How will new Chinese tariffs affect Tesla and other electric vehicle makers?

When Joe Biden was running for president in 2019, he tweeted: “Trump doesn’t get the point. He thinks his tariffs are paid for by China. Any freshman economics student could tell you that the American people pay their rates.

Five years later, in May 2024, President Biden announced a 100% tariff intended to significantly increase the price of electric vehicles (EVs) made in China. The president has set an ambitious goal of achieving a power sector free of carbon pollution by 2035 and a net-zero emissions economy by 2050 at the latest. With these goals in mind, it may seem counterproductive for the United States to block low-cost electric vehicles. — even if they come from China, a country that appears to threaten the United States’ burgeoning electric vehicle industry.

Tinglong Dai, an expert on global supply chains at Johns Hopkins University, however, says Biden’s tariffs can succeed in giving the U.S. electric vehicle industry room to grow. Without tariffs, Dai says, U.S. auto sales risk being undercut by Chinese companies, “which have much lower production costs due to their more relaxed manufacturing methods, environmental and safety standards.” , cheaper labor and more generous government subsidies for electric vehicles.”

By imposing tariffs sooner, the Biden administration hopes to prevent the U.S. market from becoming saturated with low-cost Chinese electric vehicles, which could hurt domestic manufacturers and stifle innovation. Instead, tariffs have the potential to ensure a stable and secure supply of components through domestic manufacturing and could mitigate risks associated with global supply chain disruptions and geopolitical tensions. “Biden’s decision could encourage similar protective measures elsewhere,” Dai adds, “thus strengthening the global shift toward securing supply chains and promoting domestic manufacturing.”

Conversely, while admitting that the relationship between the United States and China is “complex”, an editorial in Yahoo! finance condemns Biden’s decision to impose 100% tariffs on Chinese-made electric vehicles as it “stifles the possibility of competition in the lower end of the auto market and means the affordability gap will persist “. The article goes on to argue that the tariffs will slow the transition to zero-emission vehicles at a time when the United States needs to rapidly reduce its reliance on fossil fuels. The editorial believes that the United States wasted valuable time “waffling on tailpipe emissions standards while China figured out how to get rid of tailpipes altogether.” While it’s hard to argue with the second solution, the first position — that U.S. automakers will seize the opportunity to innovate their electric vehicle lineups — is hopeful.

Chinese electric vehicles in the United States?

Tesla, GM, Ford, Volkswagen, Hyundai and several other domestic automakers have invested tens of billions of dollars in battery and electric vehicle factories in the United States. But, like the New York Times According to reports, except for Tesla, automakers in the United States, Europe and Japan lag behind Chinese companies in terms of size, production of raw materials and key technologies.

The new tariffs on Chinese electric vehicles are aimed at protecting the U.S. electric vehicle industry and its auto workforce, with major domestic electric vehicle maker Tesla generally part of the equation. Aside from the Polestar 2 and the upcoming Volvo EX30, no electric vehicles made in China are available for sale in the United States.

Earlier this year, Volvo Cars announced plans to stop financing its Polestar brand of electric sports cars. On April 5, the automaker announced that its shareholders had agreed to distribute “a portion” of Volvo Cars’ stake in Polestar to its shareholders.

“As a reminder, production of the Polestar 3 is expected to begin in South Carolina this summer, with the Polestar 4 being produced in South Korea,” Citi analysts explained in a note on Wednesday. “Polestar is also considering adding European manufacturing for future vehicles.” Nonetheless, on Thursday, Citi analyst Itay Michaeli lowered the company’s price target on Polestar shares from $2.50 to $1.70 per share while maintaining a neutral rating.

And the batteries?

Biden’s new tariffs aim to increase the tax on imported Chinese EV batteries from 7.5% to 25%. New tariffs aimed at deterring the use of Chinese batteries and battery parts that take effect this year also risk increasing costs for popular electric vehicle makers like Tesla and Ford by thousands of dollars.

China has heavily subsidized the electric vehicle industry, so years of intense R&D and internal competition have created an extremely strong battery manufacturing sector. CATL, the world’s largest maker of electric vehicle batteries, dominates the market for so-called LFP batteries, which are cheaper and more stable than nickel-based alternatives.

Tesla makes the $38,990 Model 3 RWD in California using battery cells from CATL, one of China’s largest producers of electric vehicle batteries. The Model 3 Long Range has significant Chinese content: 40% of its value, according to US government records. Tesla will either have to absorb the higher costs, find a new battery supplier, or deprioritize the entry-level Model 3, says Sam Fiorani, vice president of global vehicle forecasting at AutoForecast Solutions.

It is not always possible to obtain exact information on the precise chemical compositions of batteries used by manufacturers. Such details constitute a closely guarded trade secret. CATL is reportedly still developing and validating the Model 3 Performance battery with Tesla, and the exact timeline for installation is not yet clear, according to local Chinese media. A higher tariff on electric vehicle battery imports would make Tesla’s cheapest car, the Model 3 RWD, more expensive to produce.

Then again, Tesla said it installed 14.7 gigawatt hours of battery storage in 2023. Its energy storage unit recorded $1.4 billion in revenue for the fourth quarter and $1.1 billion in costs for these sales. “I have predicted for many years that the storage sector would grow much faster than the automotive sector,” Tesla CEO Elon Musk said during Tesla’s fourth-quarter earnings conference call. business. “That’s what he does.” Could locally produced Tesla batteries become the standard?

There are other electric vehicles in the US market that contain Chinese batteries, such as the Ford Mustang Mach-E and the all-wheel drive variant of the Toyota bZ4X. (Ford says it has canceled plans for an LFP-powered F-150 Lightning.) However, vehicles assembled in Mexico and Japan are not subject to the tariffs. If a Chinese battery is already in a car when it arrives in the United States, it is not taxed regardless of that vehicle. It is likely that Ford and Toyota will release this asset.

The United States is closely examining these vehicles, as well as the possibility of Chinese companies circumventing tariffs by setting up factories in Mexico. Timing and strategic importance of these tariffs are crucial, says The hill, to effectively address US-China relations and move from a reactive to a proactive approach, “creatively leveraging its strengths.”