The tax war in the electric vehicle sector

Mr. Biden's decision was made based on Section 301 of the Trade Act of 1974, which allows the U.S. government to retaliate against trade activities deemed unfair or in violation of global standards. Lael Brainard, the national economic advisor to President Joe Biden, explained that the application of a fourfold increase in tariffs on Made in China electric vehicles is aimed at offsetting China's unfair practices and subsidies. According to him, this move will create a level playing field for American automakers and workers. Currently, the U.S. electric vehicle market has not recorded the official presence of major manufacturers from China such as BYD, NIO, and Polestar.

Polestar is the only brand present in this market through a partnership between Chinese Gily and Volvo. Although most Polestar vehicles are produced in China, the company plans to assemble cars at a factory in South Carolina by mid this year. Additionally, Nio and Zeekr, two car manufacturers that just went public in the U.S. last week, are also said to be targeting the U.S. market. Owen Tedford, a senior analyst at Beacon Policy Advisors, noted that previously, the amount of Chinese electric vehicles imported into the U.S. was relatively small, so the increase in tariffs would not cause significant changes in the U.S. market. However, U.S. officials are concerned that Chinese electric vehicles will soon flood the U.S. market.

The reason is due to the fierce price war currently taking place in the world's second-largest economy, involving giants like BYD, Li Auto, Nio, Xpeng, and even Tesla. This raises concerns in the U.S. 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 factory in Mexico to serve the local market. However, the U.S. government pressured Mexico to reject incentives for Chinese manufacturers. In addition to electric vehicles, several other Chinese products are also facing increased tariffs in this round, including solar panels, steel, aluminum, and medical equipment. The tariff rate on lithium-ion batteries, used for electric vehicles, has been increased by the Biden administration from 7.5% to 25% this year.

Tariff rates on other types of batteries will be increased in 2026. China has expressed disappointment over this move by the White House; spokesperson for the Chinese embassy Liu Pengyu dismissed the U.S. claim that Beijing encourages overproduction to dominate global trade. Mr. Liu argued that the U.S. claims to be ready to enhance cooperation with China on climate change but exaggerates the so-called overcapacity in the new energy sector and increases tariffs on electric vehicles. According to him, the increase in prices for electric vehicles and solar panels will make the transition from fossil fuels to renewable energy more difficult.

The impact of tariffs

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

For China, the imposition of additional tariffs may not create an immediate impact because leading Chinese electric vehicle manufacturers currently do not have a significant presence in the U.S. market, while solar panels are mainly exported through third countries. However, from a broader perspective, the economic picture becomes more complex; this tariff imposition is a sign that U.S.-China economic relations will fall into a state of freeze for a long time. Joe Brusuelas, an economist at RSMUS, noted that the last round of tariffs imposed by the U.S. on Chinese goods occurred under former President Donald Trump in 2018 and 2019, with a total value of affected goods amounting to about $300 billion. This policy is still in effect.

During his presidential campaign, Mr. Trump stated that if re-elected, he would implement a comprehensive increase in import tariffs, not limited to Chinese goods. Economists have warned that this could lead to mass unemployment and increased inflation.

The impact on economic growth

The Biden administration plans to implement the new tax policy this year on most goods. A few remaining items will be applied in 2026; this decision comes amid signs of positive performance in the U.S. labor market, with strong growth and vibrant consumer demand.

However, the fight against inflation is not yet over, forcing the Federal Reserve to maintain high interest rates. Experts believe that President Biden's tax increase plan will not lead to significant changes in U.S. monetary policy. The new tariffs are unlikely to impact inflation and GDP, and monetary policy will not consider this factor when adjusting interest rates, according to the chief economist at Oxford Economics.

The impact on domestic production

U.S. economic history shows that the imposition of import tariffs does not always yield the expected results and can even have negative effects on domestic production. In 2002, former U.S. President George Bush imposed tariffs on imported aluminum and steel; subsequent studies indicated that this policy cost the U.S. economy about $30 million. The tariffs also raised production costs for industries using steel, leading to mass unemployment in the steel sector, especially in small companies. Seven years later, former President Barack Obama continued to impose tariffs on imported tires from China, although this move was expected to protect the domestic tire manufacturing industry.

However, the results were contrary; this policy caused a thousand workers in the U.S. tire manufacturing industry to lose their jobs. Additionally, American consumers had to bear losses of up to $1.1 billion due to rising tire prices, according to a study by the Peterson Institute for International Economics. Most recently, in 2019, a study by the Fed indicated that the import tariff policy implemented by former President Donald Trump did not yield effective results in boosting job growth in the manufacturing sector in the short term. On the contrary, this policy even caused unemployment and led to higher prices for goods due to increased production costs, while also triggering retaliatory actions from other countries.

The impact on consumers

Economist Doan Swit noted that the imposition of import tariffs often carries more political significance than economic benefits. Swit stated that most economists believe that import tariffs are a bad idea because they prevent countries from benefiting from labor specialization, disrupt the flow of products and services, and lead to inefficient resource allocation. The imposition of import tariffs will cause retail distribution companies and consumers to bear additional costs. A 2023 study by the U.S. International Trade Commission showed that retail sectors had to bear almost all the additional costs arising from the policies, tariffs, and imports of former President Donald Trump.

The situation is even worse as some businesses are said to have exploited the trade war to raise prices. It has been found that some U.S. manufacturers, despite exporting products to countries outside of China, still increased product prices citing the increase in import tariffs. A report from the New York Fed indicated that the tariff policy implemented by former President Trump in 2018 caused American households to pay an additional $419 per year over time. The positive economic impact of imposing import tariffs is becoming increasingly difficult to determine. A report earlier this year from the National Bureau of Economic Research (NBER) indicated that when considering factors such as import tariffs, retaliatory tariffs, and agricultural subsidies, the actual effectiveness of this policy even caused negative impacts on businesses and jobs in the U.S.

The impact on the trade balance The COVID-19 pandemic has significantly changed the impact of the import tariff policy during former President Trump's administration on U.S. manufacturing and trade. Before the pandemic broke out, U.S. import businesses had begun to seek alternative sources of supply for goods from China. However, when the pandemic emerged and consumer demand surged, domestic inventory quickly ran out. This led to a resurgence in imports from China, according to a report by Wells Fargo 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 the volume of goods imported from some other Asian countries into the U.S. increased by 50%.

Economists at Wells Fargo noted that part of the reason could be that national businesses have shifted their manufacturing plants to other Asian countries to avoid import tariffs. Recent maritime data also reinforces suspicions that Trump’s administration circumvented laws to bring goods into the U.S. through Mexico.