How Will the New Tariff Affect EV Sales?
President Biden recently announced tariff increases for a number of Chinese-made products, including electric vehicles (EV), batteries, battery components and parts, and critical minerals. While the new measures are designed to protect the American auto industry, they will have an impact on overall EV adoption rates in the United States.
Tariff Increases on Chinese EVs and EV Components
The tariff increases are part of Biden’s economic plan to support investments and job creation for America’s economic future and national security. These include tariff increases on Chinese-made EV and EV components:
- The tariff on EVs increases from 25 percent to 100 percent in 2024
- The tariff on lithium-ion EV batteries increases from 7.5 percent to 25 percent in 2024
- The tariff on battery parts increases from 7.5 percent to 25 percent in 2024
- The tariff on natural graphite and permanent magnets increases from 0 to 25 percent in 2026
- Certain other critical minerals have a tariff increase from 0 to 25 percent in 2024
The government says the measures are intended to help prevent China from “flooding” the American market with artificially low-priced exports and to help provide a level playing field for domestic and other legacy OEMs in the American market.
EV Adoption in America
2023 was a record year for electric vehicles in the U.S. About 1.2 million American consumers chose to buy an EV – representing about 7.6 percent of the U.S. vehicle market, according to Kelley Blue Book estimates. This increased from the 5.9 percent adoption rate in 2022. EVs are forecasted to increase further in 2024, with some anticipating EVs to reach 10 percent share of the U.S. vehicle market.
It’s clear that Electric vehicle adoption is still growing in the U.S., even if the growth rate isn’t as high as some had initially forecasted or even as high as some other countries. American consumers remain open to EVs. The increasing model availability, incentives, vehicle inventory, leasing options, and infrastructure are helping many Americans make the transition.
That said, there are many barriers to electric vehicle adoption that need to be addressed before higher rates of EV adoption can occur in the United States. Challenges, such as affordability, charging infrastructure, vehicle production, supply chains, and education need to be resolved. Additionally, domestic and other legacy automakers that sell, design, and assemble vehicles in the U.S. need to remain healthy and competitive to fuel further consumer EV adoption.
When Will More Affordable EV Options Be Available?
Affordability remains one of the key concerns among many American consumers when looking at EVs. EVs still command a purchase price premium versus their gas-powered counterparts. For example, a base 2024 Kia Telluride has a starting MSRP of $36,190 compared with a base Kia EV9 at $54,900. According to Kelly Blue Book data, the average transaction price for electric vehicles in November 2023 was $52,345 – versus the industry average price for all vehicles at $48,247.
Additionally, many new EVs like the Kia EV9 don’t qualify for the $7,500 federal EV tax credit, at least when purchased (buyers can get the tax credit if they lease). Even as new models are introduced, MSRPs change, and incentives increase, price parity between an EV and internal combustion Engine (ICE) vehicles remains a challenge for many Americans.
It was in this area that many felt that Chinese imports could have helped satisfy demand from the market – inexpensive Chinese EVs have become big-selling models in many markets around the world, including some countries with mature domestic industries like the United Kingdom. With the Chinese automotive industry receiving significant support from its government, prices for its exported vehicles have tended to be lower EVs from other brands.
Will the New Tariff Make EVs More Expensive?
One of the biggest impacts of the tariff increases to consumers is affordability. With the higher price of EVs already a challenge, the tariffs may further increase prices on many models from domestic and other legacy automakers in the medium to long term.
The immediate impact of the EV tariffs on consumers may be limited. The only Chinese-made EV that is currently imported into the U.S. is the Polestar 2. However, the upcoming Polestar 4 and Volvo EX30 will soon be arriving in the U.S., and are manufactured in China. Both Polestar and Volvo are part of the Chinese company, Geely.
The broader impact to consumers may be the tariffs on Chinese-made batteries, battery components, graphite, and permanent magnets that are used in both Chinese and non-Chinese made EVs. Batteries can easily make up a third of the overall cost of an EV.
Indeed, batteries used in some vehicles, like the Ford Mustang Mach-E (LFP) and Toyota BZ4X (AWD), are made by CATL, a Chinese brand and the largest EV battery manufacturer in the world. China also controls more than 80% of the world’s graphite. Graphite, which makes up the anode in today’s Li-ion batteries, is used in virtually all EVs.
Electric cars from legacy automakers are also built with many Chinese-made components. According to the U.S. Transportation Department data, many EVs can have 30-51% Chinese content. The increased costs due to the new tariffs will likely be passed onto consumers, making EVs even more expensive. Even if automakers can obtain the materials from other sources by the 2026 tariff date, the costs may be more than those from China, leading to increased EV prices.
In theory, allowing Chinese-made EVs without tariffs may actually help accelerate EV adoption, reach zero-emission targets, and address the affordability issue. For example, BYD, the largest Chinese automaker, offers vehicles like its subcompact Seagull EV for about $10,000 USD – well within reach of most Americans. It also offers a wide range of EVs in various body styles that cost a fraction of those offered by legacy automakers. Similar low-priced vehicles would increase access to a broad range of EVs by many American consumers at various income levels.
What Do the Tariffs Mean for the Auto Industry?
While allowing Chinese-made EVs without tariffs may increase EV adoption, doing so may come at the expense of the domestic and legacy automakers that sell, design, and build vehicles in the U.S. Automakers like GM, Ford, and Toyota already struggle to produce EVs at a significant volume, a lower price point, and at a profit. Competition from low-priced Chinese EVs could negatively impact the health of legacy automakers.
The domestic auto industry is one of the largest industries in the U.S. Many legacy automakers not only produce vehicles in the U.S., but also employ tens of thousands of Americans. Increased EV adoption in the U.S. requires a healthy domestic economy for consumers to afford the vehicles on the market – and the auto industry indirectly supports millions of American jobs.
Buying Legacy Automakers Time
The tariff increases essentially buy the legacy automakers time. Chinese automakers currently have 60% of the world’s market share of EVs – and are, conservatively, five years ahead of most legacy automakers when it comes to EVs and battery supply chains.
With virtually all legacy OEMs currently incurring a loss on each EV that they sell, those automakers need to bring their costs down significantly in order to improve EV affordability and profitability. Every legacy automaker is accelerating development of a more affordable EV. Ford, for example, has announced that its “Skunkworks” EV project includes a $25,000 truck and compact SUV. Tesla also has a $25,000 EV in development.
However, to help make these vehicles and more a reality, North American battery and critical material supply chains need to improve. Additional battery production and material processing expertise needs to be built in North America.
Tariffs on Chinese EVs: A Double-Edged Sword
The recent increased tariffs on Chinese-made EVs and EV components is a double-edged sword when it comes to EV adoption in the U.S. Less expensive EVs from China would help accelerate EV adoption, and the threat of a significantly cheaper EV from China has motivated many legacy automakers to compete and advance their EV plans. But the domestic industry could use the extra time the new tariffs buy to improve its supply chain for more sustainable EV sales growth.
It’s a balancing act between improving EV affordability for American consumers and ensuring the health and competitiveness of the domestic auto industry. Both are needed to advance and sustain electric vehicle adoption in North America.
