How electric vehicles pose a difficult trade dilemma

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

Two of the most pressing challenges are how to balance domestic political concerns and geopolitical tensions. and how to encourage people to buy electric cars without hurting the country's major manufacturing industries.

In the United States, the Biden administration announced three years ago that by 2030 half of all cars sold in the United States would be electric vehicles. In Europe, the EU similarly aims to have at least 30 million zero-emission vehicles on its roads by 2030. 2030.

While these goals are likely to spur innovation and create jobs, EVs have been slower than expected to achieve their key goal of replacing gasoline-powered cars, and are far from mainstream.

Even Western users, who stubbornly do not want to give up their internal combustion engines, are faced with the dual problem of limited availability and unaffordability of domestically produced electric cars. Meanwhile, China's BYD is expanding into Europe with a more affordable electric vehicle version.

The question for U.S. and European governments is what steps they can or should take to protect automakers so important to their economies.

Subsidy

One tactic is to use subsidies to make electric cars more affordable for buyers, especially when inflation rises.

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

The American Inflation Control Act (IRA) of 2022 increased the electric vehicle tax credit to a maximum of $7,500, subject to stricter sourcing of battery components and critical minerals.

These subsidies contributed to the increase in sales. Approximately 1.2 million electric vehicles were sold in the United States in 2023, accounting for 7.6 percent of total vehicle sales in 2023, up from 5.9 percent in 2022. Similarly, in the EU, sales of pure battery electric vehicles rose from 1.6 million to over 2 million. .

However, the rules regarding subsidies can be complex enough to deter buyers.

In April 2023, the U.S. Treasury announced that certain foreign brand electric vehicles assembled in the U.S. (Audi, BMW, Hyundai, Nissan, Rivian, Volkswagen, and Volvo) will no longer be eligible for a partial tax credit. announced. To achieve full incentives, at least 40 percent of the battery's essential minerals must be extracted or processed within the United States or in countries that maintain free trade agreements, such as Mexico or Canada, and/or recycled. You need to get what you get from the material. In North America.

In December 2023, the U.S. Treasury further announced that starting in 2024, U.S.-made electric vehicles equipped with Chinese-made battery components will no longer be eligible for full subsidies provided by the IRA.

customs duty

Some governments are using import tariffs to protect domestic electric vehicle manufacturers. The US imposes a 27.5% import tax, and the UK and EU impose a 10% import tax on foreign-made cars.

The EU's more open trade policy has allowed European automakers to produce electric vehicles in China, export them to Europe and offer them at competitive prices. For example, MG Motor is headquartered in the UK and owned by his SAIC in China, but the MG5 and MG ZS are manufactured in China and exported.

Nevertheless, in September the EU's executive body, the European Commission, announced an anti-subsidy investigation into Chinese-made electric cars, which could be “distorting” the EU market, citing an influx of cheaper Chinese-made models. announced that it would consider raising import duties to prevent this. That could hurt local manufacturers. For example, China's BYD overtook Tesla as the world's best-selling manufacturer of all-electric cars at the end of 2023. BYD reported sales of 526,000 battery-only vehicles in the fourth quarter, while Tesla delivered 484,000 vehicles.

However, while higher import duties may help prevent China from exporting electric vehicles, they will also slow EV uptake in the EU. It will be extremely difficult for European manufacturers to produce the tens of millions of electric vehicles needed to meet the EU's 2030 targets in domestic factories alone. Their challenges will include China accounting for three-quarters of the world's battery cell production capacity and its dominant position in the supply chain for critical raw materials such as cobalt and lithium.

Even within the EU, France and Germany have different opinions regarding tariffs on electric cars. France supports protectionist curbs on imports from China, while Germany is concerned about possible retaliation from China that would hurt its exports.

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

For example, there are cost pressures. To resolve last November's United Auto Workers strike, GM, Ford, and Stellantis (formed from the 2021 merger of Fiat Chrysler and PSA) are offering UAW workers 25% pay raises over the next four years. It was agreed to propose. . The resulting large wage increases and the extension of union protection to factories that make electric vehicle batteries are likely to push prices higher.

Additionally, GM and Ford are focusing on building larger, more expensive electric SUVs and pickup trucks, but sales of those have been relatively weak. GM announced in October that it would postpone for one year the expansion of all-electric truck production at its Orion assembly plant in Michigan.

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