Trade Cases

Leibowitz: Europe Aims to Impose Countervailing Duties on EVs From China

Written by Lewis Leibowitz

Trade policy moves create great ironies sometimes. I often write about these ironies when the US acts against the interests of the country as a whole by protecting certain industries from international competition.

But the US is not alone, especially in recent years as the World Trade Organization and the international geopolitical order have been strained to the breaking point.

Case in point: The European Union last week initiated an anti-subsidy investigation against electric vehicles made in China. China has come to dominate the global market for electric vehicles. The explosion in electric vehicle production in China has the rest of the world playing catch-up. The EU claims that Chinese government subsidies support China’s EV production.

So far, the story seems more than plausible. China provides subsidies to many industries that its party-controlled command economy selects. Other examples include solar panels, residential real estate, rare earth metals, and steel production, to name but a few. The success of these subsidies is open to vigorous debate. The recent stagnation in China’s economic growth is largely due to the failure of real estate subsidies to produce demand from consumers, who are less numerous due in large part to the “one child” policy.

But here is where ironies abound: China is far from alone in subsidizing electric vehicle production and sales. The US, through a provision in the Inflation Reduction Act, will grant a tax credit of up to $7,500 for the purchase of an electric vehicle. That vehicle has to be produced in North America, although the US and the EU are negotiating to moderate that requirement through a “critical minerals” deal.

Many governments believe that electric vehicles are going to save the planet from catastrophic global warming. They are not only subsidizing the production and purchase of EVs—they are trying to terminate (or at least sharply restrict) the production of gasoline and diesel cars and trucks.

In the United States, the group of domestic auto producers once known as the “Big Three” are facing a major strike from the United Auto Workers union, with not-so-subtle support from the Biden administration.

The “Big Three” – Ford, General Motors, and Stellantis – are not so big anymore because they have run into competition from Toyota, Nissan, Mercedes, Volkswagen, Kia, Hyundai, and several other global companies that have set up shop in the United States. That competition resides mostly in the South, with its business-friendly “right to work” laws. The “Big Three,” or what I’ll call the “Other Three,” are centered in the Midwest, which strongly supports organized labor.

The recent profits earned by the Other Three are one of the targets of the UAW. But those profits seem to have been swelled by the sale of SUVs and other gasoline-powered platforms that the government is trying to snuff out as quickly as possible. The growing production of EVs by the Other Three are, thus far, money-losing enterprises. Among US-based automakers, only Tesla has figured out how to make EVs profitably—and part of its success stems from having considerable production in—wait for it—China.

This brings us back to the EU case against Chinese subsidies. The case started last week without a countervailing duty petition from the EU auto industry. This is very unusual. The European Commission has the authority to self-initiate these cases (as does the US Commerce Department). But it is quite rare for it to do so. It has been at least 20 years since the European Commission has self-initiated a countervailing duty action.

European automakers, seeing the danger of supplying the US market from overseas, have built factories here. Unlike in China, car companies in the West must turn a profit. Here is the problem: Western governments require EV production. But that production loses money. They are also limiting production of gasoline and diesel vehicles, which turn a handsome profit. So how will the Western car companies make it in the long run?

Part of the answer is to seek to limit competition from overseas. That explains the EU countervailing duty investigation.

Makes perfect sense—but there is a problem looming. If the anti-subsidy case succeeds in Europe, EVs will cost consumers more money. That will slow, perhaps considerably, the conversion of the auto and truck fleets to electric power. Economists have long known that subsidies reduce prices and stoke demand, while taxes (and remember, tariffs are taxes) raise prices and reduce demand. If EVs are the salvation of the planet, shouldn’t we be trying to increase demand for them?

EVs are not the only example of the climate change dilemma. The Biden administration suspended new antidumping duties on solar imports from four countries. It decided that increasing demand was more important than raising prices so that US solar firms could make money by making solar panels.

The Mountain Valley Pipeline, a gas line vigorously opposed by environmental groups, was legislatively permitted in the Inflation Reduction Act. In that case, the government (spurred on by Sen. Joe Manchin) decided that phasing out fossil fuels should wait a bit until alternative technologies could actually support the lifestyle of the United States.

I think we will see more decisions trying to walk the fine line between cleaning up and delivering goods and services to consumers, who are also voters.

Buckle up.

Lewis Leibowitz, SMU Contributor

Lewis Leibowitz

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