Navigating the Roadblocks: How Chinese EV Makers are Confronting New Tariffs

The international electric vehicle (EV) market has seen a significant development in the last decade, especially in China, which becomes a leading manufacture in the EV market. A new round of tension and economic policy provided a new challenge for Chinese manufacturers of EVs. One of the most prominent challenges for China EV makers is the new tariff they must pay for exported EVs, mostly for US and European countries. This article aims to understand the reasons behind, what Chinese manufacturers have done about them and how the tariffs will affect global EV manufacturers.

The Rise of Chinese EV Makers

The Growth Trajectory

Chinese EV makers have enjoyed an explosive growth narrative, based on government incentives for electric vehicles and new-energy technologies, pioneering innovation, and a huge domestic market. Names such as BYD (Build Your Dreams), NIO and XPeng have become widely known not just in China but around the world. This development has fed on itself and profits reinvested them in new research and development, leading to innovations in battery technology, autonomous driving, smart vehicle features, and so on. All these were aided by a set of political incentives – notably, a determination to reduce carbon emissions and improve air quality – that created encouraging conditions for the proliferation of EVs. Together, they have created a rich EV ecosystem visibly positioned to be the future leader in electric mobility.

Market Expansion and Global Ambitions

Chinese EV makers have begun targeting markets outside of China. They are building factories overseas, making partnership deals, and moving towards emerging markets where the EV market is expected to continue to grow. Chinese EVs have done well in Europe, and there has been greater inquiry these past few months even in the United States. The geographic distribution of Chinese EV brands supports this notion of quality, affordability, and technological prowess as it forms a kind of global push, moving outside of China itself. At the same time, Chinese manufacturers are entering markets and competition directly with traditional Western automakers. This complicates market dynamics and, in the face of some concern among vested interests in the traditional automotive industry, prompted a few countries to take protective measures.

Government Support and Strategic Investments

Incentives for subsidising EVs, providing tax exemptions all the way through to providing direct investment in component or raw materials production has lowered entry barriers for new EV manufacturers, permitted large-scale production and use, and put in place a strong supply chain for EV batteries. There’s little doubt that governmental backing has led to rapid domestic uptake but has also made Chinese EVs more competitive Internationally. International trade policies and tariffs now threaten this support.

The Imposition of Additional Tariffs

Background and Justification

What drives additional duties on EVs from China, for example, is the broader context of geopolitical tensions and trade disputes, specifically between China and the United States, which further escalated in recent months. New additional duties are just one of many economic measures, a set of tools that various governments have at their discretion, including the retaliation against perceived unfair or illegal subsidies, defending local industries from foreign competition and/or concern about possible theft or misappropriation of technological knowhow. In Europe, additional duties are also being discussed for the same purpose. Concerns about the impact of alleged subsidies on local industries and next-generation technologies are put forward as pressure points to bargain for long-expected and much-needed reciprocity in market access. Yet such measures are explained further in terms of simple strategic concerns about China’s growing technological and economic influence, and the potential it poses to the countries’ environment and energy mix.

Specific Tariff Measures

There are a variety of specific tariff measures in place, or proposed, in different regions; however, most target high tariffs for imported Chinese EVs or key components of EVs. For example, in the US, the Trump administration has imposed tariffs on numerous proposals to levy tariffs on Chinese-made EV batteries and other electronics, both of which are vital to the production and operation of EVs. The tariffs are also being introduced in Europe; European officials have proposed import tariffs that could affect the costs of Chinese EV imports. In many cases, the tariffs would be moderate but, in others, like with electric vehicles, the tariffs could be quite significant, considerably increasing the costs of imported Chinese EVs in such markets. The impact would not only be felt by Chinese EV manufacturers but also consumers and other businesses in these countries that rely on imports.

Immediate Impact on Chinese EV Makers

The short-term effects of these tariffs have been mixed. Production costs for Chinese EV makers have risen, leading to higher prices being charged to consumers outside China for their products, making them less competitive abroad; supply chains have been affected, disrupting the delivery of components and vehicles to customers; and some manufacturers have had to rethink their market commitments. Some are delaying the expansion plans they had outside China and redoubling their efforts in markets that are less affected by tariffs. In the long term, Chinese EV companies might be the overall winners of this more protectionist trade environment as a result of their resilience and ingenuity.

Strategic Responses by Chinese EV Makers

Diversifying Supply Chains

Chinese EV manufacturers are adapting by widening their supply chains to mitigate risk and recalibrate for a more autonomous global economic system. To reduce their reliance on any single market, these companies are sourcing components from a wide range of countries, manufacturing overseas, engaging with international suppliers and building partnerships with sister brands. By spreading production across different countries, Chinese EV firms can shield themselves from the ramifications of tariffs and maintain a more stable supply chain. Meanwhile, the government is increasing investment in domestic production capabilities, especially for essential components such as batteries, to lessen its reliance on imports and drive forward self-reliance.

Increasing Focus on Emerging Markets

To tackle the Western market’s pitfalls, Chinese EV manufacturers are also focusing increasingly on emerging markets such as Asia, Africa and Latin America. Most of these markets suffer from a combination of ever-growing urbanisation, economic growth and the consequent societal demands such as an expanding demand for micro-mobility. If the products offered match the specific needs of these markets, there is tremendous potential for expansion, and, in turn, economic rise. Even more important for the global expansion of Chinese companies and their automobile manufacturers is the development of partnerships with regional companies and governmental organisations.

Innovative Business Models and Technologies

Innovation – the development of cutting-edge technologies such as solid-state batteries, vehicle-to-grid (V2G) capabilities, parts-sharing EV platforms, and autonomous driving systems – is as important to Chinese EV makers now as it ever was to overcome tariff-related challenges. Many Chinese brands are doubling down on investing in next-generation EV technologies to improve the quality and appeal of their EVs while making them more unique to market. Additionally, they are experimenting with alternatives to traditional models of ownership, such as subscription services and battery leasing, which could provide consumers with flexible services that are less expensive than outright vehicle ownership. These strategies could help Chinese manufacturers retain market competitiveness in the face of trade barriers.

Impact on the Global EV Market

Competitive Dynamics and Market Shifts

Shortly after the announcement of those tariffs, the competitive environment of the global EV market started to undergo a dramatic remodelling. Normally, as we have seen, Chinese EV firms have taken the lion’s share of the EV market in the Western world. However, these tariffs on Chinese products have started to change that. By 2020, Western automakers are now using these tariffs to increase their competitive edge in their domestic market, with many Western firms being supported by their home government to increase innovation and efficiency in their product offerings. These tariffs are also changing the traditionally Western-dominated global production chains in supply chains, as some of these firms are now localising their production capacities, avoiding the tariffs. At the time of writing, an EV industry that once united its markets under one large brand is now splintering.

Consumer Implications

The tariffs work both ways. For consumers, they increase prices, or may simply result in fewer choices of Chinese EVs. The extra cost of a tariff ends up getting passed on to the consumer, making Chinese EVs less attractive than competing, locally produced options that are not subject to the same duty. That can slow the rate of EV adoption in markets where price sensitivity is a bigger challenge. But even there, the tariff will incentivise local manufacturers to do a better job of producing more attractive EVs that can make up the lost market share due to the tariff. Consumers might ultimately benefit. If automakers want to do better than just meeting the minimum standard to steal back market share, they will need to improve their product and service quality and features.

Environmental and Policy Considerations

In turn, the wider implications of such tariffs potentially extend into the environmental and policy domains, as these measures can have knock-on effects on the pace of the global EV roll-out. For example, higher-cost EVs due to tariffs can impede the shift to environmental-friendly vehicle technologies and contribute to rising global emissions. On the other hand, they can stimulate production and innovation of EVs from local industry, encouraging the growth of ‘green’ industries in nations imposing the tariffs. Policymakers then face the challenge of striking a balance, with trade measures not weakening environmental goals and instead encouraging the growth of domestic industries. International cooperation alongside common policy stances could help to mitigate any harmful effects to the EV market and to promote a more ‘even level playing field’.

Long-term Implications for Chinese EV Makers

Adaptation and Resilience

More immediately, the extra tariffs will be a test of how agile and resilient Chinese EV makers can be. Should they be able to continually innovate and grow their business in the global context of increasing protectionism? Can they invest in technology and raise their cost efficiency and product quality to justify higher prices in tariff-hit markets? Can they respond quickly enough to new trade policies and market developments to sustain growth and profitability? The Chinese EV makers’ experience will point the way for many other industries facing a geopolitical squeeze.

Strategic Partnerships and Collaborations

Revving up competitive alliances and partnerships with overseas automakers, technology giants or local businesses will be essential for Chinese EV-makers. This will enable them to access new markets, share technological know-how and synergies to overcome the pain of tariffs, drive knowledge spillovers and technological innovation, and advocate common interests together in multistakeholder endeavours. On this front, the Chinese government must engage with powerful governments and industry stakeholders to establish mutually beneficial trade rules and regulatory arrangements that facilitate win-win scenarios.

Future Outlook and Opportunities

The short-term picture for Chinese EV makers is undeniably bleak, whether due to additional tariffs or for any reason. But there’s a bright long-term outlook ahead for Chinese EV makers – not only because the entire auto manufacturing industry is shifting to electrify its cars, but also because global passenger mobility now demands electric transport. Chinese carmakers can seize the opportunities in emerging markets, technologies and consumers’ preferences for easy-to-drive and environmentally friendly mobility. To do that, they’ll need to continue to innovate, pivot and play the cards they are dealt by international trade. In the end, they will succeed only if they can adapt their strengths to evolving market needs.

Conclusion

While new tariffs are a tremendous challenge for Chinese EV makers, they represent further opportunities for innovation and development. As import costs will continue to rise, Chinese EV makers can ‘follow the money’ and design their supply chains accordingly, emphasising countries in light regulatory phases or thinking globally with factories and stores in emerging markets internationally. In the end, the US and then EU appeals mean new challenges but also fresh opportunities for Chinese EV makers to relocate their supply chains, target new consumers and invest in new technologies. The imposition of import duties will naturally reshuffle market shares – both in the existing US and EU markets for EVs and within the wider global market for Chinese EVs. The impact on consumers will also be significant, as average prices will rise further. However, this will be a positive development for the environment. Better environmental standards can help to protect as well as improve the natural environment, and the wider consumption of electric vehicles will further improve air quality. In the long run, adapting to these complex trade environments and the reallocation of market shares will be determined by the resilience and strategic options of Chinese EV makers. As the global demand for electric vehicles grows, Chinese migrations will ultimately decide the future of sustainable transport.