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Latest EV tariffs nail in coffin of US-China trade
Every time one set of protectionist measures against China disappoints, the United States escalates its economic war in the hope that additional restrictions will prove more effective. Yet by slapping massive tariffs on Chinese electric vehicles, America has laid bare its own hypocrisy and economic vulnerabilities
Pinelopi Koujianou Goldberg 23 May 2024

President Joe Biden’s administration has just announced 100% tariffs on electric vehicles (EVs) manufactured in China, prompting Donald Trump to promise a 200% tariff on Chinese cars made in Mexico if he is elected in November. Neither policy would have notable effects on the US car market, because imports of Chinese EVs are miniscule, owing to past tariffs and the anti-Chinese sentiment that has gripped the country in recent years. Nonetheless, the announcement is significant for three reasons.

First, the latest tariffs – which include steep increases for several other products, ranging from semiconductors to needles and syringes – are the final nail in the coffin of US-China trade cooperation. Denials of a complete decoupling can be put to rest. Gone is any pretense that America is merely erecting a “high fence” around a “small yard,” or trying to manage national-security risks without endangering bilateral economic cooperation. The United States and China are now in a full-blown economic war – one that will have far-reaching geopolitical consequences.

Second, the tariffs signal defeat. Trailing in the polls as this year’s election approaches, Biden and his team feel obliged to join the anti-China, anti-trade fervour that has emerged as one of the very few unifying issues in a polarized country. Moreover, the tariffs, combined with US complaints that China is producing too much and putting pressure on the global economic system, speak to a deep-seated anxiety about America’s international competitiveness.

These worries come despite earlier tariffs, export restrictions, and the aggressive industrial policy being pursued through the Chips and Science Act and the Inflation Reduction Act (IRA). By escalating the trade war, the administration is effectively admitting that these previous policies have not (yet) delivered, and that China is galloping ahead despite facing headwinds. Even if the tariffs are largely symbolic, they are a symbol of weakness.

Third, and perhaps most importantly, EV tariffs seriously undermine the broader climate-change agenda. Experts agree that time is of the essence in reducing greenhouse gas (GHG) emissions. With every passing year of inaction, the costs of climate change increase, bringing us closer to dangerous planetary tipping points. Absent carbon pricing, which has proven politically infeasible in the US, the decarbonization of transportation has long been a worthwhile second-best alternative.

China is by far the most price-competitive EV producer, owing to aggressive consumer subsidies that started in 2010, big investments in charging infrastructure, and domestic content requirements that favour batteries from Chinese producers. With these policies, China has been able to benefit from network externalities and learning-by-doing.

Several provisions of the IRA and the European Green Deal – including domestic content requirements – aim to emulate China’s success. But the US and Europe start with a big cost disadvantage relative to China; and while one can debate whether China’s past use of domestic content requirements was “fair”, the fact remains that its EV industry is more competitive (especially in the lower-priced segment of the market).

Since we cannot rewrite history, we should try to take advantage of the circumstances that history has created. From a climate perspective, availing ourselves of cheaply produced Chinese EVs would have been a step in the right direction. But now, tariffs will delay EV adoption and could imperil the entire EV market. In the best-case scenario, US and European producers will catch up, but only after many years. In the worst-case scenario, US consumers will simply give up on EVs, repelled by the higher costs associated with manufacturing them in Western countries.

Apart from the direct consequences for GHG emissions, tariffs on EVs also expose the hypocrisy of some climate-change advocates, further undermining the cause. The Biden administration is saying that climate policies are fine if they promote the interests of domestic workers in advanced economies, but not if they happen to benefit China. Many in the West may consider this calculation acceptable. But it will be much harder to pressure less affluent countries, such as India, to adopt green policies that may be costly in the short run. If the US and Europe are not willing to put the environment ahead of their short-term economic interests, why should anyone else?

It should be obvious by now that recent efforts to promote domestic economic interests through trade protection have failed to produce the desired results. Yet every time one set of measures disappoints, the US escalates the conflict in the hope that additional restrictions will prove more effective. In the process, it undermines the very causes it stands for (in this case, addressing climate change).

The best way to stay ahead of rivals is not to trip them; it is to run faster by concentrating on what one does best. For the US, that means promoting research and development, stimulating the creation and exchange of new ideas, encouraging innovation, and taking advantage of international talent. America should focus on creating the next Tesla, not on costly, futile efforts to outcompete low-cost rivals.

Pinelopi Koujianou Goldberg is a professor of economics at Yale University and a former World Bank Group chief economist and editor-in-chief of the American Economic Review.

Copyright: Project Syndicate

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