The United States intends to raise tariffs on electric vehicles and other goods against China, and the Ministry of Foreign Affairs responds. How should car companies respond?

China will take all necessary measures to defend its own rights and interests.

At the routine press conference of the Ministry of Foreign Affairs on the 10th, a reporter asked that the Biden administration is preparing to announce new tariffs on key strategic industries such as electric vehicles against China as early as next week (Tuesday).

Spokesperson Lin Jian of the Ministry of Foreign Affairs stated that the previous US government’s imposition of a 301 tariff on China seriously disrupted normal economic and trade exchanges between China and the United States, and has been ruled by the World Trade Organization (WTO) to violate WTO rules. The United States not only fails to correct its erroneous practices, but also continues to politicize economic and trade issues, abusing the so-called 301 tariff review process to further increase tariffs. This is a mistake that adds to the mistake.

Lin Jian said that we urge the United States to effectively comply with WTO rules, cancel all tariffs imposed on China, and not increase tariffs. China will take all necessary measures to defend its own rights and interests.

Sun Lei, Senior Partner of Beijing Dacheng Law Firm, stated in an interview with First Financial News that the US actions are suspected of violating WTO agreements.

Sun Lei explained that firstly, if this tariff is only imposed on China, this practice violates the most favored nation treatment principle of the WTO, which stipulates that all WTO members should be given the same most favorable trade treatment; Secondly, the tariffs that WTO members have negotiated and promised to reduce cannot be arbitrarily increased, thus this practice also violates the tariff reduction commitments made by the United States in the WTO.

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About to be taxed

According to comprehensive reports, officials from the Biden administration have stated that they are expected to announce an increase in tariffs on clean energy products from China on the 14th local time, targeting key minerals, solar products, and batteries from China.

Among them, electric vehicle products are of particular concern, and it is expected to increase the tariff rate from the current 25% to about 100%. Meanwhile, all imported cars to the United States are subject to an additional 2.5% tariff. This means that the overall tariff on China’s exports of electric vehicles to the United States will increase from 27.5% to 102.5%.

According to sources, the new tariffs imposed on Chinese electric vehicles are not expected to apply to traditional gasoline powered vehicles manufactured in China.

This decision was made after a one-year review of the tariff policy towards China during the Trump administration. Former US President Trump signed a presidential memorandum in 2018, imposing tariffs on approximately $370 billion worth of Chinese products exported to the United States based on the results of the 301 investigation. After the Biden administration came to power, they retained these tariffs for safety reasons.

The Office of the United States Trade Representative (USTR) began a mandatory review of this in 2022, and the final results of the review process, originally scheduled to end by the end of 2023, will be announced as soon as this week.

Sources say that tariffs on some industries considered strategically important to the US economy will be significantly increased, while other industries considered less important to national security will remain unchanged or have tariffs lowered.

It can be seen that the release of the review results coincides with the intensification of the US election. Adam Hodge, former assistant to the Biden National Security Council and the Office of the United States Trade Representative, told the media that the new tariffs, along with other policies issued by the US Treasury and Commerce departments, should alleviate some of the anxiety among American voters.

The latest response from Republican candidate Trump to the Biden administration’s message is that he will impose a 200% tariff on cars produced by China in Mexico.

Previously, on April 17th, the White House website criticized China for unfair practices and announced plans to implement new restrictions on Chinese steel and aluminum products, including raising the 301 tariff on Chinese steel and aluminum products to three times the current level and cooperating with neighboring countries to prevent indirect exports of Chinese steel and aluminum products to the United States.

A spokesperson for the Ministry of Commerce stated that China has taken note of the relevant news. The US’s accusations against China have no factual basis, and the relevant measures are typical unilateralism and protectionism, which China firmly opposes.

A spokesperson for the Ministry of Commerce stated that we urge the United States to face its own problems, stop raising tariffs on Chinese products, and immediately cancel the additional tariffs imposed on China. China will take all necessary measures to defend its own rights and interests.

Associate Professor Ding Ru from the School of International Law at China University of Political Science and Law has been tracking cases in the above-mentioned field for a long time. She told First Financial reporters that in the relevant cases, the United States has been ruled illegal by a WTO expert group, partly because it violated most favored nation treatment, and partly because it unilaterally raised tariffs without authorization, which violated Article 2 of the General Agreement on Tariffs and Trade (GATT).

She explained that Article 2 of GATT clarifies the principle of tariff binding, requiring members to submit and comply with tariff concessions upon their accession to the WTO, and not to arbitrarily increase the bound tariff rates that have already been promised.

Public information shows that the US initiated a 301 investigation into China during the previous administration and subsequently imposed additional tariffs. On April 4, 2018, the Chinese Ministry of Commerce submitted a consultation request to the WTO dispute resolution mechanism regarding the taxation proposals under the US 301 investigation into China, officially initiating the WTO dispute resolution process.

On September 15, 2020, the WTO expert group issued a report on the WTO dispute over the US 301 tariff measures, which determined that the US taxation measures in question violated WTO obligations.

The spokesperson of the Ministry of Commerce also stated that the United States has made repeated mistakes in ignoring the international economic and trade order and rules, politicizing economic and trade issues, abusing the so-called 301 tariff review procedure, publicly demanding arbitrary adjustments to tariffs on Chinese products, and shifting conflicts. This has not helped solve the problems faced by the US domestic industry. US pressure on other countries to restrict Chinese products will further undermine the security and stability of global industrial and supply chains.

How Chinese car companies face it

It should be noted that the potential measures taken by the Biden administration this time are not so much to suppress niche markets, but rather to prevent expected import growth: China’s steel, aluminum, and automobiles currently only account for a small portion of the US supply.

Sun Lei also told First Financial reporters that currently, China’s electric vehicles have a small market share in the United States, and the pain of increasing tariffs in this initial stage will be smaller. The logic of the US side is that without intervention, China’s market share of electric vehicles in the US will inevitably increase, and the cost of intervention after relying on China’s supply chain will be even greater.

It is worth noting that there are still differences among several economic advisors of the Biden administration regarding whether to adjust tariffs during the Trump era. US Trade Representative Daisy advocates raising tariffs, and the US should take “early and decisive action” to protect the US electric vehicle industry from China’s influence. Meanwhile, Finance Minister Yellen and others have called for a reduction in consumer goods tariffs, while focusing tariffs on strategic sectors.

Regarding this, Sun Lei stated that if the fact of imposing tariffs on electric vehicles in China is true, it will have a significant impact on car companies such as Tesla that invest in and build factories in China in the short term. Taking Tesla as an example, if tariffs are imposed, cars currently produced in China will only be sold in China or other markets outside the United States, which will lead to an increase in fixed costs for car companies. But Tesla’s super factories in Germany and other countries can digest and adjust this change.

Sun Lei said that for Chinese enterprises, the pressure to consider transferring investment will be greater, and the decision-making pace will accelerate. In addition, this change not only affects the electric vehicle industry. Due to the very long supply chain of automotive products, the migration of automotive assembly and production to other countries may also affect the entire supply chain, including steel and aluminum, engine technology, lithium batteries, etc.

It can be seen that while targeting China’s clean energy products, the Biden administration is also encouraging domestic clean energy investment in the United States.

Currently, the Biden administration is injecting over $2 trillion into US factories and infrastructure in an attempt to strengthen US industry and address climate change.