US Green Tariffs - I Have Questions
A guest post by Dmitry Grozoubinski
This is a guest post by Dmitry Grozoubinski (@DmitryOpines), the author of the forthcoming book, “Why Politicians Lie About Trade… and what you need to know about it”, which he swears isn’t as confrontational as it sounds. It’s an easy-to-read, accessible guide to trade policy and it has a Rules of Origin bit so my KPI is met.
Releasing on May 23rd and available for pre-order now in the UK and around the world. There are also still a few tickets remaining for the London book launch if you prefer your trade banter delivered live and with a glass of wine to help the tariffs go down smoothly.
The trade community has its schedules in a twist because an imminent Biden Administration policy will raise tariffs on Chinese electric vehicles and other clean energy-related products to as high as 100%, from an already largely prohibitive 27.5% (in the case of electric vehicles).
We’re not due to see a formal announcement until Tuesday, but given President Biden’s opponent basically called 100% rookie numbers, said he’d have done this four years ago, and threatened to go as high as 200%, this all looks very real and about as locked in as something can be within the exploding fireworks factory that is the US political system.
What I find frustrating about the discussion around this is that, as so often the case with trade policy proposals, a broad kaleidoscope of objectives and motivations are blurring together in a way that makes it very difficult to pin down the answers to three basic questions:
What is the problem?
Why is this the way to go about solving it?
What would success look like?
The Problem: Too Fast, Too Furious, Too Desirable?
Stripping everything else away, the issue at hand seems to be that the US government believes that absent its intervention, American consumers are likely to buy more Chinese vehicles, solar panels, and other clean energy goodies than it is comfortable with.
Precisely why this is a concern varies depending on who you talk to. The most commonly cited non-exclusive objections to American consumers getting behind the wheel of BYD’s Seagull EV are:
Cheap, desirable Chinese products will overwhelm the US market, driving domestic producers out of business and costing jobs;
Selling competitively into the lucrative US market will allow China to expand its lead in the technologies of the future, endangering the US national interest;
The products themselves are dangerous or defective, either due to security vulnerabilities (the TikTok argument) or poor design.
Underpinning all of these arguments is a broader concern that the competitiveness of Chinese products like EV’s or solar panels is driven not by their inherent value, but by massive subsidies from the Chinese government.
Now granted, the EU and US are also not without their own giveaways to green industries and the exact scale of Chinese subsidies is contested, but politically that almost doesn’t matter. The narrative of a Chinese state tilting the scales in favor of its green tech and EVs is locked in, and somewhat ironically the same opaqueness that makes Chinese subsidies devilishly hard to prove in a World Trade Organization dispute also makes it nearly impossible to convince anyone they’re absent (which they’re not).
Another part of the challenge is that Chinese electric vehicles for example are, by some accounts, cool as heck. I’m sure there are many valid and complex reasons why Chrysler and GM haven’t yet successfully mass-marketed anything as smooth, modern and full of features as the vehicles discussed in the article, and maybe they’re about to but like… damn. Look at those things. If Comrade Xi wants to kick in a couple of bucks to put me behind the wheel of one of those spaceships for less than the price of a Cybertruck …
Now granted, you can’t really get a feel for a car from the brief test drives the author of that article did. The Chinese cars may be less safe than they appear, there may be severe reliability issues past a certain range, and they may have security vulnerabilities exploitable by a potentially hostile Chinese regime that’s inexorably intertwined with large companies like BYD and Geely.
However, not only are many of these potential problems and vulnerabilities likely far more practically relevant in an electric vehicle than in other green technologies on the potential Biden hit list, they also raise the question of why tariffs are the vehicle (sorry) being used to tackle them.
The US needs to be pushed to be explicit in exactly what problem it’s trying to solve here, rather than throwing up a vague smokescreen of generally bad and subsidized vibes emphasizing one challenge one moment and another the next.
The Tool: Tariff Hammer go Wack?
Reports suggest that the method the Biden Administration has gone with, following their two-year review of Trump’s Section 301 tariffs, is a significant increase in tariffs. Essentially, Biden is going to tax (even harder) US citizens and firms who want to buy a Chinese product in an effort to steer them toward alternative options.
Now granted, Chinese dominance in these sectors has occurred in part behind substantial (25%) tariffs of its own. It is therefore possible to argue that given a combination of high tariff walls, domestic subsidies and internal competition allowed China to take the lead, the same could be true of the US. This is far from assured of course, but it is a counterargument to those who declare that it is impossible to build competitive products shielded from foreign competition.
As a tool, tariffs are interesting because unlike a ban through regulations or sanctions, they still leave consumers with the option to buy the goods in question - provided they’re willing to pay the premium. It’s a turning of the resistance dial upward, rather than a flicking of a switch, although when we are talking about tariffs in the three digit range the effect on sales is likely to be similar.
The challenge with tariffs is of course that if you choose to go via a tariff route, you can’t really make an argument about public safety or roadworthiness anymore. A good is either dangerous and/or vulnerable to malicious elements or it isn’t - it doesn’t become magically safer just because you made customers pay twice as much for it (though I suppose having fewer of them on the road could be considered a safety benefit, if you accept either premise).
There’s also the question of approach. The World Trade Organization rules already have a defined procedure you are supposed to follow when you suspect your industries are being harmed by actionable subsidies abroad. You are supposed to have relevant authorities carefully study the subsidies and their price effects, and then recommend tariffs calibrated to rebalance the impact subsidies are having. You are not supposed to just pick suspiciously round sounding numbers and slap them on a range of products you arrived at unilaterally.
Between its neutering of the WTO Appellate Body and its broad interpretation of the Security Exemption, the US obviously isn’t hugely concerned about its ability to successfully defend the WTO legality of its actions. With that said, leaning into the precedent that a country can just go away for a bit, have a little think, and then come up with some seemingly arbitrary numbers on how much it ‘reckons’ a fair tariff would be, risks sowing uncertainty within a global trading system already looking about nervously and eyeing the bunker doors.
If moving forward the US is going to have a policy of utilizing tariffs in this manner, some explanation for why they’re the appropriate tool and approximate parameters for when they’ll be considered moving forward would be invaluable. “Because they’re there and we can impose them without Congress,” is not a comforting response.
Success: Are ye winning, son?
What would the world need to look like five years from now in order for these tariffs to be deemed a success? It seems like a simple and obvious question, but I would be shocked if either President Biden, USTR Tai, or anyone else speaking on behalf of the United States at the announcement press conference provides a truly comprehensive answer.
Is the goal to make China cease subsidizing?
Is the goal to make China produce fewer electric vehicles and green goods?
Is it to reinvigorate electric vehicle and green good production in the US?
Is it to move elements of the Chinese production supply chain to the US or its allies?
What would the US accept as evidence that Chinese subsidies are gone, and given the head start they’ve allegedly provided the relevant industries, would it even matter?
If in a few years the price of solar panels ticks up, is that… good? It doesn’t sound good, given the planet being on fire and everything. I am sort of wearily resigned to the fact that we’re firmly at the “deal with climate change but only if we get to build all the factories that do it” phase of our collective political journey from “hoax” to “all-consuming threat” but it’s still worth asking the question (and positive that exceptions are being considered, though this begs some questions of its own…)
What if in a few years Chinese manufacturing moves a considerable portion of its production to Vietnam? Or Mexico? President Trump has said that if elected he’ll slap a 200% tariff on any such imports, so at least part of US politics clearly wouldn’t consider that a triumph.
And what if, five years from now US electric vehicles are still kind of meh and Americans are taking out bigger and bigger car loans to buy Chinese variants, tariffs be damned? Will the solution be to double or triple down on this strategy? If so, why would US automakers bother investing billions in R&D to become market leaders if whining about unfair competition will perpetually find sympathetic bipartisan ears in the White House?
Do or Do Not, There Should Be Questions as to Why
Despite the tone of the above, I’m somewhat ambivalent in a sort of resigned way about this policy. The looming threat of China is literally the only thing which seems to unite both sides of US politics, and reinvigorating US manufacturing is a critical pillar of both President Biden and President Trump’s pitch to voters. Who would battle against such tides?
I do however think it’s critical that policymakers be pushed to be clear in their diagnosis of the problem, their thought process in settling on a solution to it, and the criteria against which they’d like us to judge their success or failure.