Everyone could see this coming, but finally the European Union and the United States are enacting serious tariffs aimed at the electric vehicles (EVs) that are surging out of China and flooding into markets around the world. Nobody doubts that China’s EVs are efficient and high-tech, but there is a legitimate question on the real cost structure of these companies and the extent to which subsidies from local governments in China allowed the companies to get to where they are, as well as allowing for the manufacturing of these cars at such low cost. There are also the obvious consequences to allowing these cars to establish a solid firm foothold in Western markets—local auto manufacturers are going to be severely hit.
The EU has announced that from July it will impose additional tariffs on electric cars shipped from China, taking levies to as much as 48%, following an investigation of subsidies that started last year. This follows similar moves by the US, which raised tariffs on EVs due to take effect from Aug. 1. Even Turkey is getting into the game, announcing it will impose a 40% additional tariff on Chinese vehicle imports to stop a possible deterioration of its current account balance and to protect domestic automakers.
What causes this problem? First, the fact that local EV firms in China get huge financial benefits from local governments, which are obviously viewed as creating an uneven playing field by other countries with a private auto industry that does not receive similar support. Second, the China market is heavily impacted by the fact that auto production capacity now far exceeds market demand and the economy is not doing well, which means that China auto companies have no choice if they wish to sell all their cars, but to export them, regardless of what the margin is. This is part of the over-capacity problem, which Chinese officials swear does not exist.
The so-called tariff war ramped up during the Trump era, ultimately related to the lack of reciprocity between the two economies. US companies do not have the kind of access to the China market that China companies have in the United States, and ultimately there is going to be a consequence to that. People’s patience will run thin. Now, consumers, of course, want a good product at a cheap price and overall Chinese EVs are good quality, although there are indications that the Western consumer prefers the hybrid idea, where there is both a battery and a gasoline option for running a car. This is especially true in colder climates such as northern Europe and the northern United States, because freezing weather really does impact on the performance of battery powered cars.
There is also the question of whether or not the tariffs that have been fixed are enough to deter the Chinese manufacturers from shipping their cars across to Europe and the United States. It could well be that there is still a profit margin, even at the levels currently set, which may mean there will be further increases in tariffs, particularly if these economies are serious about protecting their local manufacturers and offset the impact of subsidies back in the middle kingdom. The Chinese government, meanwhile, of course views such tariffs with great negativity and tit-for-tat is the obvious next move.
Another angle on this is the fact that the major Western auto brands, including VW, Audi and Ford are all doing really badly in the China market these days. The days when China could provide to these companies a massive margin to offset business fading elsewhere, are gone. And yet another angle that receives surprisingly little attention is the converse of the fact that Tesla cars are famously not allowed anywhere near high-level China government meetings. All of the China EVs are well supplied with advanced electronics, and so whatever the reason is that the Teslas are limited in certain places and a certain times in China, this should surely be considered by other countries in terms of Chinese EVs.
Anyway, the auto industry involves huge amounts of money and is going to continue to be a major area of confrontation. Meanwhile, riding in one of the new EV models operating as a Didi taxi in a Chinese city can be a very pleasant experience.
Have a great weekend.