EU and US do not want the same thing from their China EV tariffs, and they will get very different outcomes

Just a month after the United States announced a sharp increase of its Section 301 tariffs on Chinese electric vehicles (EVs) from 25% to 100%, the European Union (EU), in recent days, also announced its long-expected decision to impose tariffs on Chinese battery electric vehicles (BEVs).

Behind their seemingly similar tariffs, however, Brussels and Washington have very different underlying motivations that derive from diverging strategic considerations for their own EV industries as well as their respective relations vis-a-vis China. It would be a grave mistake to hail and chant for the transatlantic efforts aimed at countering China’s current formidable competitiveness in the global EV market, while overlooking the fundamental differences between the US and EU EV industries. These fundamental differences will produce drastically different outcomes for the two industries.

To say it plainly, the biggest difference between the EU and the U.S. is that Brussels has a clear vision and roadmap to develop its EV industry, while Washington, at least for the moment, is still fumbling around. Their visions are defined primarily by their significantly different energy structures and, by extension, their respective energy strategies.

Apart from the good will to reduce greenhouse gas emissions to combat climate change, the EU, the world’s largest energy importer, has long been working on building a resilient energy system by shifting away from traditional energy to renewable energy. The pressure to transform the EU energy system became particularly acute following Russia’s invasion of Ukraine, as the EU seeks to reduce its energy dependence on Russia while keeping its energy costs affordable. 

Transport accounts for 27% of total final energy consumption in Europe, which is its top energy end use. Developing the EV industry is a necessary step to integrate renewable energy within the transportation sector, which is an essential component of the EU’s overall energy transition strategy. For Brussels, developing EV’s is a necessity, not an option.

On the other hand, despite the Biden administration’s repeated calls to transform the U.S. automobile industry towards a cleaner future, the world’s second largest emitter continues to lack a definitive motivation to carry on with this costly transition. As the world’s second largest energy producer, the U.S. energy landscape is more diverse, with significant reliance on fossil fuels, especially since 2019, when U.S. energy production exceeded domestic consumption. Texas, New Mexico, and North Dakota continue to be major producers of oil and natural gas, which gives traditional energy groups strong lobbying power over U.S. energy policies.

Such disparity in energy priorities has eventually resulted in different tariff decisions on Chinese EVs. The EU’s tariffs, while still ridiculously high, are aimed at addressing alleged government subsidies and other unfair practices. That is why there are higher tariffs placed on the Shanghai Automotive Industrial Corporation (38.1%), a Chinese state owned enterprise, than BYD (17.4%), a private company, even though it is the latter that is the more competitive and rapidly growing Chinese EV producer.

The EU’s tariffs, while still carrying a strong protectionist undertone, primarily aims to level the playing field for its automobile producers to compete with Chinese competitors, with the ultimate objective to incentivize better and more affordable EVs to accelerate its energy transition. 

The underlying motivation for the EU tariffs is pro-competition and pro-EV development, with a shrewd calculation to keep its domestic EV industry in a winning position.

For the U.S., on the other hand, the decision to impose a universal 100% tariff on all Chinese EVs is the exact opposite. Given that the U.S. lacks the motivation to transform its energy structure and its energy strategy still primarily favors fossil fuels, the development of the EV industry is more of a matter of jobs and taxes and less a matter of energy security or climate change. Given domestic politics and the partisan divide on climate issues, the push for developing the EV industry in the US is destined to run into more obstacles regardless of this White House’s efforts. The considerations behind U.S.’ tariffs on Chinese EVs relate more to trade deficits, job losses, and securing strategically important manufacturing industries that are still primarily tied to traditional energy sources. Not to mention that it is also a matter closely tied to the bitter U.S. presidential election contest, where blue-collar auto workers’ votes are at stake.

The underlying motivation for the U.S. tariffs is anti-competition and anti-EV development, with a patently obvious aim to block Chinese businesses from earning market share, revenues and profits in the U.S.

Moreover, from an industry perspective, the EU has a clear EV development strategy that is shaped by its well-evolved market dynamics, while the U.S. is currently still at a rather nascent stage, where automakers struggle to produce the concept of an American EV.

The EU has taken a proactive stance towards fostering a competitive EV industry through subsidies, incentives for R&D, and stringent emissions regulation to increase EV adoption rate. The EU market has enough familiarity with the current stage of EV products that allows manufacturers to mass produce and supply the market. Domestic automobile companies such as Volkswagen, BMW, and Peugeot are producing mature end products in terms of functionality and conceptualization. These European EVs, built by leading EU automakers, may be slightly more expensive than their Chinese competitors but still remain competitive globally given their quality.

The situation is directly opposite in the U.S. EV market. The U.S.’ EV adoption rate is less than 10% despite the Biden administration’s ambitious target to have EVs make up half of new cars sold in the US by 2030. Despite the fact that Tesla is the world’s best selling car, it is selling more EVs abroad than at home. Unlike other markets, the U.S. market has a distinguished preference for pickup trucks and CRVs, which is technically difficult to convert into electric power. Traditional American automakers such as General Motors and Ford are struggling to develop a mature EV model for the U.S. consumers and recent reports suggest that they are pulling back from EV development to instead explore hybrid CRVs and pickup trucks. Even though the U.S. is leading in AI research critical to smart car development, given the small domestic EV market and its counterproductive China tariffs, the U.S. will fail to convert that technology leadership into industrial competitiveness.

While both the U.S. and EU are utilizing non-market protectionist measures against China, the outcomes will gradually differ therefore. For the EU, its EV tariffs will help domestic automakers to survive the initial “China shock” and thereafter better compete with their Chinese competitors. For the U.S., the EV tariffs will only magnify the fear of an “extinction-level” China EV shock without providing any positive incentives for the U.S. to build its strength in the industry. Although the two sides of the Atlantic have taken seemingly identical approaches to provide their domestic EV industries favorable conditions to compete with China, their outcomes will significantly differ.