Several trade experts predict that the tariffs President Biden placed on China will backfire. Critics of tariffs and export restrictions say they not only will potentially exacerbate inflation and bring down economic growth, but they are likely to fail because Chinese businesses will find ways to work around them with the only casualty being a temporary slowdown of their Chinese businesses.
Electric vehicles are a major focus of the $18 billion of Biden’s increased tariffs on Chinese-made goods, with EV levies increasing to 100 percent from 25 percent. Analysts expect to see Chinese EV companies ramping up production in Mexico to circumvent Biden’s import taxes, using the U.S. Mexico and Canada trade agreement to thwart the tariffs. China’s BYD, for example, is looking to build a factory in Mexico.
Currently, the United States is importing relatively few Chinese electric vehicles, but that may change as it already has in Europe. Chinese electric vehicles are very inexpensive compared to domestic EV models due to China’s cheap coal electricity and labor, years of experience in building electric vehicles and their components, dominance of battery manufacturing and the supply and processing of critical minerals needed for EV manufacture. China does not have the U.S.’s dominance in world energy supplies, so it long ago saw pushing electric vehicles as a means to counter the U.S.’s national security advantages in energy.
One of the electric vehicles the United States will be supplied from China is an SUV made by Volvo, who will be exporting the Volvo EX30 to the United States this summer, at a price about $8,000 less than its intended competition, a Tesla Model Y. The vehicle will avoid tariffs because Volvo has a plant in the United States, which allows them to be rebated the tariffs. Volvo was purchased by China’s Geely years ago, and the companies are sharing a common platform and configuration among their vehicles, bringing efficiencies that decrease price. The Volvo electric vehicle is also eligible for the $7,500 federal tax credit if leased because of a Biden Administration interpretation of the Inflation Reduction Act that makes leased vehicles eligible, although about half the lessees immediately buy out their leases.
China has already found workarounds with regard to the restrictions placed on the chip industry. China’s Huawei unveiled the Mate 60, a smartphone powered by a high-end semiconductor. The new product contains an advanced chip that was the kind of technology that the Biden administration was trying to keep out of China’s hands through the passage of the CHIPS Act. Huawei’s breakthrough was less a breach of international trade rules than a result of a company’s using non-direct channels to get the banned materials it needed to make the chips because the United States did not sufficiently control those supplies, according to a recent research report.
Biden’s Justification for Tariffs
Biden has justified increasing tariffs on Chinese-made electric vehicles by accusing China of “flooding global markets with artificially low-priced exports” and noting that China’s electric vehicles harm American economic interests and American workers and companies, and threaten U.S. national security. China has been the world leader in electric vehicle manufacturing for some time, and has been able to compete favorably on price with its competitors. Restricting Chinese technology is one of the few areas that has bipartisan support in the U.S. Congress.
The number of protectionist policies by governments around the world has increased since the U.S.-Chinese trade war that was begun under President Trump. Federal policies such as the Inflation Reduction and CHIPS Acts use a mix of tax breaks, subsidies and export restrictions to build up strategic sectors such as semiconductors and green technologies locally at the expense of foreign competitors. Loopholes, however, often exist that can be exploited by foreign competitors or industry lobbyists, and China has proven quite adept at finding those avenues around U.S. law.
Economists who favor free markets tend to prefer measures that offer businesses low-interest loans and grants designed to stimulate investment in research and development, rather than using restrictions. Such incentives, they believe, tend to fuel innovation and economic growth in the future, and are not inflationary.
Conclusion
President Biden has quadrupled tariffs on electric vehicles made in China in an attempt to keep the domestic auto industry from bankruptcy in its quest to make politically correct electric vehicles instead of internal combustion engine vehicles. China has a huge advantage in the area by making cheap electric vehicles by using low-cost coal electricity, cheap labor, innovation, and years of experience in battery manufacture and critical mineral processing. Free-market economists and trade analysts, however, see protectionist trade policies such as tariffs as stifling competition, limiting consumer choice and increasing prices on Americans.
The best way to deal with China’s EV dominance is to continue with the manufacture of what America does best, which is production of petroleum-based vehicles, and to continue to develop America’s vast fossil fuel resources, to which China has limited quantity. Otherwise, the United States will be eating from China’s hands. China has spent decades preparing its manufacturing sector to supply Western markets with the green technologies and supplies needed for implementing their pledges to the Paris accord.
