While Kamala Harris and former president Donald Trump are engaged in a tight presidential race by highlighting their differences, they share similar perspectives about China. They both hold the common belief that the imposition of higher tariffs will stimulate economic growth. However, the intricate network of tariffs implemented by both the Trump and Biden administrations is generating trade tensions, adversely affecting American consumers, and hindering innovation.
In an effort to garner voter support, particularly during the presidential elections, both Trump and Joe Biden (and now Harris) have tried to protect American jobs in manufacturing and other sectors vulnerable to Chinese competition.
Fuelled by the $2 trillion coffer generated from the Bipartisan Infrastructure Law, the CHIPS & Science Act, and the Inflation Reduction Act, Biden has put together a huge public investment program to protect car manufacturing jobs in the US, especially in electric vehicle manufacturing.
To stimulate the green economy in the US, Biden set a goal of making EVs 50% of vehicle sales by 2030. To provide incentive for domestic production, the $7,500 tax credit for EV purchases is subject to certain country-of-origin rules that depend on the percentage of components and critical minerals sourced from the US.
To protect car manufacturing jobs, the USMCA stipulates that, to avoid tariffs from importing a car from Mexico, at least 75% of auto content is made in North America and 40%-45% of auto content is made by workers earning at least $16 per hour. Because Mexico workers earn much less than $16 per hour, these rules are effectively providing job security for US producers and workers.
To provide US car manufacturers a fleeting chance to survive, Biden imposed a 100% tariffs on electric vehicles and increased tariffs on other imports from China in May. Specifically, the tariffs for importing solar panels or cells were raised from 25% to 50%, steel and aluminium were increased from 7.5% to 25%, and lithium-ion EV batteries and other battery parts were increased from 7.5% to 25%. In July, the European Union announced plans to introduce additional tariffs of up to 37.6% on imports of EVs from China. Canada adopted similar trade policy to protects it auto industry.
Meanwhile, Trump also proposed several tariff increases for his second term, including a 10% universal baseline tariff on all imports, regardless of the country of origin. Also, if elected, he proposed a 60% tariff on all imports from China, revoking Permanent Normal Trade Relations with China established in 2000.
Besides EVs imported from China, US Senators Marco Rubio and John Moolenaar asked the US Defence Department to add Chinese battery maker CATL to a restricted list in late August. The intent is to block CATL from receiving US military contracts. At the same time, this request sends a warning to Ford who is building a EV battery plant in Michigan by licensing CATL technology to produce low-cost lithium-ion batteries at the facility.
Blocking EVs and EV battery imports from China is risky. While Tesla’s EVs continue to sell well, Ford, GM, and Stellantis are struggling to get their EVs produced and sold. In late August, due to unfavourable market conditions, Ford announced its plan to delay its production of its next-generation EV pickup trucks at its new plant in Tennessee and cancel its plans for its electric SUVs.
To sustain the growth of the EV sector and to support the demand of auto workers in the US, the big three automakers should change their EV development plan. Biden and his successor should modify the current EV policy adopted by the Biden Administration.
First, instead of focusing primarily on higher-priced electric SUVs and pickup trucks, the big three automakers should find ways to debunk the “small car, small profit” myth. For example, GM announced its plan to expand its production of higher-priced electric SUVs and pickup trucks such as GM’s Cadillac Lyriq or Hummer EV Pickup/SUV and stop producing its most affordable EV Chevrolet Bolt by the end of 2023.
While the $7500 EV tax credit scheme has kickstarted the EV markets with three million EVs on the road in the US as of April, 2023, a study reveal that high purchasing prices and a lack of EV charging infrastructure are two major reasons that deter many American consumers from purchasing EVs.
As the labor costs are becoming higher after the UAW strike that ended in October 2023, these higher-priced larger EVs would cost even more. With the prolonged inflation in the US, the soaring prices of these EVs may turn even more American consumers away.
To ensure EVs are affordable, automakers should reintroduce a more affordable EV lineup. Ford cut prices on its Mustang Mach-E, but it still starts at about $46,000.
Second, to create more affordable EVs without sacrificing assembly jobs in the US, Biden should loosen up the eligibility rules for the EV tax credits especially for EVs assembled in the US. For example, Nissan’s Leaf is assembled in Tennessee with an affordable base price of about $28,000. But this small and affordable EV is no longer qualified for the EV tax credit due to battery sourcing requirements announced in April.
To improve competitiveness and strengthen innovation in the EV sector, the big three and the US government should find ways to make more affordable EVs available to consumers without sacrificing American jobs.
Third, while the US government is leveraging the IRA funds to boost domestic EV battery production by offering tax credits and incentives to manufacturers and consumers, the US still relies heavily on Chinese companies such as CATL for EV batteries and related components. Indeed, blocking CATL, the largest EV battery manufacturing with 37.7% market share, from importing its EV batteries and related components into the US is too risky. This is because the US cannot fully establish a robust domestic supply chain for lithium-based EV batteries by 2030.
Instead, the US should continue import EV batteries from China that pose no national security. However, the US should develop new EV battery technology based on sustainable materials without relying on Cobalt that are primarily extracted from the Democratic Republic of Congo whose supply chains are often with child and forced labor.
Burning bridges with China is risky for the US to develop its domestic EV ecosystem. Keeping the old bridge would be a safer bet.
Christopher Tang
Christopher Tang is a distinguished professor at the UCLA Anderson School of Management
Contributions to Pearls and Irritations
Your contribution will fund quality independent comment and analysis in Pearls and Irritations
Contribute
