The Big Tariff era is here – Asia Times

The Big Tariff era is here - Asia Times

Joe Biden is about to impose 100 % tariffs on Chinese-made electric vehicles. A 100 % tax is an absolutely&nbsp, huge&nbsp, price. In order to be dynamic, Chinese EV manufacturers would have to buy their vehicles in the US for half the cost of those produced elsewhere. That just is n’t going to happen.

A 100 % price will probably suffice to keep essentially made-in-China Vehicles out of the US. The Rhodium Group just came out with a record called” Ain’t No Duty High Enough”, arguing that Europe would have 40- 50 % tariffs to preserve Chinese EVs up:

In the upcoming months, the European Commission is likely to impose countervailing duties on imports of electric vehicles ( EV ) from China to reduce the chance of subsidized cars causing harm to Europe’s auto industry. We expect the Commission to implement jobs in the 15- 30 % variety.

Some China-based suppliers will still be able to gain secure profit margins on the vehicles they export to Europe because of the significant cost savings they enjoy, even if the jobs come in at the higher end of this range.

Jobs in the 40- 50 % range—arguably actually higher for vertically integrated producers like BYD—would perhaps become necessary to make the German market unattractive for Chinese EV exporters. Policymakers in Brussels may choose to use unconventional means to protect the German automobile industry, including restrictions based on environmental or national security-related considerations, because competing duties at this stage are doubtful.

Well, Rhodium is right that non- tariff barriers — basically, sneakily crafted regulation that foreign products ca n’t satisfy but domestic products can — are pretty effective in shutting out imports. They may be correct in saying that Europe will not be politically able to have 40 to 50 % tariffs. But Biden’s new tariff is&nbsp, double&nbsp, the rate Rhodium mentions. All Chinese EV exports to the US will be destroyed by that.

Now, nuking all Chinese EV exports to the US will result in essentially&nbsp, zero change&nbsp, to anyone’s life. The reason is that China currently exports almost no EVs to the US:

Source: CSIS

So if you’re an American, you were n’t buying a Chinese EV yesterday, and now you’re not going to buy one tomorrow either. For you, nothing will change.

But that does n’t mean these tariffs are performative. They are preventative, in essence. In the past we’ve seen examples of where China suddenly floods the US or other countries with a massive amount of a certain export product— for example, &nbsp, excavators. This wo n’t happen with EVs, thanks to Binden’s tariff.

So is that good or bad? Are tariffs going to increase living costs for Americans? Will Biden’s move give a boost to the US auto industry? Will the green transition be slowed down? What does this mean for US trade policy going forward?

I’ll try to respond to those inquiries.

Will the tariffs on Chinese EVs make life more expensive for Americans?

The simple answer to” No” is that the answer is contained in the above chart. Americans were n’t buying any Chinese EVs, so doubling the price of Chinese EVs is n’t going to make Americans pay more for anything.

What the tariff&nbsp, might&nbsp do now is stop a foreseeable, cheap EV bbq from reaching America’s shores. It’s possible that if Biden had done nothing, China would have flooded the US with bargain- price high- quality EVs.

And then a few Americans who are stressed out about high interest rates and the cost of groceries might have been able to relax by purchasing a subpar, high-quality Chinese-made electric car.

And Chinese EVs are &nbsp, very&nbsp, good. China has struggled to produce high-quality internal combustion engines, but the transition to EVs has made it completely different from ICE vehicles. Since China dominates the battery industry, mastering EVs was easy.

Despite having some of the histrionic hand-wringing” We’re cooked,” etc., Kevin Williams has a long article about the high quality of Chinese electric cars. Williams ‘ conclusion is spot on:

It does n’t feel like it will lead to better cars if the US and Europe get what they want, a ban on Chinese imports. It feels like it would keep buyers of those markets locked to cars that are n’t executed as well.

It’s blatantly protectionist because, in the long run, all Western auto executives and some hawkish China experts agree that Chinese EV and PHEV models are more compelling than those from European, Asian, and American manufacturers.

This is correct. And it’s reasonable to worry that stodgy old companies like GM and Ford — and even Tesla — will have far less reason to copy creative Chinese features like screen-based controls without the pressure from Chinese imports. American consumers could end up with a dowdier, lower- quality selection of vehicles.

For one simple reason, I do n’t believe that will happen, though: &nbsp, Chinese car companies do n’t have to manufacture their cars there.

Tariffs are applied based on where final assembly for a good takes place. Therefore, BYD or other Chinese carmakers can still sell EVs to the US without being affected by Biden’s new tariff if they set up their factories in America, Mexico, Canada, or anywhere else. This is&nbsp, already in progress:

Chinese automaker BYD has made a global expansion push toward Mexico as its goal. Building cars in Mexico would help the automakers avoid high import tariffs if they were to ship them directly from China.

Chinese- owned car factories in Mexico will be able to take advantage of Chinese supply chains (especially batteries ), driving down their cost. They will create creative Chinese designs that Kevin Williams adores. And they will incorporate whatever assembly- line innovations Chinese factories have discovered, driving costs down even further.

Americans will still be able to purchase” Chinese” electric vehicles, but not from Chinese factories. That’s fine. Mexico needs the workers and income, American consumers could use some affordable, futuristic cars, and American automakers could use the competition.

An open question is to what degree China’s government will decide to subsidize Chinese- owned factories in Mexico. Theoretically, China could use all the same policy levers, such as tax credits, cheap loans, direct payments, etc., to encourage Chinese companies to import cheap cars from Mexican factories.

Whether it’ll actually do that is another question entirely — China’s government may want to keep manufacturing jobs in the country, and thus be leery of subsidizing FDI. So we’ll see.

But even without subsidies, Chinese companies do indeed make cheap good EVs, and Americans will still be able to get their hands on them under the new tariff regime.

Of course, this becomes even more difficult when tariffs are also applied to EVs produced in Mexico and other third nations. In fact, Trump is&nbsp, already threatening this:

Trump warned that Chinese companies would try to build cars in Mexico before avoiding tariffs by bringing them into the US under the US-Mexico-Canada Agreement, which Trump accepted as president. Trump said he’d put a 200 % tariff on Chinese- made cars in Mexico.

American consumers could be permanently locked out of the market for cutting-edge EVs if the tariffs are expanded to include third nations like Mexico. At that point, the only way for Chinese car companies to avoid the tariffs would be to make their cars in the United States.

Japanese companies did that successfully. But Chinese companies might be&nbsp, reluctant to do that, or their government might stop them from doing it. So we’ll see.

What do the tariffs mean for the US auto industry?

With the introduction of Biden’s tariffs, U.S. carmakers like GM and Ford will have a temporary respite from a potential wave of Chinese import competition. But unless Biden — or a future President Trump — put tariffs on EVs made in Mexico as well, the respite will be short- lived, because GM and Ford will still face brand competition from Chinese automakers in their domestic market.

That competition wo n’t just affect GM and Ford’s nascent EV business; it will also affect their entire business. ICE cars and EVs are in direct competition with each other. In the long run, EVs are preferred over ICE cars due to a number of structural factors. These include:

  1. Government initiatives to make the transition more environmentally friendly
  2. The fact that battery tech is improving by leaps and bounds while ICE tech is basically stagnant
  3. the fact that battery costs are falling annually as a result of scaling effects, largely from China ).
  4. Home charging

I argued in a post last year that EVs are going to replace ICE cars and that the transition will start right away.

ICE cars have to fill up often, unlike EVs, which charge overnight in people’s garages and so only have to visit charging stations on long trips. Therefore, to be viable, ICE cars need a sizable network of gas stations.

As EVs start to take over the market and ICE cars become rarer, many of our existing gas stations will go out of business. That will make the transition to EVs more difficult, causing the shift to become less convenient. Rinse and repeat.

Once this process starts, gas-powered vehicles will start to become a niche product, and EVs will be the vehicles most people will drive.

Right now, that is n’t happening. The US automakers are scaling back their EV plans because the market for EVs is still growing, but not as quickly as many had anticipated.

But most Americans — except for a hard core of conservatives who have turned green technology into a culture war — expect to get an EV in the not- too- distant future:

Hannah Ritchie,  

If GM and Ford scale back their offerings, and if Tesla focuses on robotaxis instead of new better EVs, then there’s a high likelihood that the EV revolution in America will be carried out by Chinese companies building cars in Mexico.

If tariffs are not imposed on Mexico and any other nation, then they wo n’t stop that, and Chinese automakers wo n’t build US factories.

And there’s something else that&nbsp, no&nbsp, US tariff can stop: American car companies getting outcompeted in export markets.

Ford generates the majority of its revenue from North America, but GM generates the same amount of revenue in Asia as does Tesla. U. S. tariffs obviously do not apply to Chinese EVs being sold to Vietnam, or Japan, or Australia, or anywhere else except the US.

They will also do absolutely nothing to hinder US automakers ‘ ability to compete in important foreign markets. Many of those other countries are unlikely to put up giant Biden- style tariffs on Chinese EVs, so GM and Ford and Tesla will be facing BYD and the other Chinese automakers on a more- or- less level playing field overseas ( except in China itself, where the government will tip the scales in favor of its own domestic brands ).

Thus, Chinese competition could force American and other automakers to leave domestic markets. That would exacerbate the existing trend:

Source: StockDividendScreener.com

Whether or not there are tariffs, US car companies are in grave danger, like European, Japanese, and Korean car companies. The EV transition is happening, and China is the best at EVs. They are, in the words of Kevin Williams,” cooked” unless they can raise their game.

Will the tariffs slow down the green transition?

Many people are concerned that these tariffs will stifle the transition to a low-carbon future powered by solar energy and batteries. For example, &nbsp, David Fickling writes:

China’s growing lead in clean technology and its vast trade surplus are combining with its sluggish efforts to decarbonize developed nations to create a toxic mix. [An acceleration in trade wars will only slow our path to zero carbon. ]

He’s right to worry. Nearly 30 % of the US’s carbon emissions, or about 4 % of the global total, are caused by transportation. If the US fails to switch to EVs, it could hamper decarbonization efforts by a small but noticeable amount.

There is n’t much to worry about here, as I previously mentioned, if tariffs are only applied to EVs produced in China. Americans will still switch to EVs, they’ll just buy their Chinese- brand EVs from factories in Mexico. The transition to green will be swift.

If the US places tariffs on&nbsp, all&nbsp, foreign EVs, though, we could be in trouble. A GM and Ford decision to ignore the EV transition ( and Tesla’s transition to robotaxis ) would then allow America to remain a gas-guzzling nation, clinging to our outdated comfort cars, orphaned from global technology, and locked out of the high-tech future.

And if Republicans turn EVs into a culture war the way they’ve done with&nbsp, lab- grown meat, they could enact restrictive state- level policies that would slow the transition even further.

I’m concerned about the US’s green transition, but it heavily depends on whether the US imposes tariffs on Mexican-made electric vehicles.

What does this mean for trade policy going forward?

The most crucial aspect of these tariffs probably is the message that they send. Protectionism is now the consensus economic policy of both major political parties in the United States.

Trump is trying to one-up Biden by promising to raise the 100 % tariffs to 200 %, extend them to Mexico, and impose an additional 60 % tariff on all Chinese-made goods after Biden extended the Trump tariffs and levied the new EV tariffs.

There is currently no major party or presidential candidate that you can vote for in America that is even remotely interested in free trade. Still, that raises a lot of questions. Most importantly, there’s the question of what, exactly, protectionism is trying to&nbsp, protect. I see four of the main potential uses for tariffs:

  1. Protecting auto industry jobs and/or corporate profits
  2. reducing trade frictions with China
  3. Eliminating security risks from Chinese hacking
  4. preserving the capacity of the domestic defense sector

The first of these is probably foremost in the minds of many progressives, and possibly Trump as well. On the plus side, labor protectionists would be happy if Chinese automakers were persuaded to establish their factories in the US like Japanese automakers did.

GM and Ford would still be mad, and they’d probably have some supporters in Congress, but the prospect of a whole bunch of good American manufacturing jobs in BYD or Geely factories would probably win out.

Everyone talks about the second of these, which is reducing trade imbalances. &nbsp, Articles about the Second China Shock&nbsp, usually mention things like Chinese underconsumption, overcapacity, and trade imbalances.

A report from The Rhodium Group called” Overcapacity at the Gates” effectively sums up the viewpoint. The two most well- known commentators on this issue— or at least, the two I read the most — are &nbsp, Brad Setser&nbsp, and&nbsp, Michael Pettis, so if you want to learn more about this idea, check them out.

It’s unclear whether trade imbalances on their own constitute a real concern or whether they’re a catch-all proxy for worries about jobs and other issues. It’s also not clear whether tariffs can restore trade balance — it’s possible that the expensive dollar is to blame, and that only an abdication of the dollar’s role as the global reserve currency can fix things.

In a post coming soon, I’ll elaborate on that. But for right now, what’s clear is that many people are upset about trade imbalances, and tariffs are one available policy for trying to address those imbalances.

The third problem, security risks from Chinese-made goods, is something I’m not really qualified to assess. The fear is that if China’s security services put backdoors in Chinese- made products, they could use those built- in vulnerabilities&nbsp, to cause havoc in the US&nbsp, in the event of a war:

According to Commerce Secretary Gina Raimondo, connected cars “are like smart phones on wheels” and pose a significant threat to national security.

” These vehicles are connected to the internet. They gather a lot of sensitive information about the drivers, including personal information, biometric data, and where the car goes,” she told reporters late on Wednesday.

Data collection is not the only concern, she and other officials said. Additionally, connected vehicles could be remotely controlled or manipulated by evil entities.

” Imagine if there were thousands or hundreds of thousands of Chinese- connected vehicles on American roads that could be immediately and simultaneously disabled by somebody in Beijing,’ ‘ Raimondo said. So it’s frightful to consider the cyber risks and espionage risks that these pose. ‘

It’s pretty terrifying to think about how much destruction China could cause if it controlled all of our cars, given how one wayward cargo ship just&nbsp, took out a major bridge&nbsp, in Baltimore that will take years to repair.

I will say, though, that it seems like the danger here is entirely from Chinese- made&nbsp, computer chips. A BYD car made with those same chips has the same security as a GM or Ford vehicle.

So if you’re worried about cybersecurity, it seems to me that the one and only thing you need to keep out of the US are Chinese- made semiconductors.

Anyway, this brings us to the last factor: the capacity for defense manufacturing. In times of war, civilian factories are typically repurposed to make war materiel— for example, when Ford&nbsp, churned out massive quantities&nbsp, of B- 24 bombers during World War 2.

We have a law known as the Defense Production Act that authorizes the government to direct US businesses to switch their production lines to produce military equipment or other goods essential to national security ( for instance, we made companies build ventilators during Covid using the DPA ).

But the DPA is useless if you&nbsp, do n’t have the factories&nbsp, to repurpose. In a war, the US wo n’t be able to significantly increase its defense production capacity if US heavy manufacturing fails and dies in the face of Chinese competition. That could lead to a swift and devastating US defeat at the hands of China.

My guess is that China is well-versed in this and that it has been generous with subsidies and gung-ho about increasing its manufacturing exports because of it.

Yes, of course they want jobs and growth, but the tantalizing potential of forcibly deindustrializing the West through subsidized exports has undoubtedly crossed the minds of every Chinese leader.

Therefore, trade barriers must be erected to prevent overly heavily subventioned Chinese import surges in order to have domestic manufacturing available for military repurposing.

This consideration has nothing to do with American jobs or profits or trade deficits — it’s just a cold, hard military reality. The Cato Institute, the writers at&nbsp, The Economist, and others who support protectionism appear to have no other choice but to take the lead.

In other words, there are multiple intersecting reasons for tariffs to go up, and most off these have bipartisan appeal. The significant changes in American trade policy are likely only the result of Binden’s massive tariffs on Chinese electric vehicles.

This article was originally published on Noah Smith’s Noahpinion&nbsp, Substack, and it is now republished with kind permission. Read the&nbsp, original&nbsp, and become a Noahopinion&nbsp, subscriber&nbsp, here.