Polestar has more than a few issues with the proposed rule, according to its public comment. For one, the definition is too broad and “creates crippling uncertainty for businesses.” A better-defined list would be helpful here, it says.
Polestar also says that “if a large portion of manufacturing or software development is occurring outside of the country of a foreign adversary, mere ownership should not be the determinative factor for applying the various prohibitions within the Proposed Rule.” Polestar is a US-organized company and a subsidiary of a UK publicly limited company that is listed on the NASDAQ exchange in New York. Its HQ is in Sweden, and seven out of 10 board members are from Europe or the USA. It builds Polestar 3 SUVs in South Carolina and will build the Polestar 4 in South Korea from next year. In fact, out of 2,800 employees, only 280 are based in China, Polestar says.
With the company’s “key decision-makers” being in Sweden, there is little reason to believe the national security concerns apply here, the company says, saying that the US Commerce Department should consider whether it has gone too far.
Polestar may be the most affected automaker by the new rule, but it is not the only one. Last month, the Commerce Department told Ford and General Motors that imports of the Lincoln Nautilus and Buick Envision—both of which are made in China—would also have to cease under the new rule.
The ongoing dispute between the United States and China over electric vehicles shows no sign of abating. Today, Reuters reports that China has asked the World Trade Organization to set up a special panel to determine if US EV subsidies are an unfair trade barrier.
The Inflation Reduction Act of 2022 has been the most significant climate legislation in US history, with hundreds of billions of dollars of funding for the clean energy transition. Among its many details, it revamped the federal tax credit for buying a new electric vehicle.
In the past, a credit of up to $7,500 was tied to a plug-in vehicle’s battery capacity. But it’s now tied to where the car and its batteries were assembled, as well as where the battery minerals come from. Final assembly of the vehicle must be in North America, for example, and ever-increasing amounts of the battery pack’s content and value must come from North America or a country with which the US has a free trade agreement.
Even more troubling for Chinese automakers is a rule from the US Treasury Department that prohibits tax subsidies for vehicles manufactured by companies linked to “foreign entities of concern,” a category that includes Russia, North Korea, Iran, and China.
China’s action at the WTO actually predates the new US EV tariffs—it first went to the trade organization in March, arguing that the US tax credits hinder fair competition and break existing WTO agreements.
China’s commerce ministry told Reuters that protectionist EV subsidies from the US “undermine international cooperation on climate change.”
Enlarge/ New energy vehicles are being loaded into containers for export at Taicang Port and Taicang International Terminal in Suzhou, Jiangsu Province, China, on April 26, 2024.
Photo by Costfoto/NurPhoto via Getty Images
President Joe Biden is expected to levy new 100 percent tariffs targeted at specific Chinese industries, including electric vehicles, on Tuesday. The announcement follows growing calls from automakers, unions, and bipartisan efforts in Congress to address the problem of China unfairly subsidizing its own industries to undermine foreign competitors.
Why are Chinese EVs so cheap?
The Chinese government has been giving its green industries heavy direct subsidies for some time now, far in excess of those handed out by US or European governments. For EV makers like BYD, this has meant billions of dollars a year, in addition to the consumer-facing tax benefit for car buyers, similar to how EV sales are incentivized in the US.
Brands like BYD have concentrated on making their cars cheaper to build—only using one windshield wiper instead of two, for example—but also through vertical integration. Other than Tesla, automakers in the US, Europe, Japan, and Korea instead rely heavily on multiple tiers of suppliers, most of whom supply parts to more than one automaker.
That has allowed Chinese automakers to sell their products in foreign markets at prices no one else can hope to compete with, undermining local industries in the process. This has been most relevant in Europe, where Chinese automakers like BYD and MG have already set up shop. Last year, 1 in 5 EVs sold in Europe were made in China; this year, it’s expected this number will rise to 1 in 4.
Chinese car imports to the US are already subject to an additional 25 percent import tariff on top of the 2.5 percent tariff that applies to any car imported to the US. And Chinese brands have yet to enter the US market. If enacted this week, the new 102.5 percent tariffs would apply to Polestar and Lotus, both of which currently build their US-market EVs in China. But that doesn’t mean the industry isn’t terrified.
“If there are no trade barriers established, they will pretty much demolish most other car companies in the world,” said Tesla CEO Elon Musk in January.
“If you cannot compete fair and square with the Chinese around the world, then 20 percent to 30 percent of your revenue is at risk,” said Ford CEO Jim Farley in February.
It probably goes without saying that the United Auto Workers also thinks protecting the US auto industry is worthwhile. “The transition to cleaner technologies cannot be used to intensify the global race to the bottom through offshoring and low wages. We need to see movement by the administration to protect these jobs. The nascent EV industry needs tariff protections—otherwise we are going to be awash in imports. The stakes of the transition are high for American workers,” the union said in a statement in March.
This year, senators on both sides of the aisle—most recently Sherrod Brown (D–Ohio)—have called for a ban on Chinese EV imports. And pressure from the US Trade Representative has seen the Mexican government promise not to offer incentives to Chinese EV makers looking to establish a beachhead inside the United States-Mexico-Canada Free Trade Agreement.
Enlarge/ BYD electric cars stand at a BYD dealership on April 05, 2024, in Berlin, Germany. BYD, which stands for Build Your Dreams, is a Chinese manufacturer that went from making solar panels to electric cars. The company is seeking to gain a foothold in the German auto market.
Sean Gallup/Getty Images
Influential US Senator Sherrod Brown (D–Ohio) has called on US President Joe Biden to ban electric vehicles from Chinese brands. Brown calls Chinese EVs “an existential threat” to the US automotive industry and says that allowing imports of cheap EVs from Chinese brands “is inconsistent with a pro-worker industrial policy.”
Brown’s letter to the president is the most recent to sound alarms about the threat of heavily subsidized Chinese EVs moving into established markets. Brands like BYD and MG have been on sale in the European Union for some years now, and last October, the EU launched an anti-subsidy investigation into whether the Chinese government is giving Chinese brands an unfair advantage.
The EU probe won’t wrap until November, but another report published this week found that government subsidies for green technology companies are prevalent in China. BYD, which now sells more EVs than Tesla, has benefited from almost $4 billion (3.7 billion euro) in direct help from the Chinese government in 2022, according to a study by the Kiel Institute.
Last month, the EU even started paying extra attention to imports of Chinese EVs, issuing a threat of retroactive tariffs that could start being imposed this summer.
Chinese EV imports to the EU have increased by 14 percent since the start of its investigation, but they have yet to really begin in the US, where there are a few barriers in their way. Chinese batteries make an EV ineligible for the IRS’s clean vehicle tax credit, for one thing. And Chinese-made vehicles (like the Lincoln Nautilus, Buick Envision, and Polestar 2) are already subject to a 27.5 percent import tax.
An existential threat?
But Chinese EVs are on sale in Mexico already, and that has American automakers worried. Last year, Ford CEO Jim Farley said he saw Chinese automakers “as the main competitors, not GM or Toyota.” And in January, Tesla CEO Elon Musk said he believed that “if there are no trade barriers established, they will pretty much demolish most other car companies in the world.”
But not if Congress gets its way. A few weeks ago, Joshua Hawley (R-Mo.)—using very similar language to Brown—called for a tax increase on Chinese EVs. Hawley wanted to raise the base tariff from 2.5 percent to 100 percent, which would result in Chinese EVs being subject to an overall 125 percent import tax, up from today’s 27.5 percent. Hawley also wanted to apply those rates to Chinese EVs assembled in Mexico.
“A surge in Chinese EV sales would cripple the domestic manufacturing base, including critical inputs from parts suppliers to steel, tires, and glass producers,” wrote Brown, noting also that Chinese EVs could “undermine efforts to reshore semiconductor production.” Brown is similarly down on allowing made-in-Mexico EVs from Chinese brands.
It’s not just the potential damage to the US auto industry that has prompted this letter. Brown wrote that he is concerned about the risk of China having access to data collected by connected cars, “whether it be information about traffic patterns, critical infrastructure, or the lives of Americans,” pointing out that “China does not allow American-made electric vehicles near their official buildings.”
At the end of February, the Commerce Department also warned of the security risk from Chinese-connected cars and revealed it has launched an investigation into the matter.
Brown doesn’t just want a tariff on Chinese EVs, though. “When the goal is to dominate a sector, tariffs are insufficient to stop their attack on American manufacturing,” Brown wrote. “Instead, the Administration should act now to ban Chinese EVs before they destroy the potential for the US EV market. For this reason, no solution should be left off the table, including the use of Section 421 (China Safeguard) of the Trade Act of 1974, or some other authority.”
