The tax battle in the electric car sector

President Biden's decision is based on Section 301 of the 1974 Trade Act, which allows the US government to retaliate against trade activities deemed unfair or violating global standards. Lael Brainard, economic advisor to President Joe Biden, explained that applying a fourfold tax on electric cars Made in China is to offset China's unfair trade practices and subsidies. According to him, this action will create a level playing field for US automakers and workers. Currently, the US electric car market has not officially seen the presence of major manufacturers from China such as BYD, NIO, and Polestar.

Polestar is the only brand present in this market through a collaboration between Chinese Geely and Volvo. Although most Polestar cars are manufactured in China, the company plans to assemble cars at a plant in South Carolina by mid-year. In addition, Neo and Zeekr, two car companies that recently went public in the US, are also believed to be targeting the US market. Owen Tedford, a senior analyst at Beacon Policy Advisors, believes that since the amount of Chinese electric cars imported into the US was relatively small, the tariff increase will not significantly impact the US market. However, US officials are concerned that Chinese electric cars will soon flood the US market.

The reason is the fierce price war currently taking place in the world's second-largest economy, with major players such as BYD, Li Auto, Nio, Xpeng, and even Tesla. This has led the US to fear that Chinese manufacturers will seek to export to escape domestic difficulties. In February, BYD, considered a direct competitor to Tesla, announced plans to establish a plant in Mexico to serve the local market. However, the US government has pressured Mexico to reject incentives for Chinese manufacturers. In addition to electric cars, other Chinese products subject to tariffs in this round include solar energy panels, steel, aluminum, and medical equipment. The tariff rate for lithium-ion batteries used in electric cars has been increased by the Biden administration from 7.5% to 25% this year.

The tariff rate for other types of batteries will be increased in 2026. China has expressed disappointment with this move, with Chinese Embassy spokesperson Liu Pengyu rejecting US claims that Beijing encourages overproduction to dominate global trade. Liu believes that while the US claims to be willing to enhance cooperation with China on climate change, it exaggerates the so-called excess capacity in the new energy sector and increases tariffs on electric cars. According to him, the increased prices of electric cars and solar panels will make the transition from fossil fuels to renewable energy more difficult.

Impact of imposing tariffs

Although the new tariffs on Chinese goods may not have a significant short-term impact on US GDP, inflation, and interest rates, this move is predicted to lead to a freeze in long-term US-China economic relations. For decades, countries around the world have used import tariffs as an effective measure to protect and promote domestic industries. However, CNN cites studies and history showing that the actual economic impact of import tariffs often does not meet expectations. Economists believe that in the short term, these tariffs will not have a significant impact on US GDP, inflation, and monetary policy.

For China, the additional tariffs may not have an immediate impact because China's leading electric car manufacturers have not yet made a significant presence in the US market, while solar energy panels are mainly exported through third countries. However, from a broader perspective, the economic landscape becomes more complex, indicating that these tariffs are a sign that US-China economic relations will freeze for a long time. Joe Brusuelas, an economist at RSMUS, believes that the most recent US tariffs on Chinese goods occurred under former President Donald Trump in 2018 and 2019, affecting about $300 billion worth of goods. This policy is still in effect.

During his presidential campaign, President Trump declared that if re-elected, he would implement a comprehensive import tariff policy, not limited to Chinese goods. Economists have warned that this could lead to widespread unemployment and increased inflation.

Impact on economic growth

The Biden administration is expected to implement new tax policies this year for most items. A few remaining items will be implemented in 2026. This decision is made against the backdrop of the US labor market showing positive signs with strong growth and vibrant consumer demand.

However, the fight against inflation has not yet reached a conclusion, forcing the US Federal Reserve to maintain interest rates at a high level. Experts believe that President Biden's tax plan will not result in significant changes to US monetary policy. The new tariffs are unlikely to affect inflation, GDP, or monetary policy, and these factors will not be considered when adjusting interest rates, according to the chief economist at Oxford Economics.

Impact on domestic production

US economic history shows that import tariffs do not always have the desired effect and can even have negative effects on domestic production. In 2002, former President George Bush applied tariffs on imported aluminum and steel, with subsequent studies showing that this policy caused about $30 million in damage to the US economy. The tariffs also led to increased production costs for industries using steel, resulting in widespread unemployment in the steel industry, especially at small-scale companies. Seven years later, former President Barack Obama continued to apply tariffs on imported tires from China, although this move was expected to protect the domestic tire manufacturing industry.

However, the results were contrary, as this policy led to a thousand job losses in the US tire manufacturing industry. In addition, American consumers suffered losses of up to $1.1 billion due to higher tire prices, according to a study by the Peterson Institute for International Economics. Most recently, in 2019, a Fed study showed that the import tariffs imposed by former President Donald Trump did not have a positive impact on short-term job growth in the manufacturing sector. Instead, this policy even led to a trade war, causing higher commodity prices due to increased production costs, and triggering retaliatory actions from other countries.

Impact on consumers

Economic expert Doan Swit believes that applying import taxes often has more political significance than economic benefits. Swit stated that most economists believe that import tariffs are a bad idea because they hinder countries from benefiting from labor specialization, disrupt the flow of products and services, and lead to inefficient resource allocation. A 2023 study by the US International Trade Commission shows that retailers have borne almost all the costs arising from former President Donald Trump's policies, taxes, and imports.

The situation worsens when some businesses are believed to have taken advantage of the trade war to raise prices. It was found that some US manufacturers, despite exporting products to countries other than China, still raised product prices citing increased import tariffs. A report from the New York Fed shows that the import tariffs imposed by former President Trump in 2018 led American households to pay an additional $419 per year. The positive economic impact of import tariffs is increasingly difficult to determine. A report earlier this year from the National Bureau of Economic Research showed that when considering factors such as import tariffs, retaliatory tariffs, and agricultural subsidies, the actual effectiveness of this policy has negative effects on businesses and employment in the US.

Impact on trade balance The COVID-19 pandemic has significantly changed the impact of former President Trump's import tariff policy on US production and trade activities. Before the pandemic broke out, US importers had begun seeking alternative supply sources for goods from China. However, when the pandemic hit and consumer demand surged, domestic inventories quickly depleted. This led to a resurgence in imports from China, according to a Wells Fargo report in April. However, by the end of 2023, the volume of goods imported from the world's second-largest economy had decreased by 3% compared to 2019, while imports from other Asian countries to the US increased by 50%.

Economic experts at Wells Fargo believe that one reason may be that national companies have moved production plants to other Asian countries to avoid import tariffs. Recent maritime data also raises suspicions about Trump's bypassing of the law to bring goods into the US through Mexico.

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