Protectionism or Free Trade: The EV Tariff Wars

The EV Tariff Wars
EV tariff wars between the US, China, & the EU will shape the global EV market's future, balancing protectionism, innovation & international cooperation

As the global EV market accelerates, the battle over tariffs intensifies among the three major players: the United States, China, and the European Union (EU).

At the heart of this conflict lies a fundamental question: should countries adopt protectionist measures to shield their domestic industries or pursue free trade agreements to foster global competition?

Ursula von der Leyen, EU Commission President stated: “Global markets are flooded with cheaper Chinese electric cars. Their price is kept artificially low by huge state subsidies. This is distorting our market. The outcome of this debate will shape the future of the EV industry and its impact on international economic development and sustainability."

Ursula von der Leyen, EU Commission President

Once unimaginable, the shift toward trade protectionism reflects a consensus that sees green industrial policy as a multifaceted tool for addressing various issues: the climate crisis, economic stagnation, domestic manufacturing decline and geopolitical competition with China.

However, this approach poses challenges, as noted by MIT economics professor David Autor, who remarked that cheaper Chinese EVs could accelerate US decarbonisation but may be devastating for the American EV industry.

China's rapid ascent in the EV market is noteworthy. From exporting US$400 million of EVs in 2019 to US$34 billion by 2023, it has become the world's leading car exporter, home to three of the four largest EV manufacturers.

Despite this growth, Chinese-made EVs are scarcely available in the US, making the tariff debate seem symbolic for now. However, the long-term strategy is building a protective market barrier to shield American manufacturers as the Inflation Reduction Act stimulates the US domestic economy The protectionism aims to secure American jobs and industry as the country pushes towards having EVs comprise half of all new car sales by 2030, which was under 10% last year.

The Big 3: China, EU & US | Milestones and challenges

China holds a strategic advantage in the EV tariff wars due to its massive domestic market and robust government support. As the world's largest EV market, Chinese manufacturers benefit from economies of scale, reducing production costs.

Furthermore, China's Belt and Road Initiative is expanding its influence and opening new markets for its EVs, further solidifying its position in the global market. Despite these strengths, China faces several challenges that could hinder its long-term success and leadership in the global EV industry.

One of the primary issues is the heavy reliance on government subsidies, which have been essential in driving EV adoption but are not sustainable in the long term.

Additionally, the market is becoming increasingly competitive, with domestic and international players vying for market share, putting pressure on Chinese manufacturers to innovate and reduce costs continuously. Another critical challenge is securing a stable supply of raw materials for battery production amid global supply chain disruptions and geopolitical tensions.

EV tariff wars

Moreover, while China's domestic market is vast, expanding into international markets pose regulatory and logistical hurdles. Environmental concerns loom large, as the country must ensure that its EV production and battery disposal processes are sustainable to maintain its leadership in green technology. 

The US boasts a technological edge, with companies like Tesla leading innovation. US firms are heavily investing in battery technology and autonomous driving, which could provide a significant advantage in the long run. However, despite being home to these innovative companies, the US faces several challenges that limit its full potential in the EV market. 

A significant issue is the insufficient charging infrastructure, which hampers widespread EV adoption and raises concerns about convenience and accessibility for EV drivers. High production costs remain a barrier as US manufacturers struggle to compete with cheaper EVs produced in China.

As well as this, fluctuating government policies and protectionist measures, such as the Biden tariffs, create an uncertain market environment that can deter investment and slow growth. Furthermore, the US must address the supply chain vulnerabilities  surrounding the critical raw materials needed for battery production, which are often sourced from politically unstable regions.

Additionally, there is a need for substantial investment in research and development to keep pace with rapid technological advancement and to support the transition to more sustainable manufacturing practices. Overcoming these challenges is crucial for the US to maintain its competitive edge and achieve its ambitious EV adoption goals.

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The EU adopts a balanced approach by reducing tariffs through free trade agreements and investing in innovation, positioning itself well to compete globally. By fostering a competitive environment and promoting sustainability, the EU aims for long-term success in the EV market.

However, several challenges and strategic missteps have hindered its ability to maintain a competitive edge. Additionally, the EU is exploring protectionist measures, such as increasing tariffs on non-European EVs, to protect its domestic manufacturers.

The EU faces a multitude of challenges in the adoption and integration of EVs. One significant hurdle is establishing a comprehensive charging infrastructure capable of supporting growing EVs on the road. The lack of standardised charging stations, varying charging speeds, and inadequate coverage in rural areas deter potential buyers and hinder long-distance travel.

On top of this, concerns about the environmental impact of EV batteries and the sustainability of their production persist, creating a demand for innovative battery recycling solutions and responsible material sourcing methods.

EV affordability also remains an issue, with higher upfront costs than traditional vehicles, despite potential long-term savings on fuel and maintenance. Policymakers must address these challenges through strategic investments in infrastructure, incentives for manufacturers, and robust regulatory frameworks to accelerate the transition to electric mobility in Europe.

Enter BRICS member countries into the equation 

The BRICS member countries — Brazil, Russia, India, China and South Africa — and new members such as Iran, Egypt, Ethiopia and the United Arab Emirates collectively represent around 40.7% of the world's population. Instead, a significant demographic and economic bloc is pivotal to the future of the global EV market due to its vast consumer base, significant resources, and proactive government policies.

BRICS member countries—China, Brazil, Russia, India and South Africa—and new members such as Iran, Egypt, Ethiopia and the United Arab Emirates

Although there are no formal Free Trade Agreements between BRICS countries, member countries benefit from enhanced trade opportunities, which lead to increased exports and imports among the member nations.

While initial research and development of EVs often occurs in the US and EU, large-scale manufacturing frequently moves to countries with cheaper labour, many of which are BRICS member countries. Over the next decade, the future of the automotive industry lies within the BRICS nations, which will account for a significant portion of global auto sales. These countries offer opportunities for cost-effective R&D, sourcing, and manufacturing.

So, will protectionism work? Indeed, China will dust off the Biden tariffs and focus on the BRICS member countries that constitute 40% of the global population, where they are welcome. The cheaper Chinese models will sell well in these countries volume-wise, and there will be no protectionist policies to hinder China's growth.

Consequently, favourable trade with BRICS member countries will impact car sales from EU and US manufacturers. Although there will always be a place for established EU and US EV manufacturers, China will through BRICS, remain dominant.  

The EV tariff wars are a complex and evolving battle with no clear winner yet. However, China's strategic market advantages, the US' technological innovations and EU’s balanced trade policies all play crucial roles.

The ultimate winner will likely be the region who best combines protectionist measures with innovation and international cooperation to dominate the global EV market. As governments navigate these challenging waters, the world benefits from a more sustainable and competitive EV industry.

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