US tariffs on EVs: Pre-emptive or political?

The Biden-Harris Administration is set to impose new tariffs on a range of imports from China. These are being introduced under Section 301 of the 1974 Trade Act and will be phased in over the next three years1. The steepest rise is for Electric Vehicles (EVs), for which tariffs will increase from 25% to 100%.

With the forthcoming Presidential elections, the announcement is - in good part - a political move designed to show Americans that Biden supports the US car industry and its workers and is committed to a domestic green transition. At the same time, it also reflects concerns regarding unfair competition from China – which range from subsidies for its EV industry to concerns regarding intellectual property and technology transfer.

First, note that US EV imports have been rising dramatically (Figure 1). This might at first glance suggest that the tariff increase is a response to concerns that Chinese imports are crowding out US EV producers. However, the US imported a negligible amount of electric vehicles from China in 2022-23 (less than $400M in 2023 which amounts to only 2% of US EV imports), whereas in contrast the EU and the UK respectively imported $10.5B and $4.6B from China. The US has decreased imports of EVs from China since 2020. See Fig 2, which for each country gives the share of imports from China relative to their total EV imports.

Source: UN Comtrade. Notes: Electric vehicles are defined by HS 870380
– “vehicles with only electric motor for propulsion.”

US exports of EVs have also stagnated, and exports of EVs to China have fallen by over 40% since 2017. The overall decline is primarily because US producers tend to make few EVs which markets outside the US want, and because there is an increased tendency for manufacturers to make where they sell. The stagnation in exports suggests that any adverse effect on jobs from imports would not be offset by export growth.

There are six other countries that export more EVs to the US than China, with Germany at the top of the ranking (Figure 3). The low level of Chinese imports by the US is driven by a mix of factors –existing tariffs, China’s competitiveness is in small EVs which are not so popular in the US, and low brand recognition in the US.

If the US tariff on EVs is really there to protect the EV industry, then it is a pre-emptive tariff – and that alone makes it very unusual. Under the rules of the World Trade Organization (WTO), safeguard tariffs can be introduced in the face of a sudden dislocative surge in imports – but that is clearly not the case here.

The US’s concern therefore would appear to be about future Chinese competitiveness harming future jobs and productivity in sectors critical to US national security. In theory, increased protection may increase domestic prices and create additional rents for businesses and workers, which in turn may incentivise new firms to produce and innovate and thus create more jobs2. It is theoretically possible for protectionism to deliver growth when done right.

However, empirical evidence from the US indicates that existing tariffs have had little or no employment effects and if anything, they may have reduced income3. An increase in tariffs on one country (China), may simply lead to diversion of imports to other countries (e.g. Mexico) and indeed may encourage Chinese investment in those other countries to circumvent the tariffs. Additionally, it is worth noting that, first, while the US is concerned about Chinese subsidies, it is, in turn, supporting its domestic industry extensively under the Inflation Reduction Act. Second, the US is also introducing tariffs on a range of other intermediate products used in vehicle manufacture that risk increasing US firms’ costs and thus competitiveness.

The economic rationale of the proposed tariffs is complex and unclear, which takes us back to the politics. There is some evidence that the success of Trump’s tariffs was political rather than economic. Research shows that Trump’s trade war against partner countries contributed to support for Republicans, and contributed to electoral success in certain states in the 2020 Presidential election.

Concerns about Chinese subsidies and trade practices are not limited to the US. As shown in Fig 2, there has been an increase in China's share of EV imports in the EU and the UK. The EU is finalising an investigation into Chinese practices which is due to conclude in June, and the expectation is that the EU will also announce (countervailing) tariffs on Chinese imports – though more likely of the order of 15-30% rather than the US’s 100%. However, the EU, and in particular Germany, relies considerably more on China as an export market. China has also announced several plans to invest in EV production in the EU – such as in Hungary and Spain. This will allow China to serve the European market without facing the new increased tariffs.

For the UK, the policy choices are perhaps harder. It is likely that there will be pressure on the UK to follow the US and the EU, and indications are that the Trade Remedies Authority may launch an investigation into Chinese subsidies. Yet the size of UK EV production, as well as the take up of EVs, is smaller. There are some important strategic choices to be made regarding the level of support to be given to UK EV producers, the form of that support, and the response to Chinese and EU competitiveness – all of which will determine the success or failure of EV production in the UK and the decisions of multinationals regarding the production location of different models.

EVs are contributing to decarbonisation. Lower prices for EVs, whether imported or domestically produced, can accelerate the green transition. Policymakers and consumers should welcome low-cost imports and foreign investment in building domestic capacity. At the same time, there may be economic and industrial policy considerations given the size and importance of the car industry in many economies. Where there are unfair subsidies then there may be grounds for countervailing duties but these should be proportionate and consistent with WTO rules. It is far from clear that this is the case with regard to Biden’s tariffs.

Biden’s tariffs highlight not only the tension between the objectives of the green transition and supporting a domestic (EV) industry, but also the tension between the US and China. The tariffs will likely lead to retaliation from China, further increasing tension. None of this is good for the world economy, let alone the environment.