How electric cars create a sticky trade dilemma

Western governments hoping to curb greenhouse gas emissions are encouraging greater use of electric vehicles to help achieve their goals. But it is becoming increasingly clear that providing support involves resolving dilemmas.

Two of the most pressing issues are: how to balance domestic political concerns with geopolitical tensions; and how to encourage citizens to buy electric vehicles without damaging the country's manufacturing priorities.

In the United States, the Biden administration proposed three years ago that electric vehicles should account for half of U.S. car sales by 2030. In Europe, the EU aims to have at least 30 million zero-emission cars on the road by 2030, meanwhile.

The goals may spur innovation and create jobs, but achieving the main goal — the replacement of gasoline vehicles with electric cars — has been slower than expected and far from mainstream.

Even those Western users who have not been reluctant to abandon the internal combustion engine have encountered the twin problems of limited availability and unaffordability of domestically produced electric vehicles. China's BYD, on the other hand, is making inroads in Europe with more affordable electric cars.

The question facing U.S. and European governments is: What can or should they do to protect automakers so important to their broader economies?

subsidy

One strategy is to use subsidies to make electric vehicles more affordable for buyers, especially as inflation rises.

Germany has chosen to offer tax incentives of €6,750 (€9,000 in 2022) for pure electric vehicles and €6,750 for plug-in hybrid vehicles.

The U.S. Inflation Reduction Act (IRA) of 2022 provides an electric vehicle tax credit of up to $7,500, but this is subject to increasingly tight restrictions on battery components and sources of critical minerals.

These subsidies help boost sales. In the United States, electric vehicle sales will reach nearly 1.2 million units in 2023, accounting for 7.6% of total sales in 2023, up from 5.9% in 2022. In the EU, sales of pure electric vehicles also exceeded 2 million, up from 1.6 million.

However, subsidy rules can become complex to the point where buyers may be deterred.

In April 2023, the U.S. Treasury Department announced that certain foreign-brand electric vehicles assembled in the U.S. — Audi, BMW, Hyundai, Nissan, Rivian, Volkswagen and Volvo — would no longer be eligible for partial tax credits. To receive the full incentive, at least 40% of battery-critical minerals need to be extracted or processed in the United States or a country with which it maintains a free trade agreement (such as Mexico or Canada), and/or come from recycled materials in North America.

In December 2023, the U.S. Treasury Department also announced that starting in 2024, U.S.-made electric vehicles using battery components made in China will not be eligible for full subsidies provided by the IRA.

tariff

Some governments have used import tariffs to protect domestic EV manufacturers. The United States imposes a 27.5% import tariff on foreign-made cars, while the United Kingdom and the European Union impose a 10% tariff.

The EU's more open trade policies enable European carmakers to produce electric vehicles in China and then export them to Europe and offer them at competitive prices. For example, although MG Motor is headquartered in the UK and is part of China's SAIC Motor, its MG 5 and MG ZS are manufactured and exported in China.

Nonetheless, the European Commission, the EU's executive agency, announced in September a countervailing investigation into Chinese electric vehicles, a move that could “distort” the EU market, and said it would consider raising import tariffs to prevent an influx of cheaper Chinese models that could damage the market. Benefits for local manufacturers. For example, China's BYD surpassed Tesla at the end of 2023 to become the world's best-selling pure electric vehicle manufacturer. BYD reported fourth-quarter pure electric vehicle sales of 526,000 vehicles, while Tesla delivered 484,000 vehicles.

But while raising import tariffs may help prevent Chinese EV exports, it could also slow EV adoption in the EU. It will be very difficult for European manufacturers to produce the tens of millions of electric vehicles needed to meet the EU's 2030 goals from domestic factories alone. Challenges they face include China's three-quarters share of global battery production capacity and its dominance of the supply chain for key raw materials such as cobalt and lithium.

Even within the EU, France and Germany are divided over electric vehicle tariffs. France supports protectionist restrictions on Chinese imports, while Germany fears China may retaliate, hurting its own exports.

In the United States, efforts to protect domestic manufacturers also face increasingly complex challenges.

For example, there is pressure on costs. To quell a UAW strike last November, General Motors, Ford and Stellantis (formed by the 2021 merger of Fiat Chrysler and PSA) have agreed to give UAW workers 25% pay raises over the next four years. The resulting sharp wage increases and the expansion of union protections to electric vehicle battery-making plants could push prices higher.

In addition, General Motors and Ford have been working on producing larger and more expensive electric SUVs and pickup trucks, but sales of these products have been relatively sluggish. In October, General Motors announced a one-year delay in expanding production of all-electric trucks at its Orion, Michigan, assembly plant.

Tax credits are complex and shrinking, while tariffs require fine-tuning. For these reasons, both strategies pose challenges for EU and US policymakers trying to bring convenient, affordable electric vehicles into the mainstream.