Navigating Change: The Impact of Tariffs and Elections on the Future of the US EV Market
The U.S. electric vehicle market is undergoing significant transformation, driven by the interplay of political developments and economic policies. The recent increase in U.S. tariffs on Chinese EVs adds a layer of complexity to an already dynamic industry landscape. With the U.S. gearing up for its upcoming elections, both policymakers and industry stakeholders are keenly observing how new policies will address existing challenges and impact the operations of various industrial sectors, particularly EVs. These political and economic shifts have far-reaching implications, influencing not only the cost and accessibility of EVs but also the growth and expansion of charging infrastructure. As demand for electric vehicles continues to accelerate, it is crucial to analyze potential disruptions and opportunities within the EV and charging infrastructure sectors to navigate the future of transportation.
Strategic Implications of Biden's Increased Tariffs on Chinese EVs
Notably, President Biden has upheld the tariffs on Chinese products initially imposed by the Trump administration, despite political differences. In 2018, Trump established a 25% tariff on Chinese-made electric vehicles (EVs) to bolster domestic manufacturing. The Biden administration had maintained this tariff, alongside the existing 2.5% tariff on imported cars from other regions. Recently, Biden's administration announced a substantial increase in tariffs on Chinese-made electric cars, raising them from 25% to 100%, effective in 2024. This strategic move aims to counter perceived unfair trade practices and safeguard American jobs. These elevated tariffs are anticipated to significantly influence the electric vehicle market across the U.S., China, and Canada, with potential repercussions for companies like Tesla, Rivian, Ford, General Motors, BYD, NIO, and others.
Current Market Dynamics in the US EV Sector
The United States has firmly established itself in the global electric vehicle (EV) sector, surpassing Germany to become the second-largest EV market in 2023, with approximately 1.2 million EVs sold, according to PTR. In 2023, revenue from the direct sales of Chinese EVs in the US was about $346 million, with the majority of the US market dominated by domestic manufacturers. By the last quarter of 2023, Tesla held around 50% of the US EV market share, while General Motors and Ford accounted for 8% and 6%, respectively. In the first quarter of 2024, Geely was the only Chinese company exporting EVs to the US, capturing around 1% of the market share.
Impact and Motivation Behind Increased Tariffs on Chinese EVs
Biden's decision to increase tariffs during an election year appears to be motivated more by political considerations than economic benefits, potentially aimed at garnering votes from automotive hubs like Michigan and Ohio. The main reasons behind the 300% increase in the EV tariffs are protecting American jobs and influencing voter support.
Impact of Price Disparity on EV Adoption
Chinese EVs are priced at one-third of locally manufactured EVs, reflecting a significant price difference influenced by varying production capacities between both countries. If US consumers are allowed to purchase Chinese EVs, they are likely to choose the more affordable option to reduce their carbon footprint. However, the recently increased tariffs will impact major automaker Tesla, which imports the Model 3 from its Gigafactory in Shanghai. Tesla will face higher costs for its imported models in the US, potentially leading to price increases for consumers or reduced profit margins for the company. Initially, the adoption of EVs in the US may slow down until sufficient local production can reduce prices due to economies of scale.
Challenges and Disruptions in the Supply Chain
The increased tariffs on importing Chinese EVs will not only slow down adoption rates but also affect the entire supply chain, as a substantial portion of raw materials for EV manufacturing is sourced from China. The batteries used in EVs, for instance, require lithium, and China holds some of the largest lithium reserves globally. Tesla relies 40% on China for its battery supply chain. As the US seeks to boost local EV manufacturing, the demand for these critical raw materials will surge, potentially causing supply shortages and price volatility. Additionally, Panasonic's battery production in the US relies on materials refined in China which is the major supplier for Tesla, Mazda, and Subaru.
Therefore, while the increased tariffs aim to strengthen domestic manufacturing and protect jobs, they also present challenges by raising costs and potentially causing supply chain disruptions. This complicates efforts to accelerate EV adoption and expand local production
Political Reasons for the Increased Tariffs
Election Year Strategy
The announcement from Biden's office during an election year is as much a political maneuver as it is a climate protection measure. Biden's 2020 victory was achieved after a close competition, and this time, key topics of discussion include EVs and EV infrastructure. With Michigan and Ohio being pivotal automotive hubs, curbing the growth of Chinese automakers could bolster Biden's standing with voters in these crucial states, potentially giving the Democratic Party an edge in the November elections.
Impact on Biden's Climate Goals
The Biden administration has consistently advocated for promoting a greener environment and reducing the adverse effects of global warming. At the same time, they are focused on elevating US manufacturing to a global leadership position. However, the imposition of $18 billion in tariffs on Chinese EVs has had a negative impact on Biden's goal of having 50% of all vehicles sold in the US be electric by 2030. Biden has called for automakers to increase sales of EVs while also reducing carbon emissions from gasoline-powered models, which contribute about one-fifth of America’s global warming emissions.
Increased Tariffs Impact on China
Effect on Chinese EV Exporters
China, the largest exporter of EVs globally, accounts for about a quarter of EVs sold in Europe being Chinese-made. Without the imposition of significant tariffs by the US government, the situation in the US could have been similar. In the first quarter of 2024, BYD exceeded Tesla in EV production, highlighting the substantial contribution of Chinese automakers to vehicle electrification.
However, the 100% tariff imposed by the US on Chinese EVs presents challenges for China's entry into the US market. With such high tariffs, it becomes impractical for Chinese manufacturers to compete directly in the US market. This is expected to sharply reduce Chinese EV imports to the US, forcing companies to either absorb unsustainable costs, explore new markets, or scale back production.
Additionally, these tariffs could lead to an oversupply of EVs in China, potentially lowering domestic prices and increasing competition among local brands.
China's Response and Alternative Strategies
However, China is exploring alternative routes to enter the US market. The country has been actively scouting for manufacturing locations in Mexico. Chinese car suppliers are establishing facilities in the suburbs of Monterrey, located in the northeast of Mexico. They are setting up a supply chain to support Tesla's future Gigafactory in Nuevo León. Industrial states such as Durango, Jalisco, Mexico State, and Nuevo León are attracting interest from Chinese automakers to establish assembly plants.
Overview of the Canadian Market
Canada's Position on Tariffs
Canada is closely monitoring the situation following the US government's announcement of a 100% tariff on Chinese EVs but has not yet decided whether to follow suit. Historically, Canada and the US have aligned their strategies on EV batteries and manufacturing. To keep Chinese manufacturers out of the North American market, Canada has invested heavily, approximately $30 billion, in EV battery and vehicle manufacturing facilities for companies like Stellates, Volkswagen, and Honda.
Investment in EV Manufacturing
Currently, tariffs on Chinese-made EVs in Canada stand at around 6%, and vehicles under certain price caps qualify for significant federal and provincial incentives. Canada has been accelerating its efforts to promote local manufacturing. In mid-May, Prime Minister Justin Trudeau announced a new $1.6 billion EV battery plant, supported by an investment from Japanese company Asahi Kasei Corp and Honda.
In April, Honda announced a substantial expansion of its original facility in Alliston, Ontario, Canada, to produce batteries and assemble electric versions of its top-selling models. However, Canada acknowledges that one way to counter the dominance of inexpensive Chinese EVs in the North American market is by raising tariffs. Currently, Canadian tariffs are low, giving Chinese players a competitive advantage in the region. If Canada follows the US in imposing higher tariffs, China would lose another potential market opportunity.
U.S. Automotive OEMs Reconsider Tariff Support Amid Rising Concerns
U.S. automotive OEMs initially supported increased tariffs, seeing them as a positive step for American manufacturing and economic growth. However, this position has evolved, with some key industry figures now expressing concerns about the potential negative impact of these tariffs. Elon Musk, who previously backed U.S. tariffs on Chinese electric vehicles (EVs), recently reversed his stance, arguing that such tariffs distort the market and inhibit free trade. He now advocates for a trade environment without import taxes.
In contrast, General Motors (GM) and Ford leaders have not publicly voiced their opinions as directly as Musk. However, both companies have expressed concerns over the potential negative impact of tariffs on their operations. GM, under CEO Mary Barra, has historically been wary of tariffs that could increase vehicle production costs, particularly those affecting essential components like semiconductors and batteries, which are crucial for EV production. Similarly, Jim Farley, CEO of Ford Motor Company, has highlighted the potential disruption tariffs could cause to the supply chain, stressing the importance of maintaining free and fair trade to ensure competitiveness in the global market.
The American Automotive Policy Council (AAPC), representing GM, Ford, and Stellantis, has also consistently lobbied against tariffs that could jeopardize the global competitiveness of the U.S. auto industry. This growing resistance among OEMs suggests a recognition that while tariffs might offer short-term benefits, they could ultimately slow down the overall growth of the EV market and lead to retaliatory actions from China, further complicating the global trade landscape.
Analysis of the Increased Tariffs
Above mentioned examples indicate that the 25% tariff on Chinese EVs has effectively hindered Chinese automakers from gaining a significant foothold in the US market. Given the already low import numbers of Chinese EVs, the recently announced increase in tariffs is unlikely to have a sudden or dramatic impact on the overall EV industry in the US.
The long-term implications of Chinese industry policies pose a significant threat to the US automotive manufacturing sector. President Biden was committed to preventing the dominance of Chinese EVs in the U.S. market. Although he has stepped back, the Democratic Party continues to support protective measures to ensure U.S. industry remains competitive globally. The 100% tariff on Chinese EVs is designed to strengthen domestic manufacturing and protect jobs within the EV sector. This policy is expected to boost the competitiveness of U.S.-made EVs and drive investments in the domestic EV industry as demand for locally produced vehicles increases.
However, these higher tariffs may also lead to increased costs for EV components and materials. While Biden supports the adoption of EVs through policies and incentives in the Inflation Reduction Act and the Infrastructure Investment and Jobs Act (IIJA) to protect the environment and promote greener transportation, the tariffs could have unintended consequences. They could result in higher consumer prices, potentially slowing the adoption rate of EVs and the rollout of charging infrastructure.
The threefold increase in tariffs on Chinese EVs represents a strategic move to curb China's growth in the North American and global markets. This policy, mirrored by Europe, aims to bolster local manufacturing. In the US, this stance appears steadfast, with Republican candidate Trump planning to impose even more aggressive tariffs on Chinese products and block Chinese suppliers from entering the US market through Mexico by imposing tariffs on Mexican goods.
However, this encouragement of American manufacturing could hinder the US in achieving its climate goals, including the Paris Agreement target of having 20% of all vehicles on the road electrically driven by 2030. While local manufacturing initiatives like the Inflation Reduction Act offer a balanced approach to reducing Chinese dominance and achieving climate goals, an aggressive import halt could slow the transition to sustainable transportation and make it harder for the masses to make eco-friendly choices due to soaring prices.
Therefore, while increasing tariffs on Chinese EVs can support domestic manufacturing, it is imperative for the US to explore alternative supply chain options for raw materials to reduce dependence on Chinese imports. This approach could significantly lower prices for American consumers, ensuring a more resilient and competitive domestic EV industry.
Additionally, companies like Tesla, which has manufacturing facilities in China, may need to relocate their production to maintain profit margins and their global market position. Meanwhile, China must innovate and explore new strategies to penetrate the US market if Trump assumes office and imposes more stringent tariffs on Chinese and Mexican goods.
In conclusion, a balanced strategy that encourages local manufacturing while ensuring a diverse supply chain for raw materials is essential for the US to achieve its climate goals and maintain a competitive edge in the global EV market.
