The global implications of EU tariffs on Chinese EVs

On June 12, the European Union (EU) announced new provisional levies on Chinese electric vehicles (EVs), with the tariff level to be based on estimates of how much state support an EV exporter receives. The new tariffs follow from a months-long investigation into China’s use of financial subsidies, and they will be imposed on top of the 10 percent tariff that the EU already has in place.

 They are “provisional” because they might be revised downward if Chinese producers can offer evidence that the support they receive is less than estimated. Separately, if the EU can reach an agreement with China to reduce the volume of Chinese EV exports to Europe, the new tariffs may not be implemented.

The new tariffs reflect the EU’s upper-bound estimate of the total subsidy per vehicle that Chinese producers receive from all levels of government throughout their supply chains. The investigators sent requests for cooperation to all Chinese EV producers, and selected three from among those who complied: BYD, Geely, and SAIC. They then pored over those companies’ records and interviewed company insiders and industry experts.

The EU’s findings provide insight into the true nature of the United States’ 100 percent “anti-subsidy” tariff on Chinese EVs. The US tariff, announced last month (with no serious investigation), is so much higher than any reasonable estimate of Chinese subsidies that its protectionist intent is obvious.

Even before President Joe Biden’s administration imposed the 100 percent levy on Chinese EVs, US tariffs on Chinese imports – erected under Donald Trump, but carried over by Biden – were already at levels similar to the infamous US Smoot-Hawley tariffs of the 1930s. In 2020, a World Trade Organization panel (consisting of experts from countries other than the US and China) ruled that these tariffs are inconsistent with US legal obligations at the WTO. But both the Trump and Biden administrations have chosen to ignore WTO rules.

Some commentators seem to believe that since China’s cost advantage is so large, a 30 percent tariff is not enough to curtail Chinese EV exports. But this assumption is mistaken for at least two reasons.

First, because different markets have different standards for safety and other matters, auto producers often must adjust car designs accordingly, and this reduces the number of sales per model in a given market. (For example, Chinese standards emphasize the safety of pedestrians and others outside a vehicle in the event of a collision, whereas the US standard emphasizes the safety of the driver and others inside the car.) Second, any given model needs to reach a certain threshold of sales volume to be profitable. Thus, any tariff that can reduce the expected quantity of sales sufficiently could remove the incentive for exporting to that foreign market altogether.

The primary victims of the US tariffs (besides Chinese exporters and American consumers) are producers from smaller countries that now face an elevated risk of larger countries imposing protectionist measures with seeming impunity.

As EVs are an important tool in the world’s transition to a net-zero economy, some subsidies are better than none. A globally efficient subsidy rate for EV production and consumption is higher in the absence of a sufficiently high global carbon tax. The EU and US probably prefer tariffs on foreign goods to subsidies on domestic EV production because both are already burdened by high levels of debt.

The new tariffs will certainly harm Chinese EV manufacturers’ prospects, in terms of both profits and jobs. But they are also bad for European and American households, because they will raise prices (domestic producers will face less competitive pressure) and delay the transition from highly polluting traditional automobiles.

At the same time, the new tariffs will create two opposing forces in the rest of the world. 
The world would have been much better off if major powers had found a way to negotiate a common pro-climate subsidy scheme for EVs, and a common tax on carbon emissions. Instead, we may get a self-destructive race to the bottom.

-- Project Syndicate
Shang-Jin Wei us a former chief economist at the Asian Development Bank