History has it that tariffs rarely work, but Biden's 100% tariffs on Chinese electric vehicles could buck that trend

In June 2019, then-presidential candidate Joe Biden tweeted: “Trump doesn’t understand the basics. He believes his tariffs will be paid for by China. Any economics major could tell you that the American people pay their tariffs.”

Five years later, through May 2024, President Biden has announced a rise in tariffs on plenty of Chinese imports, including a 100% tariff This would significantly increase the value of electrical vehicles manufactured in China.

For one nation is committed to reducing greenhouse gas emissions, U.S. efforts to dam low-cost electric vehicles could seem counterproductive. At a Price of around $12,000Chinese automaker BYD's Seagull electric automotive could quickly boost electric vehicle sales if it landed at that price within the US, where the most cost effective recent electric cars cost almost thrice more.

As an authority for global supply chainsHowever, I imagine that the Biden tariffs can reach giving the US electric vehicle industry room to grow. Without the tariffs, U.S. auto sales risk being undercut by Chinese corporations, which have much lower production costs due to their tariffs Manufacturing methodslooser Environmental and safety standardscheaper labor and more generous government subsidies for electric vehicles.

Tariffs have a checkered history

The US has an extended history of tariffs not reached their economic goals.

The Smoot-Hawley Tariff Act The goal of the 1930 law was to guard American jobs by increasing tariffs on imported goods. But it failed because it caused other countries to extend their tariffs, which led to a decline in international trade and deepened the Great Depression.

President George W. Bush Steel tariffs 2002 This also led to higher steel prices, hurting steel-using industries and costing American manufacturing an estimated 200,000 jobs. The tariffs were lifted after the World Trade Organization ruled against them.

The Obama administration's tariffs on solar modules made in China In 2012, direct imports were blocked but did not promote a domestic solar panel industry. Today the USA relies heavily on imports Companies operating in Southeast Asia – especially Cambodia, Malaysia, Thailand and Vietnam. Many of those corporations are connected to China.

Why electric vehicle tariffs are different this time

However, Biden's electric vehicle tariffs could defy historical precedent and succeed where the solar tariff failed, for just a few necessary reasons:

1. Timing is essential.

When Obama imposed tariffs on solar panels in 2012, almost half of US installations used panels already made in China. In contrast, that is the case with electric vehicles made in China, including models sold within the US by Volvo and Polestar negligible US market shares.

Because the U.S. market isn’t depending on Chinese-made electric vehicles, the tariffs will be imposed without significant disruption or price increases, giving the domestic industry time to grow and compete more effectively.

By imposing tariffs early, the Biden administration hopes to forestall It prevents the U.S. market from becoming saturated with low-cost Chinese electric vehicles, which could undercut domestic manufacturers and stifle innovation.

2. Global supply chains aren’t any longer the identical today.

The The COVID-19 pandemic has exposed vulnerabilities in global supply chains, akin to the chance of disruptions in the supply of critical components and delays in production and shipping. These problems prompted many countries, including the United States, to accomplish that reassess their dependency to foreign manufacturers of critical goods and Switching to reshoring – bringing production back to the USA – and strengthening domestic supply chains.

The war in Ukraine has further exacerbated the disconnect between the U.S.- and Chinese-led economies, a phenomenon I call the “supply chain iron curtain.”

In a recent McKinsey survey 67% of managers They cited geopolitical risk as the most important threat to global growth. In this context, electric vehicles and their components, especially batteries, are key products mentioned in Biden's report Supply chain reviews seen as crucial to the resilience of the country's supply chain.

Ensuring a stable and secure supply of those components through domestic manufacturing can mitigate the risks related to global supply chain disruptions and geopolitical tensions.

3. National security concerns are greater.

Unlike solar panels, electric vehicles have a direct impact on national security. The Biden administration considers Chinese-made electric vehicles as potential cybersecurity threat as a result of the potential of embedded software that could possibly be used for surveillance or cyberattacks.

US Secretary of Commerce Gina Raimondo has Espionage risks discussed This includes the potential of foreign-made electric vehicles collecting sensitive data and transmitting it outside the United States. Officials have raised concerns in regards to the resilience of an electrical vehicle supply chain depending on other countries within the event of a geopolitical conflict.

BYD goals to sell electric vehicles in Mexico

While Biden's electric vehicle tariffs may reach keeping Chinese competition out for some time, Chinese electric manufacturers may attempt to accomplish that avoid the tariffs by relocating production to countries like Mexico.

This scenario is comparable to previous tactics by Chinese solar panel manufacturers that shifted production to other Asian countries to avoid US tariffs.

Chinese automotive manufacturer BYD, the world market leader in EV sales, is already Exploring the development of a factory in Mexico To produces its recent electric truck. Almost 10% of cars sold in Mexico in 2023 were produced by Chinese automotive manufacturers.

Given the changing geopolitical reality, Biden's 100% tariffs on electric vehicles are likely the beginning of a broader strategy quite than an isolated measure. U.S. Trade Representative Katherine Tai hinted at this at a recent press conference, explaining that the treatment of Mexican-made vehicles would require:a separate pathand “stay updated” for future actions.

Is Europe next?

Given that there are almost no Chinese-made electric vehicles within the U.S. auto market, Biden's tariffs on electric vehicles within the U.S. are unlikely to have a noticeable short-term impact. However, they may impact decisions in Europe.

The European Union recorded greater than Chinese electric automotive imports double over a seven-month period in 2023thereby undercutting European vehicles with lower prices. Manufacturers are anxious. If finance minister from the Group of Seven advanced democracies meet at the top of May, Tariffs might be on the agenda.

Biden's move could promote similar protective measures elsewhere, reinforcing the worldwide shift to secure supply chains and promote domestic production.