Navigating the Issue of Driving Out Chinese Cars and Parts

The United States (US) has long been protective when it comes to its automotive sector as amply demonstrated by its high pickup truck tariffs, non-tariff barriers, and trade demands. Anxieties about job losses, interest in preserving American manufacturing, desires to defend America’s auto export share, concerns about trade deficits, and domestic politics all have played a role. These factors remain relevant, but new ones have been added to the mix. These include the quest to maintain a leading role in automobile subsectors of the future such as electric vehicles (EVs) and EV batteries and, relatedly, the fight against climate change. Fueling the US’s more aggressive stance are the facts that China has emerged as the world’s biggest EV producer and exporter, is a critical supplier of many EV parts and materials, and is the US’s main geopolitical rival, which makes deindustrialization and economic dependency heated political issues.[i]

As far as China is concerned, the US has been particularly aggressive, though its laws, regulations, and rhetoric often makes no explicit mention of China. With respect to the former, in 2018, then US President Donald Trump instituted a 27.5 percent tariff against China-made cars as part of his trade war against China.[ii] More recently, the US adopted the Inflation Reduction Act (IRA). Among other things, the IRA provides hundreds of billions of dollars in tax breaks for EV purchases and clean tech manufacturing. These incentives frequently come with domestic content or production requirements.[iii] In this vein, it is worth noting that the US government decided in early December that “no US-manufactured EVs that include Chinese-made battery components will be eligible for [full IRA]…subsidies” and that EVs will not get IRA incentives “if they are made by companies with significant ties to the Chinese government or produced with a licensing agreement with a China-based or Beijing-controlled operator.”[iv] Washington has also tried to influence the treatment of Chinese foreign direct investment (FDI) in the auto sector in other countries like Mexico.[v] In the US, one also sees a backlash at the local level as witnessed in the town of Green Charter, Michigan, where voters threw out town council members that had welcomed the construction of a state-supported, Gotion High-Tech battery plant and revoked a resolution providing water service to the planned plant site.[vi]

These measures have costs. Americans have far fewer EV car choices than those in other countries and thus pay a lot more for EVs than consumers in those places.[vii] More expensive EVs implies slower EV adoption which, in turn, hinders the fight against climate change.[viii] Reduced EV affordability raises equality issues, too, by making EVs a toy of the wealthy. American sanctions against Chinese car firms, parts, and inputs may spur Chinese measures against American car companies in China or sanctions that affect the availability and affordability of car parts and part inputs such as rare earths.[ix] The shunning of Chinese businesses may limit opportunities to cooperate with those having the most sophisticated manufacturing processes or best EVs technologies as well as cost tens of thousands of manufacturing jobs and the tax revenues and economic development that come from Chinese firms localizing production in the US or countries like Mexico that the US wants to develop.[x] Regardless of what one thinks about the global trading system, it is hard to deny that EV and EV battery wars will undercut it.

It is not clear US policy is way off course. Dependencies on foreign countries for goods or technologies do create national security risks, especially when the foreign country is a rival. Many analysts have pointed out the potential downsides to having Chinese companies, which are beholden to Beijing legally and in practice (though the degree of subservience is debatable), in charge of a computer/radar on wheels that gathers a huge amount of data on drivers, passengers, and the surrounding environment and which can be programmed or hacked from afar by those with potentially nefarious intent. Connected EVs also might be used to disrupt devices connected to Internet of Things as well as telecommunications systems.[xi] Supply chain resilience is not just a national security matter. Dependence on one or a few countries exposes US companies to weather events, shipping lane disruptions, and the like that can negatively affect their operations. Aside from this, while the wisdom of US industrial policy has long been debated, a stunted domestic EV industry may limit the potential for supporting industries to prosper, particularly if foreign companies favor their own good and service providers, which is the case with most Chinese firms. Moreover, letting Chinese EV sector subsidies go unchallenged seems problematic from a free trade standpoint even if some of these subsidies benefit American car companies and the US itself has embraced many protectionist policies.[xii] Finally, protectionist America policies have the benefit of encouraging Chinese companies to invest in the US.[xiii]

During his visit to China in October, California Governor Gavin Newsom, asked, after a test drive, if wanted to take a Yangwang U8, a plug-in hybrid SUV made by China’s BYD, back to Sacramento supposedly joked “‘No, I want two.’”[xiv] Dealing properly with the Chinese EV and battery challenge is no joke. There are serious misunderstandings about what is going on.[xv] There also is a need for a full and balanced consideration of the costs and benefits of US policy. Absent this, the US government and state governments are likely to steer us off course.