U.S. market and kill off local competitors. To prevent this, the Biden Administration has levied a 100% tariff on all Chinese EVs, along with increased duties on battery components, lithium and materials like graphite.
To understand why, you must understand how tariffs work and what the Biden Administration is trying to accomplish with the new duties. To walk me through it, I spoke to Adam Hersh, Ph.D., a Senior Economist and China-U.S. relations expert at the Economic Policy Institute, a nonpartisan, nonprofit think tank.
While no tariff package is perfect, Hersh suggests that the Biden Administration's new approach is likely to strengthen the domestic auto industry and make it more competitive.
The only way it may fail is if U.S. consumers and automakers choose to turn away from the electric car revolution.
Why Countries Use Tariffs, And How They Can Fail
At a core level, a tariff is an import tax. Tariffs can be broad or targeted and are used for various reasons. Hersh points out that many smaller and developing nations use tariffs primarily as a source of tax revenue that's easier to collect than income or sales taxes. Yet, they are also a political and diplomatic tool that countries use to protect local industries and punish what they see as unfair trade practices. In the U.S.-China relationship, tariffs have the dominant role.
With any tariff, countries must be aware of protectionism's long-term risks. If a country bars off foreign competition without a competitive local alternative, Hersh says high tariff walls can produce "inefficient monopolies."
"Ultimately, they can become involved in the policy[making], influencing the policy to maintain their market position rather than investing in improving their product or efficiency," Hersh told InsideEVs.
These risks exist even if the target of the tariffs does not penalize you for icing them out. Yet, following the Trump Administration's tariff package back in 2018, China retaliated hard. The country imposed a slew of duties on U.S. exports, including a 40% tariff on U.S.-built cars.
The total cost of Beijing's retaliatory moves made the tariffs a huge net loss for the American economy. The U.S.-China Business Council estimates that the 2018 tariff package cost the American economy 245,000 jobs in the long term. The Tax Foundation paints a slightly rosier picture, saying that the U.S. lost 166,000 full-time jobs and 0.21% of its GDP over the trade war.
U.S. government census data shows that the trade deficit between the U.S. and China did not dramatically improve after the tariffs were imposed, and the U.S.-China Business Council, the Tax Foundation and Hersh all note that greater imports from the rest of the world offset any trade reduction with China. In total, the U.S. share of global exports declined following the Trump-era tariffs.
These effects were all unsurprising to economists. Hersh points out that tariffs alone rarely make a nation more competitive. Using only tariffs, a country can only make goods more expensive and limit consumer choice.
Instead, he says tariffs have to be part of a comprehensive policy initiative designed to make local producers stronger and more competitive.
Why Biden's Tariffs Might Succeed
While Trump's tariffs were purely punitive, Biden's are supported by the kind of domestic investment that Hersh considers essential to a successful policy. The 2022 Inflation Reduction Act (IRA) heavily incentivized localized electric vehicle production, spurring a litany of new electric vehicle, clean energy, battery and supply chain investments that are already reshaping the American auto industry.
As Atlas EV Hub noted, BlueGreen Alliance Foundation EV Jobs Hub data shows that EV manufacturing investments soared following the passage of the IRA. They point out that in the 11 years before the IRA was passed, total U.S. EV manufacturing investments totaled $91 billion. In the first 15 months after the IRA passed, companies announced $82 billion of EV manufacturing investments.
Of all the money ever announced or spent on EV and battery manufacturing in the U.S., over 60% came in the last two years alone. The change of pace has been staggering. Yet because many of these projects will take years to build, consumers and workers have not even begun to feel the full weight of these incentives.
This should help American companies (and foreign companies with U.S. investments) catch up to Chinese EV brands, which benefitted from a staggering $57 billion of direct consumer incentives to purchase EVs between 2016 and 2022, according to a report from consulting firm AlixPartners. U.S. consumers received about $12 billion during that period, per AlixPartners.
That's not nearly the end of it, either. Hersh, of the Economic Policy Institute, notes that Chinese EV manufacturers receive subsidies or assistance at almost every step in their supply chain. Health and safety regulations are relaxed. Permitting is easier. Materials production is subsidized. Land grants from provincial governments are common. At every turn, the Chinese government has broken down barriers for its EV industry, hoping to grow an industry to shame the world. And it's worked.
The combination of tariffs and domestic investments is designed to get the U.S. EV industry to reach competitive parity with China. Now that they're safe from a flood of cheap Chinese EVs, automakers have time to learn from successful players in the Chinese market, according to Mark Wakefield, global co-leader of the automotive and industrial practice at AlixPartners.
"It'll give them some time to catch up," he told InsideEVs.
What Success Looks Like
In a briefing with InsideEVs and other news media, spokespeople for the Biden Administration laid out clear goals for the tariffs. The President is trying to protect American jobs and companies, build supply chain resilience in key sectors and reduce Beijing's leverage over the American economy.
If they succeed, the combination of tariffs and investments will produce an American EV industry that is fit to take on its fiercest Chinese competitors. The jobs impact of this cannot be overstated: According to Economic Policy Institute data, one job in automotive manufacturing supports an average of 10 other jobs—through supply chains, local services, spent wages and more—throughout the economy. As recently as 2019, that figure was more like 14 indirect jobs for each auto manufacturing role.
The strategic payoff will be even greater. Washington will simply not accept a world in which it is heavily reliant on Beijing for its domestic transportation needs, a reality that seems not too far off considering how much cheaper Chinese EVs are. The Commerce Department has recently announced draft rules, that would ban connected car data from being collected by Chinese entities, a clear sign that the Administration is afraid of China using automotive exports to help its strategic agenda.
Hersh also notes that militaries like having sophisticated domestic automotive production that can lead to dual-use technologies and projects. The U.S. Defense Department has a deep interest in battlefield electric vehicles, and in any large-scale war high-competency automakers are a valuable asset. General Motors is already a defense contractor, and it'd be hard to imagine BYD filling that role.
But the real hope is that this pays off for American consumers, not just automakers and U.S. policymakers. If blocking out Chinese EVs for a while helps cultivate a dynamic, exciting domestic EV boom, it'll be a huge win for us and the climate.
What Failure Would Look Like
Yet it's too soon to say whether automakers will seize this opportunity. The scale of investments suggests that U.S. companies are taking EVs seriously, but their slow pace of change and heavy opposition to tougher climate rules make me wonder whether they've really internalized the lessons Tesla, Chinese automakers and even Hyundai have to share with them.
"One hopes that this time will be used to change enough to be competitive and learn the lessons of what has been working to win in China and gain new market share. If you look at the traditional automakers, it's really difficult to say those lessons have been learned," Wakefield said.
But China's labor market is a very difficult one than even the U.S. has. Wakefield noted that Chinese auto companies tend to work longer hours than American companies, that they tend to meet deadlines without excessive delays and that the time-to-market for new models is drastically shorter. Chinese automakers, he said, have perfected the art of making cars "good enough" in most areas while offering "surprise and delight" in terms of design and tech features, which is what their consumers care most about. Using that strategy, they can deliver compelling cars cheaper than their counterparts in America. (Moreover, widespread accusations of forced slave labor in China's supply chains have no doubt kept costs down as well.)
But Wakefield said there are still things the Western automakers can do to get ahead on EVs, including applying learnings from Chinese cars themselves.
"[Why not] adopt some of these things that are the right thing to do? Things that are smart ideas they've executed well?" he asked. "You can become a formidable competitor by being a learning organization and paranoid and courageous, [and being] smart about how far you push."
With enough competition and innovation, he said America could have its own "little Spartan breeding ground" of fierce, efficient competitors able to survive in a Chinese market he describes as a "knife fight" while also satisfying U.S consumers.
"But it takes competition, and a desire to win," he said. And, ultimately, "it takes a desire to change."
Contact the author: mack.hogan@insideevs.com
