Car wars

Car wars

Last week, the Biden administration announced that the US would impose 100% tariffs on imports of Chinese electric vehicles (EVs). In terms of trade policy, a 100% tariff is shock and awe stuff. It is a landmark decision in the competition to dominate the global EV market.

• At first glance, this looks like an empty gesture. Vanishingly few Chinese EVs are sold in the US because the vehicles are already subject to 25% duties. The US market is dominated by home-grown producers like Tesla and imports from South Korea, Germany, Japan and Mexico. But this is about the future, not the present shape, of the US car market.

• With the US elections in less than six months, politics is also at work. The decision seems designed to win votes in key battleground states. But it is of a piece with an increasingly protectionist US approach to trade. In a speech last year, United States Trade Representative Katherine Tai argued that trade policy must switch from what she described as a focus on “artificially” low costs for consumers and the interests of big companies to prioritising national security, workers interests and small businesses. 

• Gone, it seems, are the days when US policymakers lauded the benefits of free trade. On this, the Democrats and Republicans appear to agree. Mr Trump kicked off the current US-China trade war in 2018 with the imposition of new tariffs on a wide range of Chinese products. At the time Mr Biden pledged to reverse the tariffs, saying, "Trump doesn't get the basics. He thinks his tariffs are being paid by China…any freshman econ student could tell you that the American people are paying his tariffs." In office President Biden has kept the Trump tariffs and is now building on them.

• In the competition to show who is tougher on China, Mr Trump has said that he would levy even higher tariffs on Chinese imports than proposed by Mr Biden.

• Chinese EVs are cheap and offer increasingly advanced features. You get a sense of the break-neck speed of evolution that Xiaomi, a smartphone maker, is entering the EV market and plans to deliver 100,000 cars in its first full year of production. (The Beijing auto show, which ended earlier this month, seems to have left western journalists awe struck. EV Insider motoring correspondent Kevin William’s piece was titled, “I went to China and drove a dozen electric cars. Western automakers are cooked”. In a similar vein, The Economist opined that “Chinese carmakers are leaving Western rivals in the dust”.) 

• Chinese exports of cars (few of which go to the US) have risen five-fold over the last three years to about five million vehicles in 2023. Most are internal combustion engine cars, though EV shipments have also surged. Chinese capacity in car production is staggering. The Wall Street Journal reports that China has the capacity to produce some 40m vehicles a year, far in excess of current output of 30m. Western policymakers are all too aware that China's excess capacity of 10m units is close to the US output of 12m cars (in 2023) and two-thirds of the EU output of 15m.  Overcapacity has led to a price war in China and is driving Chinese exports.

• The Biden administration’s response is to protect the US auto industry behind a tariff wall. As Mr Biden acknowledged in 2019, tariffs will raise prices for US consumers. They will also reduce choice and, by slowing the adoption of electric vehicles, keep carbon emissions higher for longer. As the FT reported last week, “EV penetration of the US car market is miles behind that of China, and indeed the EU. Sales of EVs in the US are slowing and US manufacturers are switching to hybrids”.

• As president, Mr Biden has made climate change a priority, rejoining the Paris agreement and spending vast sums through the Inflation Reduction Act to speed the energy transition. Last week’s decision on tariffs shows that Mr Biden also wants a ‘Made in America’ energy transition – even if, by excluding Chinese EVs, it risks a slower one.

• In the short term the Chinese car industry will continue to focus on selling vehicles in emerging markets, Europe and the Middle East where tariffs are relatively low. Imports of Chinese cars into Europe have surged in the last three years. Almost a quarter of EVs sold in Europe this year are likely to be Chinese.

• European Commission president Ursula von der Leyen has talked of global markets “being flooded with cheaper Chinese electric cars” and “huge state subsidies” keeping prices artificially low. Last September the EU Commission opened an investigation into whether to apply punitive tariffs on Chinese EV imports to the region. That the investigation is not universally popular among European carmakers illustrates the global nature of the car industry. VW and Mercedes-Benz manufacture in China at scale and have warned that any EU action against Chinese EV imports risks retaliation. (In the first four months of this year foreign marques, principally Japanese, German and US automakers, accounted for 40% of Chinese car sales.)

• To avoid paying tariffs Chinese producers seem likely, in time, to shift production closer to the markets they serve in order, much as the Japanese auto industry did in the 1980s and 1990s.

• Given the political climate it is hard to see Chinese automakers setting up shop in the US. But manufacturing cars in Mexico for the US market would, under the US-Mexico-Canada Agreement, allow Chinese carmakers to avoid US tariffs (Mr Trump has already said he would introduce 200% tariffs on such cars and Bloomberg reports that the Biden administration is seeking ways to counter Mexican-made Chinese imports). Europe seems likely to be more receptive to Chinese inward investment. France’s finance minister has said that Chinese carmakers are welcome to open plants in France. Earlier this year China’s BYD, the world’s biggest EV maker, announced it would build an assembly plant in Hungary. 

• Electric vehicles and China are remaking the auto industry. Governments are determined that they, at least as much as consumers, will shape the outcome of this contest.

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week down 0.2% at 8,420.

Economics

• US president Joe Biden announced steep rises in tariffs on imports of Chinese EVs, batteries and solar panels amid concerns that a flood of imports driven by overcapacity and subsidies would damage US producers
• Beijing criticised the move saying it would “take all necessary measures to safeguard its legitimate rights and interests”. The EU is also expected to introduce new tariffs
• US inflation fell to 3.4% in the 12 months to April, down from 3.5% the previous month. The fall, in line with expectations, has reinforced beliefs that the Fed will start to cut US interest rates later in the year
• UK unemployment ticked up to 4.3% in the three months to March but average total pay was up 5.7% in the three months to March compared with the same period last year, ahead of expectations, painting a mixed picture of the labour market. Data for April, an important month for pay settlements and the first month after the rise in the National Living Wage, will be closely watched for signs of continued inflationary pressures
• UK Steel has written to the UK government to urge them to speed up plans to bring in a carbon-border adjustment tax amid fears that when the EU brings in such a tax in 2026, it will flood the UK market with high-emission steel, the FT reports
• UK chancellor Jeremy Hunt hinted that he would like to cut National Insurance again in the Autumn if possible, describing it as a “double tax on work”
• Matthew Beesley, CEO of UK asset manager Jupiter Asset Management, said investors were turning to UK equities because they were “the cheapest they have been in 50 years” and at trading at a large discount to US stocks
• Land Securities, a major office landlord in London, said that attendance at its offices had risen by 18% over the year to March as workers return to the office
• The Japanese economy shrank by a greater-than-expected 0.5% in the first quarter as the weak yen continues to put consumers under pressure
• US retail sales were flat in April compared with the previous month
• Nickel prices rose to a nine-month high as pro-independence protests in New Caledonia, a French overseas territory with significant deposits of the mineral, turned violent
• The ECB warned that high public debt levels in the euro area left members vulnerable to adverse geopolitical shocks and at risk of persistently high interest rates. It noted that many support measures introduced following the invasion of Ukraine and the pandemic had yet to be reversed
• Chinese retail sales grew by 2.3% in April compared with the same month last year, the lowest growth since December 2022, while industrial production grew by 6.7% over the same period. These readings will do little to assuage concerns over Chinese industrial overcapacity
• Chinese property investment was down 9.8% in the first four months of the year compared with a year earlier while new home sales were down 24% as difficulties in the real estate sector persist
• The Chinese central bank loosened mortgage regulations in an attempt to stimulate the sector

Business

• Ontario’s municipal pension fund wrote off its investment in troubled UK utility Thames Water. It was the largest shareholder
• A Russian court seized €463m of assets owned by Italian bank UniCredit in a dispute over bank guarantees. The ECB has reportedly asked euro area lenders to detail their exit plans from their Russian exposures
• Chinese EV producers are reportedly rushing to ship vehicles to Brazil and Mexico amid speculation that they are planning to introduce high tariffs
• Tesla chair Robyn Denholm said that the company needed to climb “Mount Everest” to persuade shareholders to back a relocation to Texas and a $56bn pay deal for Elon Musk
• The US Department of Justice said it is considering launching a criminal prosecution against troubled plane manufacturer Boeing after an alleged breach of a 2021 agreement that protected the company from criminal charges over deadly 737 Max crashes in 2018 and 2019

Global and political developments

• The FT reports that new cases of COVID are rising driven by a new variant prompting concerns about a surge in cases over summer
• A helicopter carrying Iranian president Ebrahim Raisi crashed on Sunday
• Russian forces have advanced 10km over the Russo-Ukrainian border towards Kharkiv, Ukraine’s second-largest city, but their advance has now been halted, according to Kyiv
• Russia and China reaffirmed their close relationship during a two-day visit of Russian president Vladimir Putin to Beijing
• UK Labour leader Keir Starmer announced six election pledges ahead of an expected general election later this year
• Slovakian president Robert Fico remains in a serious but stable condition following an attempted assassination that saw him shot five times
• US president Joe Biden and former president Donald Trump will face off in debates in June and September
• Georgia’s pro-Russian government signed into law controversial measures seen by some as restricting media and civic freedoms despite widespread protests 

And finally… last week, Barclays published a research estimating that Taylor Swift’s Eras Tour will provide a £1bn boost to the UK economy, with fans attending one of the 15 UK concerts spending an average of £848 once costs of accommodation, food, drink and merchandise are accounted for – bank notes