President Joe Biden moved last week to initiate a series of heavy new tariffs designed to protect his favoured industries from Chinese encroachment. The move came following the completion of a review conducted under Section 301 of the 1974 Trade Act that enables the executive branch to retaliate against what it deems to be unfair trade practices.
The tariffs are designed to protect the US auto industry from an invasion of low-priced, good-quality EVs made in China, where the costs of labour, raw materials and components are vastly lower than in the United States.
In addition to making the cost of importing China-manufactured and assembled EVs into the US cost-prohibitive, tariffs will also land hard on some domestic carmakers currently sourcing steel, aluminum, EV components, and EV batteries directly from China.
What the tariffs will not address, however, is the issue former President Donald Trump targeted in March, when he touched off a media frenzy by claiming that efforts by Chinese automakers to assemble EVs in plants located in Mexico and sell them into the US could result in a “bloodbath” in the American car industry. Such cars would be exempt from the Biden tariffs under the terms of the US/Mexico/Canada trade Agreement (USMCA), which replaced the Clinton-era NAFTA deal during the Trump administration.
It is unclear at this time whether the higher tariff rate on EV imports will impact Volvo’s EX30 compact battery electric SUV model, which it has planned to introduce into the US market this summer. Volvo, owned by Chinese giant Geely, had expected to be able to sell its new fully-electric EV at a price around $37,000 in the American market. That was due to a tariff refund provision that would allow it to claim reimbursement for almost 100 per cent of the previous 27.5 per cent tariff because it manufactures other cars in the US. That refund provision would apply even though the EX30 is to be made mainly from parts manufactured in China. There is no indication that the higher tariff provision would do anything to change Volvo’s ability to access that refund provision.
Specific to the Mexico-centric issue, Reuters reports that Biden officials have pressured the Mexican federal government led by President Andres Manuel Lopez Obrador to deny Chinese companies the tax breaks, free lands, and other incentives it has traditionally offered to international companies to build manufacturing and assembly plants there. At a meeting between Mexican federal officials and Chinese carmaker BYD Corp., Reuters says the government “made clear they would not give incentives like those awarded to automakers in the past and that officials would be putting on pause any future meetings with Chinese automakers.”
However, a denial of subsidies and incentives at the federal level does not prevent state governments in Mexico from making similar offers. Several Mexican states, including northern ones like Durango and Nuevo Leon, have been actively courting Chinese carmakers to open plants in their regions.
While the magnitude of the higher tariff rates sounds impressive at first glance, AP reports they will apply to only around $18 billion in current imports. Given that the Mexico-based workaround remains open to Chinese carmakers like BYD, Trump’s concerns about a looming bloodbath in the US auto market remain in effect pending further developments.
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“American workers can outwork and outcompete anyone as long as the competition is fair,” Biden said in a White House Rose Garden announcement. “But for too long, it hasn’t been fair. For years, the Chinese government has poured state money into Chinese companies … it’s not competition, it’s cheating.”
Many of Biden’s higher tariffs are designed to protect US makers of electric vehicles. (EVs). Among other provisions, the new tariffs raise the tax on Chinese-made electric cars from 27.5 per cent to 102.5 per cent, an almost four-fold increase. Tariffs on some Chinese steel and aluminum imports will rise to 25 per cent this year, as will the tariff for lithium-ion EV batteries.