Opinion: US tariffs on Chinese EVs are no cure-all for domestic EV makers

Washington's Biden Administration has, in the culmination of a months-long narrative on the future of the US auto industry, quadrupled import duties on Chinese EVs with the introduction of a 100pc tariff which the White House hopes will stave off Chinese competition and keep US OEMs afloat in the EV race.

Upward tariff adjustment has been widely expected after frequent US government criticism of what it calls "unfair trade practises" employed by the Chinese auto industry. The administration has now confirmed that a 100pc duty will come into force on Chinese EVs, as well as smaller trade barriers placed on batteries and components.

The rate on lithium-ion EV batteries will increase from 7.5pc to 25pc, while previous tariff-free natural graphite for cathodes will be subject to a 25pc surcharge in 2026. The tariff rate for "certain other critical minerals" will increase from zero to 25pc in 2024, the White House says.

Such tariffs — as well as similar ones expected to be announced soon by the EU — have divided the auto industry. On one side are manufacturers with little or no Chinese business and limited reliance on China in their BEV supply chains, worried that highly advanced Chinese EVs might be allowed to flood their home markets.

On the other are OEMs who fear unintended consequences, such as reprisals against their own Chinese investments, or the need to reconfigure supply chains for their EV production.

Clear what was coming

After the tightening of Foreign Entity of Concern rules of origin at the start of this year, which disqualified Chinese minerals and battery manufacturing from US purchases incentives, the US industry has had plenty of time to prepare for this announcement. Nevertheless, the tariffs will not simply be a panacea for US EV manufacturing at a time of slowing demand.

The duties imposed on batteries and components will force many OEMs to reconfigure their supply chains, in turn placing extra importance on the buildout of the North American upstream value chain. In the last year, a slew of upstream battery projects have been announced or launched, many located in Ontario, Canada, near the US manufacturing hotbed of Michigan. Pressure is now on these upstream operations to replace as much as 80pc of the world's battery mineral refining, which is currently done in China.

Unintended consequences

But the trade barriers could represent as a double-edged sword for American automakers, who, while having their domestic market shored up against a potential flood of cheaper EVs, may find China being forced out of their value chains a hindrance to developing globally competitive new products.

Stiffer competition from technologically advanced and affordable Chinese EVs could have also provided the animus needed to ensure that US legacy firms like Ford and GM are incentivised to build differentiated products even at home. While the US market is becoming increasingly competitive as pure play start-ups like Rivian ramp up and OEMs from Europe, South Korea and Vietnam up their BEV games, the scale at which new players are selling EVs domestically in the US is not yet large enough to meaningfully sharpen Ford and GM's overall focus.

And the two Detroit heavyweights could then run the risk of complacency in being more easily able to secure protected domestic EV industry, spelling trouble for their EVs' competitiveness abroad.

Chinese EVs notably lead the way in terms of software advancement, with tech companies like Xiaomi recently joining the fold of EV manufacturers. Western brands like VW have also launched Chinese JVs and sub-brands centred around software-defined vehicles, illustrating the impetus coming from China's tech industry and its consumer culture beginning to dictate tastes in the EV market — albeit there are some doubts emerging that all Chinese tastes in in-car experience will translate more globally.

But, more broadly with limited exposure to these market forces, traditional US automaking risks finding itself falling out of relevance as the e-mobility revolution gathers pace.

Higher tariffs on Chinese imports alone "would not necessarily make American companies more competitive globally and it would also lead to higher consumer prices for EVs," notes Tom Moerenhout, research scholar at Columbia University's Center on Global Energy Policy. This view is echoed by Ilaria Mazzocco of thinktank the Centre for Strategic and International Studies, who says that "complete insulation from competition would likely also make American companies even less competitive in the long term".

Furthermore, the threat of Chinese EVs undercutting US-made vehicles at home is potentially overstated in the first place. In February, Chinese EV leader BYD publicly dismissed the prospect of exporting its EVs at scale to the US, and is instead preparing for a push into several European countries, as well as developing markets in South Asia.

In any case, while Chinese firms sell EVs for unbeatably low prices in China, they have on the whole shot for higher prices in their export strategies as a way to recoup squeezed margins at home owing to intensely fought price wars raging in the Chinese market.

"Many Chinese EV makers will target exports, which command a price premium, to soothe the pain at home, especially since capacity has risen so fast over the past couple of years," says Michael Havemeyer, vice-president at consulting firm USI.

As such, the prospect of an influx of imported Chinese EVs — even before tariff hikes - was unlikely to see anything like the bargain basement prices offered by Chinese OEMs at home being brought to the US, raising the question of whether the value of the new tariffs is more symbolic than pragmatic.

However, the policy is an easy win for Joe Biden, with the White House presenting the tariffs as measures to protect American jobs in key manufacturing swing states just in time for this year's election. And the matter of limiting Chinese imports is a rare piece of common ground between Biden and Republican challenger Donald Trump — who has recently suggested punitive tariffs on a wide array of Chinese goods — suggesting an element of political expediency to the policy that is perhaps front and centre above the industry's long-term interests.