Why EV Tariffs Won't Stop Chinese Cars

China has become the world's largest automobile exporter. $9,200 US dollars equivalent. Chinese automakers will eventually come here, and they will do so regardless of whether there is a tariff or not. About 40 years ago, the Chinese automotive industry barely existed. Today, the country makes enough

cars

to supply half the world. I call him the Great Godzilla. The world has never seen an automotive industry of this scale. This is a giant machine that has just been launched and has its eyes set on the United States, which, thanks to the rise of China, is now the second largest automobile market on the planet.

There are no Chinese car brands on sale in the United States at this time, although some others such as Volvo, Polestar and Lotus are Chinese-owned, but insiders say it's just a matter of time. The country has been increasing exports to get rid of excess capacity. Surveys indicate that a large proportion of buyers, especially younger ones, would be happy to buy a Chinese car despite concerns about privacy etc. But not everyone shares the enthusiasm. President Biden slapped Chinese automakers with heavy

tariffs

, effectively doubling the price of a Chinese export electric vehicle, which can otherwise be at least as cheap as $11,500 within the auto industry.

Opinions vary, but many say

tariffs

may not be as effective in the long term and could do more harm than good. So what are the alternatives? We asked some industry experts to find out if the Detroit three, Toyota and Hyundai, could compete well against these Chinese brands. It will take more than simply raising the tariff from 25% to 100%. I'm not exaggerating when I say that China, the challenge that China is presenting to the world, including the United States, is unprecedented. You know, in the case of the Japanese and the Koreans, when they came to the United States, we were able to persuade, maybe coerce a little bit.

Hey, if you want to sell here, you have to build your transplant here. But they could own it. And they were our allies and ultimately depended more on us than we depended on them. They were more in the case of China. We don't have that kind of influence with them. China has the capacity to make half of the world's

cars

, four times as many as the United States typically makes. The annual demand within the country is about 25 million units. That leaves 15 million cars to export, almost as many as the United States can sell in a good year.

China shipped 5 million cars to more than 100 countries in 2023, making it one of the world's largest exporters. Chinese cars are now seen in virtually every market except the United States and Canada. And because there is so much capacity at home and the domestic market has a price war, the Chinese automakers themselves are very motivated to go out and introduce their products in Europe. The United States, a combination of favorable policies and a booming economy, brought them to where they are today. China welcomed foreign automakers to the country starting in the 1980s, and especially after some policy changes in the following decade.

The rules were simple: Foreign companies could sell cars in the country as long as they partnered with a local Chinese automaker. Chinese companies also made some cross-border investments. Chinese automaker Geely bought Volvo cars from Ford, for example. And finally, many companies are owned by the government and even private companies receive generous subsidies. Electric vehicle manufacturer BYD received $3.7 billion between 2018 and 2022. For example, in state capitalism, the goal is to build a globally powerful auto industry to get there. We need big companies. But, by the way, at the local, provincial and federal level we will also offer all kinds of help.

So Western automakers look at that and say: how the hell do we compete? But Chinese companies have also created solid products. When they attended the Detroit Auto Show 15 years ago, their cars were not competitive. You could see the quality problems with those vehicles as you sat in them, as you played with them. Now those cars are of much higher quality. They are very competitive. Once they hit the ground, they pay attention to the entire configuration of each car seat, not just the driver's cabin. Eh, that's what I think. It makes the traditional design vehicle obsolete. Bill Russo, a former Chrysler executive, says the Chinese have been very successful in developing new business models based on software and services.

Many of the newcomers have experience in the technology, electronics and mobile devices markets. When the iPhone arrived, Nokia products quickly disappeared. That's what's happening now in China in the automobile business. American consumers are also receptive to Chinese cars. Nearly half of respondents in a recent survey said they are familiar with Chinese vehicle brands, and 76% under the age of 40 said they would consider purchasing a vehicle from a Chinese brand. Consideration then decreased significantly in the older age group. Dealing with this new reality. Tariffs have become a popular political tool, especially under former President Trump as of 2018. Automotive executives at the time, including Tesla CEO Elon Musk, denounced what they saw as an imbalance between the United States' trade rules.

United States and China. Lately, it is the Biden administration that is focused first and foremost on tariffs. Tariffs on electric vehicles will increase from 25% to 100% in 2024, the administration says. China's extensive subsidies and non-trade practices have created substantial risks of overcapacity. Chinese exports of electric vehicles grew 70% between 2022 and 2023. Tariffs are also rising on a variety of materials used in automobile manufacturing, lithium-ion batteries, graphite, magnets, steel, aluminum and semiconductors. China controls more than 80% of certain segments of the electric vehicle battery supply chain, the administration said. That leaves American supply chains vulnerable and puts national security and clean energy goals at risk.

Some politicians are pushing for even stricter restrictions. The industry response is mixed. Union leaders support him, for obvious reasons. So is the Alliance for Automotive Innovation, the automotive industry's leading trade association. Tesla CEO Elon Musk criticized the tariffs, but even he had said in early 2024 that without trade barriers, most Western automakers would be demolished by Chinese competition. They can sell electric vehicles cheaper than cheaper fuel-burning cars and, according to some, are far ahead of the competition in software and technology. But Rousseau is skeptical about tariffs. The Trump-era trade war may have been a missile aimed at Beijing, but it landed squarely in Detroit, he once wrote.

Two things happened. First, the trade war raised the costs of many parts that American automakers sourced from China or elsewhere. GM and Ford reported that Trump's tariffs in 2018 saddled them each with an additional $1 billion in steel and aluminum costs. Second, it likely accelerated the globalization of Chinese companies seeking to circumvent trade rules by making investments beyond their own borders. They are building factories in Mexico. They are building factories all over the world: Africa, the Middle East, Europe, Eastern Europe, Western Europe and Southeast Asia. There has never been a greater effort by China to decarbonize its supply chain than now.

If elected, Donald Trump pledged to impose a 100% tax on any car manufactured in Mexico by a Chinese company. Political analysts say doing so would violate the terms of the same deal Trump made with Mexico. It could also cause more friction with the country, which in 2023 became the United States' largest trading partner. In any case, executives like Rousseau maintain that these measures are delaying the inevitable. American companies must face the fact that Chinese companies have extremely competitive and attractive products, and American consumers want them. If you can make aspirational products affordable with configurations that surprise and delight users of that platform, that's a universal value proposition.

And I'm sorry, Americans buy Chinese products and for decades have been enjoying the benefits of that in terms of affordability forever. If you close it, all you will do is make it more expensive. There are alternatives. Take a page from what China did 30 years ago when it was just starting out and said, Hey, do you want to get into our market? United States welcomes. But by the way, to sell here you have to manufacture here, you have to build plants here. And when you manufacture here, you have to form a joint venture with an American company that will own half of the business.

Ah OK. And by the way, we would like you to export from the United States as well, so that we can gain additional benefits from your stay here. We could do the same. That's called flipping the script. The problem is not that we have to keep them out. The problem is that we should let them in so that we can reap the benefits of the DNA that they have been able to create. And then. But do it under a guided process, do it with policies. And right now, no one is writing those policies, no one is writing policies that will allow some of the benefits of globalization and the scale and configurations of products and technologies to come back to the Western world.

And that will really weaken and not help the industry. It will weaken the industry. If we don't allow that to happen. And although there are no Chinese-branded cars for sale in the United States, more than 100 Chinese-owned auto companies already have a presence in the United States. They are concentrated in Detroit and Silicon Valley, and there are Chinese auto suppliers spread across 30 US states. But you'd never know it because we don't see Chinese cars on American roads, so it doesn't happen. No what? It can not be true. But it is. They are here. They are preparing for the time when it will be right to go in and sell their cars to Americans.