The US is tightening the screws on China

Joe Biden is about to almost quadruple the tariffs on Chinese electric vehicles which, at face value, is odd, given that the US only imports a relative handful of Chinese EVs.

The announcement of the increase in the tariff rate from 27.5 per cent (which includes a 2.5 per cent tariff on all imported vehicles) to 102.5 per cent is expected this week, driven by a mix of domestic politics, national security concerns and the ongoing trade war between the US and China.

The Biden administration is trying to be strategic in its dealings with Chinese exports.Credit: AP

EVs won’t be the only Chinese exports targeted. Widespread US media reports say that Chinese-manufactured batteries, solar cells and some critical minerals will also be hit with higher import duties while Biden had already asked his trade office to triple the tariffs on steel and aluminium.

While imports of Chinese EVs to the US last year were a modest (relative to the size of the US market) $US368 million ($559 million), the punitive tariffs regime comes amid global concerns about the flood of cheap Chinese exports of key components of the green economy.

Chinese EVs have been priced out of the US market by the existing tariff regime, put in place by the Trump administration, but significant overcapacity in a Chinese auto industry built to dominate the global EV market and weak domestic demand has seen prices fall quite significantly and exports of EVs rise quite dramatically.

In Europe last year, imports of Chinese-built EVs soared 70 per cent, with the Chinese vehicles accounting for nearly 20 per cent of all EVs sold. That share has been forecast to rise to 25 per cent this year.

With the average selling price of those vehicles more than twice what they would return within China but about 40 per cent cheaper than European-built EVs, there’s an obvious concern on both sides of the Atlantic that a flood of Chinese EVs could wipe out their domestic automobile industries.

Even Elon Musk has warned that the Chinese EV industry would “demolish” its global rivals without trade barriers.

For Biden, the decision to impose punitive tariffs on EVs, solar cells, batteries and, perhaps, semiconductors is both a pre-emptive move to protect his car industry, but also to protect the hundreds of billions of dollars his administration has provided, through his signature Inflation Reduction Act, to rebuild a green manufacturing base.

There’s a strand of national security concern – EVs are capable of collecting and on-sending vast amounts of data, some of it potentially sensitive – and also significant domestic political sensitivities, given that Biden has been trying to attract the votes of manufacturing workers and the autoworkers in particular.

The US is ramping up tariffs on a number of China’s green industries, including economic vehicles.Credit: Bloomberg

Not to be outdone, Donald Trump’s response to the Biden plan has been to say that he would slap 200 per cent tariffs on Chinese EVs, along with his plan to lift the tariff rate on all Chinese imports to 60 per cent. Trump imposed an average rate of just over 20 per cent on all imports from China during his previous administration.

China dominates the manufacturing for most of the green technologies, producing about 80 per cent of the world’s solar panels, a similar global share in batteries and 60 per cent in EVs as part of the national strategy, supported by layers of subsidies and non-financial support, developed over more than two decades.

Those industries are geared for exports, leveraging off China’s vast domestic market, and would be left with significant overcapacity if their major offshore markets were closed off.

While the US move is pre-emptive rather than a response to an immediate threat, the prospect of being shut out of Europe would be of far greater concern to China.

The European Union, which launched an anti-subsidy investigation into its imports of Chinese EVs last October, said earlier this year it had found evidence that China had been unfairly subsidising its EV manufacturers through government revenue foregone or not collected, government supplies of goods and services at “less than adequate remuneration”, as well as direct transfers of funds and cheap loans.

The EU has started requiring customs registration of Chinese EV imports in case it decides to apply retrospective tariffs, with EU officials hinting earlier this month that tariffs could be imposed mid-year.

The EU, which has the most advanced and stringent regime for reducing carbon emissions, isn’t (unlike the US) seeking to ban all Chinese EV imports.

It wants a more level playing field for its auto industries so that they aren’t wiped out, but it needs still relatively cheap Chinese EVs to achieve its emissions targets because its domestic companies aren’t capable of producing the volumes of affordable vehicles required.

While China says it competes fairly and criticises the responses from Western governments as protectionist (which they are), its state-driven economic model is inherently built on identifying and subsidising, via all mechanisms possible, industries where it believes it can gain competitive advantage and dominate globally.

The weaknesses in its economy exposed by the collapse of its property sector and the pandemic have seen it look to exports to maintain growth, promoting more investment in factories geared for exports of products deemed strategic.

In a reflection of the excess capacity that has created, domestic prices have been falling – China has been experiencing deflation – and, while the volume of its exports has been rising, their value hasn’t risen in tandem.

It is, as the Americans and Europeans have been arguing, flooding the world with cheap goods that threaten their own industries and employment.

Tariffs and subsidies are a crude response. They lock in higher prices for consumers, generating inflation in the process. To the extent that they displace Chinese exports, those goods will be diverted to other, more receptive markets, leaving those economies sheltering behind trade barriers with shrinking markets for their own, less internationally competitive goods.

China dominates the manufacturing for most of the green technologies.Credit: Bloomberg

The alternative, of course, is to allow China’s exports to flood in, lowering costs across the economy – particularly the cost of green transitions – but cementing the global dominance of strategic industries by, from the US and European perspective, a geopolitical rival.

That’s not to say China could easily switch its output of EVs or solar panels to new markets. Europe accounts for about 40 per cent (and rising) of its EV exports and just under 50 per cent of its solar panel exports. Given the degree of excess capacity in its manufacturing base, if those were choked off to any material degree, it would suffer significant economic indigestion.

The Biden administration is trying to be strategic. Rather than the general tariff wall that Trump wants to build around the US economy, it is seeking to target specific industries where China’s exports threaten US investment and jobs in industries it also sees as vital to its evolving economy, that have national security implications or that could create economic vulnerabilities if dominated by a rival. It’s doing so while trying to maintain a broader trade relationship with China.

It is conceivable, if this weren’t an election year and if Biden weren’t up against the “Tariff Man”, the four-year review of Trump’s tariffs that are the backdrop to this week’s announcement might have included some lowering of the duty rates on non-strategic imports from China. In the current political context, that’s unlikely.

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