The Hundred Percent Wall

The United States government increased the tariff rate on electric vehicles imported from China to 100 percent in May 2024. This is a fourfold increase from the previous 25 percent levy. The White House says this move protects American jobs from state-subsidized competition. It targets roughly $18 billion in annual trade imports from China. This is a clear signal that the era of a globalized automotive market is coming to an end.

Section 301 of the Trade Act of 1974 allows the president to impose these duties to address unfair trade practices. The current administration is using this power to shield a domestic industry that is struggling to make the transition to electric power. American manufacturers are currently focused on high-margin trucks and luxury SUVs. They have not yet mastered the art of building a profitable, affordable electric car.

Tariffs on lithium-ion EV batteries and battery parts rose from 7.5 percent to 25 percent. Critical minerals face similar hikes over the next two years. Natural graphite, a necessary component for battery anodes, will see its tariff jump to 25 percent in 2026. China currently processes about 90 percent of the world’s graphite. You cannot build a cheap electric car without these materials right now.

BYD, a Chinese automaker, sells the Seagull hatchback for approximately $10,000 in its home market. This car is a competent machine with modern safety features and a respectable urban range. No American manufacturer offers an electric vehicle for less than $25,000. This price gap is the primary reason the tariff wall was built. The goal is to keep the Seagull and its peers off American roads until Detroit can catch up.

Ford Motor Company delayed approximately $12 billion in EV-related spending late last year. General Motors abandoned its goal of building 400,000 electric vehicles by mid-2024. These companies are scaling back because they cannot find a way to make these cars profitable at prices people are willing to pay. Inventory for electric vehicles has risen across the United States. Dealers are finding that the early adopters have already bought their cars.

Protectionism often leads to lazy engineering. If a company does not have to worry about a cheaper, better product taking its customers, it has less incentive to innovate. We saw this with the 1964 Chicken Tax, which placed a 25 percent tariff on light trucks. That tax is still in place today. It successfully kept foreign trucks out of the market but resulted in American trucks becoming larger, heavier, and more expensive every year.

The European Commission, the executive body of the European Union, is currently conducting its own anti-subsidy investigation into Chinese EVs. They are expected to announce their own set of duties later this summer. Brussels is watching Washington closely. They are worried that if the U.S. closes its doors, the entire surplus of Chinese cars will be diverted to European ports. This would collapse the price of European-made cars and threaten local manufacturing jobs.

China’s Ministry of Commerce expressed strong dissatisfaction with the new American tariffs. They have promised to take all necessary measures to defend their interests. This usually means hitting back where it hurts most. They could target large-displacement internal combustion vehicles. Most of the luxury SUVs exported from the U.S. to China fall into this category.

German carmakers like BMW and Mercedes-Benz are particularly worried about this retaliation. They produce many of their largest vehicles in the United States and ship them to Chinese buyers. A retaliatory tax would make these high-profit vehicles unsellable in their largest market. The global supply chain is too interconnected for a trade war to be one-sided.

The United Auto Workers union, which represents workers at the major Detroit manufacturers, has been vocal in its support for these tariffs. They want to ensure that the transition to electric power does not result in the offshoring of union jobs. This is a political reality that any administration must face. The price of protecting those jobs is being paid by the American consumer in the form of higher vehicle prices.

Solar cells and semiconductors are also part of this new tariff regime. Duties on Chinese semiconductors will double to 50 percent by 2025. These chips are the brains of modern cars. Even a gasoline car requires hundreds of these components to operate everything from the fuel injection to the infotainment system. Higher chip costs will eventually show up on the window sticker of every vehicle on the lot.

Steel and aluminum imports from China will now face a 25 percent tariff. These are the basic building blocks of any car. While American automakers buy much of their metal from domestic or North American sources, global prices tend to rise when supply is restricted. Every input for vehicle manufacturing is getting more expensive.

History shows that industries behind trade barriers often become less competitive on the global stage. If American automakers only build cars that can survive in the protected U.S. market, they will find it impossible to sell those same cars in South America, Southeast Asia, or Europe. They are being given a safe harbor but are losing their sea legs.

I don’t know if Detroit will use this breathing room to actually fix their cost structures. They might just use it to keep selling $70,000 pickups until the next crisis hits. Policy makers are betting that a 100 percent tax will force domestic innovation. It is more likely to just keep the status quo in place while the rest of the world moves on to cheaper technology.

When competition is removed, the customer is the one who loses. If you are waiting for a $20,000 electric car that can handle a daily commute, you should look at the data and lower your expectations. The wall is high and it is not coming down anytime soon. Detroit has its shield and the American driver has the bill.