Unplugging progress: the case against EV tariffs

Would tariffs on Chinese EVs stall Western decarbonisation and consumer choice?

by Matthew Prescod

Those of us who would welcome cheaper, greener vehicles, have cause for concern: Western policymakers seem keen on ensuring they stay expensive. Earlier this month, the EU slapped steep tariffs on Chinese electric vehicle (EV) imports, climbing up to 45% over a five-year period. Underlying the tariffs imposed by the EU in October, and the US earlier in May, is the belief that Chinese EVs will come to dominate their markets in the future, and that pre-emptive import taxes can forestall this. Contrary to policymakers’ aspirations, these tariffs are going to drive up the prices of EVs in the West, impede progress to net zero, and fail to halt the march of Chinese EVs into foreign markets.

Proponents of tariffs argue that state support for Chinese EVs is historically extensive, that this has resulted in unfair competition, and that the playing field could be levelled by making these cars more expensive to import. It is true that Chinese industrial policy has provided substantial support for its domestic EV industry. Since 2009, the Chinese EV industry is estimated to have received at least $231bn in subsidies and aid. Half of this is in sales tax exemptions for domestic consumers, with the rest constituting funding for R&D programmes, infrastructure like charging points, and government procurement contracts.

However, it is also true that Western policymakers have engaged in industrial support for their domestic manufactures, just at a much lower level, and aimed at different parts pf the industry. In the aftermath of the 2008 recession, the US government bailed out the car industry to the tune of $80bn. In 2009, more largesse followed with $8.4bn of loans provided to car manufacturers developing alternative vehicle technologies. More recently, over $7bn was earmarked in 2021 for loans to build EV charging infrastructure, and the 2022 Inflation Reduction Act provided billions in financial support to boost manufacturers producing and selling batteries in the US. Looking at Europe, the EU earmarked over €90bn over a six-year period for the Horizon Europe research initiative, with a focus on green tech including EVs and battery production. To take another example, the European Battery Alliance was founded 2017, with the aim to create a European EV battery manufacturing value chain. Not to mention, individual states like France and Germany have provided billions of national funding for EV infrastructure and supporting the automotive industry to transition. The hypocrisy of European and American policymakers calling foul play when engaging in similar tactics, albeit at a lower nominal level, undermines the legitimacy of their claims.

But even if the US and the EU practiced what they preach, that would still not be a reason for protectionism. In an ideal world, where no state subsidises any particular industries, the best trade policy is zero tariffs. In our less-than-ideal world, where some states do subsidise some industries, the best trade policy is… still zero tariffs! If the Chinese state wants to subsidise EVs, that is their choice. We should then buy their subsidised EVs, and pocket the subsidies contained in the price. Whether the cost advantage of Chinese EV producers is based on economic fundamentals (e.g. lower wages), or whether it is an artificial, policy-induced one, makes no difference from the perspective of an individual consumer.

Economically speaking, we know that tariffs will lead to higher prices for consumers and reduced choice. With less competition in the car market, Western automakers will be able to increase their prices without fear of losing market share, as protective barriers limit consumer options. Reducing competition also stifles innovation, by diminishing the motivation to improve their EVs and offer better value. A significant cause of Western’ automakers’ woes is not a lack of subsidies, but being late to the game, having had significant legacy investments in internal combustion engine technology. As a result, they struggle to develop EVs at the same scale and price as Chinese EV manufacturers. This challenge is reflected in the fact average EV prices in the US and Europe are over double that of the Asia-Pacific region, making the products out of reach for the average consumer.

Fencing out Chinese EVs will also slow the push to decarbonisation in Western economies. Transportation accounts for almost a third of greenhouse gas emissions in the US and EU, and 22% in the UK. As noted by the UK’s Climate Change Committee, transport is now the highest emitting sector of the UK economy. If the UK is to reach net zero by 2050, we will need 55% of all vehicles to be electric. Instead of welcoming affordable EVs, tariffs would price out the innumerable number of consumers who are waiting for more affordable options.

As Adam Smith wrote in The Wealth of Nations, “To widen the market and to narrow the competition, is always the interest of the dealers.” While levying tariffs benefit domestic producers in the short-term, they harm everyone in the long-term. British policymakers would be wise to resist the growing tide of protectionism and acknowledge that economic growth and decarbonisation depend on opening doors, not raising barriers. Let’s welcome affordable EVs wherever they are from, and let consumers choose.