US has the trade tools needed for China’s EVs — but it must use them

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The writer is vice-president of the Asia Society Policy Institute

Amid resounding applause from the European parliament, Commission president Ursula von der Leyen recently announced the initiation of a subsidies investigation into China’s unfair trade practices in the electric vehicle sector.

This was a bold move in light of possible retribution against European car and other companies operating in China. Recalling how Chinese unfair and predatory practices led to the demise of the European solar industry, von der Leyen stressed the urgency for Europe to pre-empt a similar fate in the auto sector.

The EU’s move will hopefully lead US policymakers to evaluate their own policy tools and develop a proactive response.

Over the past decade, the Chinese EV industry has benefited from massive state subsidies and other government support. This paved the way for the country to become the largest global vehicle exporter this year, surpassing Germany and Japan. “New energy vehicles and equipment” was one of the 10 technology sectors targeted for global leadership in Beijing’s Made in China 2025 policy.

Moreover, China has strategically secured critical mineral deposits around the world needed for battery production, such as lithium. That means for several years Beijing has been able to dictate that EVs use Chinese-made batteries, which account for up to 60 per cent of the value of a car. While China has the world’s largest domestic automotive market at some 26mn vehicles, its EV companies are producing way more than the domestic market can consume — an excess of as much as 10mn a year, according to some estimates.

In many respects, the EV playbook looks similar to those followed by Beijing in developing its solar, steel and aluminium sectors. In those industries, massive subsidies led to overproduction and excess supply, saturating global markets and crippling international competitors. The oversupply of EVs has already found its way to Europe and many other corners of the world.

So far, the US has been spared an influx of Chinese cars due to a number of factors. First, the American tariff of 27.5 per cent (a 2.5 per cent toll on all auto imports plus the 25 per cent China import-specific one) is relatively high. Second, Chinese vehicles are ineligible for consumer EV tax credits under the Inflation Reduction Act, disadvantaging them in the US market. Third, geopolitical tensions are likely to have steered Chinese auto manufacturers away from the American market.

But there is no guarantee that this situation will continue, particularly as Chinese companies face rising pressure to offload their excess production. As a result, it’s in the US interest to act early.

The Biden administration has a number of tools at hand to do this. Like Europe, it can initiate a subsidies investigation under the US countervailing duty law, and even couple it with an antidumping probe if it can show that Chinese car companies are charging unfairly low prices. The challenge here would be demonstrating — as required by statute — that the domestic industry was injured by imports from China when the volume of Chinese cars imported so far has been negligible.

An alternative could be a new investigation under Section 301 of the Trade Act focused exclusively on Chinese unfair practices in the automotive and battery sectors, but this would take time. The administration could also consider initiating cases on national security grounds or over safeguards, but such remedies would not be China-specific and could result in contentious disputes with allies and partners.

Rather than begin lengthy trade investigations, the Biden administration has another mechanism at its disposal. It could adjust the vehicle levy as part of the trade representative’s ongoing, mandated Section 301 review of the wider China tariffs imposed by former president Donald Trump.

This review, which is due to be completed by the end of the year, could enable the US to raise the 27.5 per cent duty to a level that would, with more certainty, shield the American market from an onslaught of Chinese EVs.

Importantly, this could be done as part of an overall rebalancing of the tariffs, paving the way for the US to reduce tariffs on other consumer and industrial goods that are hurting America’s interests more than China’s.

Trade representative Katherine Tai has repeatedly said the US needs to use its trade tools in a strategic manner. This is the perfect opportunity to put this policy objective into practice.