China recently became the world’s largest car exporter, and by all accounts their global market share will keep expanding. One silver lining, at least, is that more and more leaders are figuring out that absent tariff increases, our nation will become a slave to foreign nations that do prioritize production.
In the last week, two of the most prominent voices in the automotive industry have plainly and clearly said that without tariff increases, the American car industry faces an existential threat. The United Auto Workers (UAW) submitted a detailed call to USTR, and subsequently Tesla CEO Elon Musk cautioned that absent tariffs or other trade barriers, Chinese carmakers would “pretty much demolish” their foreign rivals.
Before getting to the UAW’s submission, some context on recent developments. It’s looking ever more like the automobile industry will serve as the dam that finally broke the global free trade tidal wave.
In October of 2022, Stellantis (formerly Fiat-Chrysler) CEO Carlos Tavares became the first global automotive leader to openly call for increased tariffs on Chinese cars. However, the following year, in October, 2023, Stellantis signed a new joint venture with China’s Leapmotor, giving Stellantis distribution and sales rights to Leapmotor cars outside of China. He appears to have now changed his position, criticizing a European probe into Chinese car subsidies that is expected to lead to tariff increases.
Domestically, last November, U.S. House Select Committee on the Chinese Communist Party (“Select Committee”) Chairman Mike Gallagher (R-WI), ranking member Raja Krishnamoorthi (D-IL), and Committee members Rep. John Moolenaar (R-MI) and Rep. Haley Stevens (D-MI) warned in a letter to U.S. Trade Representative Katherine Tai said that it was “critical that tariffs on PRC automobiles not only be maintained but also increased to stem the expected surge in PRC imports.” (emphasis in original).
Currently, passenger cars assembled in China and exported to the United States are subject to both the 2.5% Most Favored Nation (MFN) rate, as well as an additional 25% tariff pursuant to the “Section 301” action initiated by President Trump in 2018. This makes for a combined 27.5% tariff on car imports from China. Section 301 tariffs are applied on top of the MFN rate.
Is a 27.5% tariff enough? GM, Ford, and China’s Polestar plough through.
27.5% may sound like a lot, but the effectiveness of U.S. ad valorem tariffs (those expressed as a percentage of value, rather than $ per unit) have been compromised by bad policy in our customs valuation rules. The 27.5% is not applied to anything close to the car’s MSRP; rather, the starting point is what the importer claimed they paid overseas, and then from there multiple options are available to lower that value.
General Motors has been importing the Buick Envision, built by GM’s Joint Venture partner SAIC, a Chinese state-owned enterprise since 2015. When the tariff on the Envision went from 2.5% to 27.5%, consumers were warned of a price increase of $8000, but that never happened. Likely, GM was able to lower its tariff liability through a combination of ‘assists’ and ‘duty drawback’, and Chinese currency devaluation helped SAIC absorb the rest of the tariff increase. While this is disappointing when the intention of the tariff is protection, it has the happy consolation prize of being ‘free revenue’ for the U.S. Treasury.
In April, 2023, Ford announced that it would outsource the Lincoln Nautilus from its wholly owned factory in Ontario, Canada, to its Chinese joint venture, Changan Ford Automobile Co., Ltd.
Separately, electric vehicles fully-made in China by Polestar, a brand owned by Zhejiang Geely Holding Group Co., Ltd (that also owns Volvo) have been imported in volume since 2020, all subject to the 27.5% tariff. However, this tariff has also been muted by the Biden Administration’s decision to offer the full $7,500 EV tax credit under the Inflation Reduction Act if consumers opt to lease Chinese EVs instead of purchasing.
Biden Admin appears poised to increased tariffs on electric vehicles imported from China.
Earlier this month, Ambassador Tai responded to the Select Committee, saying she agreed that “additional responses” were warranted. The New York Times reported that “Administration officials appear likely to raise tariffs on electric vehicles and other strategic goods from China” as part of the Section 301 four-year review process.
It’s unclear at this time whether gas cars imports from China like the Buick Envision and Lincoln Nautilus would be included in the increased tariffs. Failing to do so would be a huge oversight, as America’s own supply chain for internal combustion engines faces an existential crisis.
The UAW Goes Beyond Just China Tariffs
The UAW is warning that bolder action is needed. Chinese brands, like all existing global automotive brands, are not limiting themselves to operations within China. Merely applying tariffs against vehicles assembled in China won’t stop Chinese car companies from taking over our market; they’ll assemble in other countries, whether Mexico, Europe, or elsewhere, to serve the U.S. market.
America’s 2.5% MFN tariff is – plainly – trivial. Roughly three quarters of a million cars are imported from Europe annually subject to the 2.5% MFN tariff rate, and Europe is not a low wage exporter. Europe’s MFN tariff on cars is 10%.
For example, an American car going to China pays 25% import duty, but a Chinese car coming to the US only pays 2.5%, a tenfold difference— Elon Musk (@elonmusk) March 8, 2018
MFN tariff increases are long overdue. Likely, what’s left of the American automobile industry is largely thanks to the 25% MFN tariff rate for trucks proclaimed by President Johnson in December, 1963. Indeed, this is the only notable MFN tariff increase since the ‘MFN’ concept was put into statute in 1934.
President Trump recognized this problem, and his Secretary of Commerce, Wilbur Ross, conducted a national security investigation pursuant to Section 232 of the Trade Expansion Act of 1962. This allows the President to proclaim tariff increases if Commerce finds that it is necessary to protect national security. In February, 2019, Commerce did find that vehicle imports were threatening national security. However, due to overwhelming pressure from Congress, which in turn was being pressured by free trade groups, no Proclamation resulted from that finding.
Behind the scenes, however, that finding was helpful in giving the Trump Administration leverage in pushing for a better automotive deal in USMCA. But with a hostile Congress opposed to MFN tariff increases, there was only so much that could be done.
The UAW noted this in their call for the MFN tariff increase: “we believe the USMCA has not, and cannot on its own, achieve the impacts it set out for the auto industry.”
Ultimately, proper MFN tariff increases should be legislated by Congress, as the Constitution gives Congress that authority. This issue already enjoys bipartisan support, and hopefully Congressional leadership – in particular at the House Ways and Means and Senate Finance committees – can drive out in front sooner rather than later.