🔋Pick And Choose
🔋Pick And Choose
A surprising bi-partisan policy during an election year will have a huge impact on the US economy.
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With increasing political polarization in the US, especially with a contentious election rematch between Biden and Trump this year, the parties don’t agree on much these days. We just found out one of the few things the parties agree on is tariffs, specifically on China. The White House is using the Trade Act of 1974 to issue huge increases in Tariffs for Chinese electric vehicles, solar cells, battery cells and materials, steel, aluminum, semiconductors, and even medical supplies.
While I’m not fond of either party, if I told you in 2019 that the Biden administration would employ the most aggressive tariffs on China you likely would’ve laughed at my face based on political debates at the time. Times change and here we are in 2024 and the government seems to be bipartisan in its distaste for China in favor of the re-industrialization of the US.
The full list of Tariffs is as follows.
Electric vehicles - 25% to 100% beginning this year.
Semiconductors - 25% to 50% by 2025.
Lithium-ion batteries: in electric vehicles - 7.5% to 25% this year
All other lithium-ion batteries in 2026.
Battery parts and battery minerals will also increase to 25% this year.
Solar cells - 25% to 50% this year.
Steel and aluminum - 0%-7.5% to 25% this year.
Ship-to-shore container cranes - zero to 25% this year.
Medical: Hospital syringes and needles - zero to 50% this year.
Personal protective equipment such as face masks, certain respirators, and surgical gloves - 25% increase.
I discussed Biden’s dilemma dealing with the expiration of the solar panel tariff pause last week in What A Rift. I also argued that tariffs are fundamentally a protectionist scheme by governments that hurt producers and consumers alike. It’s our lucky day this week though, as we got our answer whether Biden chooses to help the US domestic industry or the solar project developers looking to supply cheap solar.
While they may have to get through Congress, these tariffs send a clear message that the Biden White House chooses the domestic manufacturers. The lobbying and protectionist language paid off. This will make the US manufacturing of solar and other relevant industries more competitive domestically on a relative basis assuming the US can adequately police and discourage the circumvention of tariffs.
The first point is crazy. Chinese EVs in the US were already rare, but this effectively blocks direct imports to the US. A 100% tariff would essentially obliterate any margin and stifle any chance of seeing Chinese EVs.
Companies aren’t dumb and often circumvent tariffs by building manufacturing and distribution in other countries, similar to what we’ve seen with the solar industry. There is some concern over Chinese companies using manufacturing bases in Mexico and elsewhere to circumvent the tariffs. This leads to talk of automotive tariffs on Mexico as well and some politicians are even calling for outright bans on Chinese goods like vehicles.
China maintains 70+% of the EV battery manufacturing capacity which means this has high importance for the battery market. While the US plans to double its battery manufacturing in 2024, this will still add price pressure on batteries coming from the dominant source. Most battery raw materials whether in the form of raw components or cathode materials like NMC or LFP also come primarily from China. These tariffs add friction at every step of the way over the next few years. While the tariffs are intended to help domestic manufacturers, they place a lot of stress on them to follow through and be successful companies. Without competition and with government support their competitiveness, the incentive to provide cheaper better products is fundamentally muted. Will they grow into successful companies without the proper price signals of the market or only run into similar problems a few years from now?
You can also safely guess that China is the dominant producer of steel and aluminum. These energy-intensive industries were pioneered and once dominated by the US. However, China’s willingness to capitalize on cheap coal and labor allows it to create a competitive advantage in these types of industries.
Conclusion
While the government claims there will be “no inflationary impact,” we know that it will take time for the US industrial base to catch up with the demand, and Chinese companies will raise prices to retain margins. I’ve written previously about the themes of deglobalization on the world stage geopolitically and this is yet another step in that direction. China will not be pleased and they have already denounced the new tariffs. Expect the trade war to escalate further regardless of who wins the November election and there to be some response. Chinese companies will search to find manufacturing and distribution hubs elsewhere to circumvent the tariffs, making life more difficult for US companies and regulators.
Europe is experiencing growth in Chinese vehicle sales because the companies offer compelling products. This is something the US wants to withhold from US consumers simply because it is from China. For consumers, it is difficult to find new cars under 20k. There are many new Chinese EVs between 10k-20k. Imagine paying half the cost for a new car and how much more savings and investment individuals in the US could provide.
The White House wants to support battery and renewables industries based on their policies like the Inflation Reduction Act (IRA) but wants to pick and choose where the products come from. In doing so, the natural cut-throat competitive profit motive for companies is undermined. Tariffs as I discussed last week are merely a protectionist scheme that diminishes economic prosperity domestically, contrary to the policy aims.
One example of a second-order consequence of these policies is that they relatively make regular internal combustion vehicles (ICEs) more competitive. This is of course contrary to their aims. By providing positive price pressure on battery and industrial metals that EVs have a significantly higher share, it should slow down the EV/ICE price parity that it will take consumers to make the switch.
Further, while the absence of cheap cars in the US hurts the consumer’s wallet, it also helps those in other countries. Chinese automakers will find buyers for their vehicles regardless. Whether it be Europe, Asia, or elsewhere, someone will benefit from cheap vehicles whose citizens have relatively more disposable income because of their car. Over time, the US economy will slow compared to others considering policies of this type.
While it is likely that US manufacturers of batteries, solar, and EVs will breathe a sigh of relief, the long-term implications remain to be seen. This will spur companies to search for other suppliers of raw materials alongside the push through tax breaks and subsidies through policies like the IRA. In the end, it is merely a protectionist policy that doesn’t help the domestic economy or energy transition goals in the long run and serves to fuel resentment from those targeted.
-Grayson
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