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chinatarriffEVs

Source: public/assets/writing/humanstructures/chinatarriffEVs.docx · humanstructures

Title of the Article:

Biden hits Chinese electric cars and solar cells with higher tariffs

Source of the Article:

BBC

Date article was published:

15 May 2024

URL of the Article:

https://www.bbc.co.uk/nws/business-69004520



The article discusses the US President Joe Biden’s decision to raise tariffs on China-made electric cars (25% to 100%) among others. The tariff is meant as a protectionist measure, not only attempting to ensure the growth of the US domestic industry and “intended to protect US jobs” but also to combat unfair policies from China such as their domestic subsidies. This move is criticized by “business owners arguing that they were driving up prices for everyday Americans,” and as not necessarily increasing the competitiveness of the US’s domestic EV markets by a representative of an independent think tank. A tariff is a tax on imported goods in the global market to protect domestic firms and employment from foreign competition, which sometimes creates inefficiencies due to the interlinked nature of the economy, demonstrating interdependence.



Figure 1: Effects of raised tariffs on US imports of Chinese Electric Vehicles

The effects of raising tariffs on Chinese EV imports in the US can be shown by Figure 1. Before the additional tariff, the US had the price of EVs at Schina+t1 (Pc+t1), which is lower than the domestic price (Pd) and greater than the normal Chinese EV import price (Pc). At Pc+t1, the quantity of EVs supplied by the domestic market is Q1 and the quantity demanded is Q4. Hence, the number of imports from the foreign market is Q4-Q1. When the additional EV tariff is imposed, the price of imported EVs rises to Schina+t2 (Pc+t2). At Pc+t2, the quantity supplied by domestic firms increases from Q1 to Q2, and the quantity demanded by US consumers decreases from Q4 to Q3. This causes the quantity of EVs imported from the Chinese market to decrease from Q4-Q1 to Q3-Q2.

Steel tariffs are a form of government intervention that offer some advantages to certain stakeholders and the US economy. Firstly, reduced imports work to protect domestic firms who receive a higher price of Pc+t2 and sell a larger quantity of Q1. Domestic workers in EV industries are also better off as increased EV production allows for more manufacturing jobs for any workers. 

The effect of on government revenue is mixed. They lose from lower quantity that is taxed from Q4-Q1 to Q3-Q2, but they gain from setting Pc+t1 to Pc+t2. In Figure 2, area e represents revenue gained from raising the EV tariffs from 25% to 100%, and areas h+j represents the revenue lost. If area h+j > area e, then the additional tariff is worse off for the government, while if area is greater, then the government will be better off.



Figure 2: Chinese EV tariff’s effects on US 

Despite the advantages that the EV tariffs offer, there are many disadvantages. Firstly,

tariffs imposed on other nations can cause retaliatory actions, for example China's commerce ministry said that the new tariffs would "severely affect the atmosphere for bilateral cooperation." This could mean that US exporters are forced to sell their products at higher prices, which leads to a decline in export revenues and welfare loss. Consequently, they may be forced to lay off domestic workers as they no longer need as many workers due to decreased consumption, which leads to an increase in unemployment in US, showing how markets can be interdependent.

Secondly, the retaliatory action could raise prices domestically for goods and hurt the consumers that utilise EVs, which could push lower-income families to buy gasoline cars as demonstrated by loss of Q4-Q3, which would increase environmental damage through climate change.

Thirdly, EV production is transferred away from efficient foreign producers to inefficient domestic producers. Foreign EV producers are worse off because they export a smaller quantity of EVs to the US and earn lower revenues than before. This results in a greater global misallocation of resources, which is welfare loss from society as more factors of production must be used by domestic firms to produce the same amount of EVs foreign firms produce, illustrated by the loss of area d. Moreover, consumers are worse off by paying higher prices for EVs, Pchina+t2, and getting a smaller quantity Q3. Consumption decreases due to higher prices and as such area f is lost.

In conclusion, although tariffs benefit domestic EV firms and workers, they give rise to retaliatory actions and result in welfare loss from both foreign producers, and consumers. The article mentioned that "the administration's promotion of the tariffs as strategic was a 'euphemism for protection for sectors that are politically important for this administration,'" which suggests that the tariffs are not a suitable solution to protect domestic EV production and increase employment but instead influenced by domestic politics. In my opinion, the tariff increase should be lifted. If you were going to HAVE to implement any policy, a different policy that respects the interdependence of the US and China could be government R&D, developing more efficient EV production methods. Another method utilised may be government investment in human capital through education and training of EV manufacturing workers, which may reduce structural unemployment.