Should the EU put tariffs on EV cars from China?

The IMF’s Finance and Development magazine published an article on the EV market in the European Union. The EU has set a goal of 100% EV adoption by 2035, a goal that could be achieved by importing EV cars from China which retail at 20% less than similar French, German or Italian models in the EU. How will the European EV market be impacted by permitting Chinese imports? It comes down to comparative advantage. A lot depends on how strong is the level of comparative advantage is and with EV production this is quite complex with the highly dynamic nature of technology innovation. The IMF look at previous scenarios as an indicator.

During the oil crisis years of 1973 (oil prices quadrupled) and 1979 (oil prices doubled) the traditional US car / truck became very expensive to run and Americans started to buy significant numbers of Japanese cars which were much more reliable and cheaper to run. Between 1970 and 1985, the share of imported Japanese cars in the US rose from almost 1.7 to nearly 15%, before shrinking as trade tensions grew. Japan’s entry transformed US and global car markets. A scenario is if China was to import EVs (with no trade barriers) that equate to 15% of the market share (EV shock), how would that impact output of EU producers. It is unlikely to follow the same pattern as Japan’s entry into the US market as the EU has already imposed tariffs on Chinese EVs up to 45% but China could become a more dominant player in the car market than Japan was.

The impact of a EV shock varies amongst EU producers. In simple terms the increase in supply of EVs from China will reduce prices for consumers but it reduces demand for EU produced EV cars. This will mean a loss of jobs etc for certain countries but the impact will be modest for Germany, France and Italy but Hungary and the Czech Republic would be the worst affected economies with a drop in GDP between 1% – 1.5% over 5 years. One way to protect the EU EV market would be to put tariffs on Chinese imports but historically tariffs are not the right answer. Why?

• Whilst protecting local production tariffs raise prices as well as production costs in sectors that could use Chinese vehicles as inputs.

• EU producers will also be less competitive on the global market.

• Tariffs could slow the EU’s climate transition, resulting in additional CO2 emissions.

• The price effect of tariffs could cause consumers to buy more traditional cars that run on petrol which adds to emissions.

Costs of Tariffs > Benefits of Tariffs = EU countries poorer.

Other policies – relocation of production like Nissan & Toyota in the UK In order to compete with Chinese imports increased investment and productivity are key areas. If Chinese producers were relocate production to the EU this would lessen the impact and would also create jobs and growth. This was the case with Nissan where the company established production in the UK to gain easier access to the European market and avoid trade barriers. Nissan was the first Japanese automaker to set up a plant in the UK, opening its Sunderland factory in 1986. The decision was influenced by the UK government’s incentives, access to skilled labor, and the ability to export to the European Economic Community (EEC) without tariffs. Sunderland became one of the most productive car plants in Europe. Toyota followed, opening its Burnaston plant in Derbyshire in 1992. Like Nissan, Toyota sought to localise production within Europe to avoid trade restrictions, reduce costs, and establish a stronger presence in the growing European car market.

The EU needs active policies to encourage investment and productivity gains in the auto sector and to assist with any job transitions—while making room for BYDs, Nios, and Xpengs on European roads

For more on Trade Barriers view the key notes (accompanied by fully coloured diagrams/models) on elearneconomics that will assist students to understand concepts and terms for external examinations, assignments or topic tests.