The Chinese electric vehicle tariff conundrum

Good trade policy is not easy. It is economically complex and often politically intractable, always hard to balance between winners and losers, especially in an election year.

President Joe Biden’s decision to raise tariffs on Chinese electric vehicles is a striking example. The president has added new tariffs on Chinese EVs, semiconductors, batteries, solar cells, steel and aluminum. The tariffs on EVs jumped to 100 percent from 25 percent.

The goal is to keep China from undercutting American companies and threatening manufacturing jobs.

Treasury Secretary Janet Yellen’s recent meeting with China’s economic leadership foreshadowed the tariffs. China’s growth model — to find lucrative consumer markets, produce with war-production ferocity, often to overcapacity, and then export aggressively — cannot be tolerated by its trading partners. “China is now simply too large,” Yellen notes, “for the rest of the world to absorb this enormous capacity.” EU President Ursula von der Leyen repeated this message: the EU’s relationship with China “is also challenged, for example through state-induced overcapacity, unequal market access and over dependencies.”

To be clear, tariff protection is designed to reduce the competition that would threaten jobs — but also executive pay, bonuses, and capital gains and dividends to shareholders — all at the expense of consumers. This risk shift and wealth transfer is a form of socialism for the wealthy. It may be necessary given the Chinese juggernaut, just as it might have seemed so in the face of previous German and Japanese juggernauts. 

On the other hand, for a quarter of a century, environmentalists have pushed hard for electric vehicles and other clean energy sources to reduce greenhouse emissions. Moreover, there are millions of low-income Americans for whom even a decent $10,000 car — electric or not — would be a godsend.

EVs have always been too expensive. Now, thanks to China’s worrisome growth model, EVs are too cheap. China is producing more than 10 million electric cars a year, some for less than $10,000. The president, horrified at this, couldn’t move fast enough to keep people from buying them. And Trump is right there with him, claiming that tariffs should be higher, and on all Chinese products.

This conundrum would be funny if it weren’t potentially tragic. A flood of imports could seriously injure the domestic auto industry, just as China decimated the U.S. solar panel and wind turbine industries. But here is the hard choice: save the auto industry or let Americans get very good cars really cheap while helping save the planet. An injection of tens of millions of low-cost EVs on the world’s roads — subsidized by the Chinese — would definitely slow emissions and increase consumer welfare, thanks to China’s ferocious growth model.

Some have suggested voluntary export restraints, a standard trade tool under President Ronald Reagan, in which the exporting country is “requested” to form a cartel to control exports. Such a cartel, however, would let the exporters reap the higher profits of their Beijing-managed sales to the U.S. Instead, the administration chose Section 301 to unilaterally impose a 100 percent tariff. Tariffs at least transfer the import tax levied on American consumers to the U.S. government. 

However, this need not be a rash binary choice. A better strategy is available in American law consistent with our World Trade Organization treaty obligations.

Section 201 of the Trade Act of 1974 offers parties who suffer “serious injury” by excessive imports a “safeguard” protection. This process reaches a more considered, evidence-based outcome and bolsters the role of the rules-based trading system the U.S. has led for the past 75 years.

Safeguard measures, not meant to target a particular country, can be allocated in exceptional circumstances where imports have increased extremely quickly. Importantly, safeguard measures should not last more than four years, but can be extended up to eight years, subject to a determination by competent national authorities that the measure is needed, and that the industry is making the effort to adjust to the new competition. In the U.S., free traders in Congress required a federal investigation after two years to ensure that the protected industry is making a good-faith effort to come up to speed against competitors.

Under this temporary safeguard protection, the president has flexibility to construct a remedy to effectively protect domestic interests and balance winners and losers. With the rigorous analysis of the nature of the “serious injury” to domestic industry provided by the U.S International Trade Commission, the president could, for example, impose a tariff rate quota in which a set number of Chinese EVs could enter the country each year at the existing 25 percent tariff, above which the 100 percent tariff would apply. He could adjust the number of imports and the level of tariffs each year based on analysis of the current effect. Meanwhile, support for domestic industry could speed the needed adjustments to meet Chinese competition, all while Americans are benefitting from good, cheap, low-polluting automobiles.

Those who worry that blocking imports will slow the global emission-reduction process can rest easy. China will produce the electric vehicles whether Americans buy them or not. What we don’t buy, others will. Perhaps the climate will be even better served if those low-polluting vehicles replace cars in less regulated countries.

In a perfect world, the good cheap EVs would go to people for whom a $10,000 car is a lifesaver and not just a way to upgrade the next Caribbean vacation. Perhaps the president could save bold intervention in free-markets for, say, a tax incentive for low-priced Chinese EVs for people who make less than 80 percent of the national median income. If the government insists on interfering in the market, at least do it in a manner both consistent with our trade laws and helpful to the people that most need the help.

Robert A. Rogowsky is professor of trade and diplomacy at the Middlebury Institute of International Studies and adjunct professor at Georgetown University’s School of Foreign Service. He is a former chief economist and director of operations at the U.S. International Trade Commission.