The question of whether tariffs should be imposed distracts from the real problem: can Western manufacturers build cheap EVs to compete with their Chinese counterparts.
Yesterday, Jonathan Reynolds signaled he was not planning to impose tough tariffs on Chinese electric vehicle imports, in a sign Britain intends to break from the EU and US and take advantage of the relatively cheap imports. “I am not ruling anything out but, if you have a very much export-orientated industry, the decision you take [has to be] the right one for that sector,” Reynolds explained.
The context: Why is Reynolds under pressure to slap tariffs on China?
Automakers like BYD have made China the number one exporter of EVs by offering cheap models sold for as little as £7,600 domestically. The cars have been credited for their high quality, and the distance they can travel on a single charge is increasingly competitive with more expensive alternatives. As a Dutch policy advisor interviewed for a forthcoming Social Market Foundation report on government EV support explained, affordable EVs would “ensure that people from middle income groups can become part of the transition.”
The Seagull, BYD’s cheapest model, costs less than £7,500 in China, half the price of the UK’s cheapest EV, and comes with premium features.
Figure 1: BYD offers EVs for substantially cheaper costs than the UK’s cheapest models
Source: Carwow and South China Morning Post
And while those prices are likely to increase when exported, it leaves BYD with substantial room to maneuver in Britain’s not-so-crowded market. Even after tariffs, BYD has promised to sell the Seagull in Europe for less than £16,800 (€20,000).
Western companies are panicking, warning that without tariffs a flood of cheap EVs from China will overwhelm their industry and force them to slash working class jobs. In May, US officials announced tariffs on Chinese EVs would rise to 102.5%, and in July, EU officials followed suit with tariffs that could be worth up to 48%.
But tariffs are a band-aid solution. BYD is already building new factories in Hungary and Turkey, with the cars set to roll off the line as soon as 2025. By building vehicles on European soil, Chinese companies would not be liable for any tariffs in Europe or the UK, increasing domestic manufacturing rather than decreasing it.
Meanwhile, EVs bring immense benefits to their consumers. Cheaper to run and maintain, EVs save households thousands of pounds in the long run, and forthcoming research from the Social Market Foundation will show they are enough to bring nearly a million households out of poverty, while making our streets healthier and planet stronger.
Lastly, looming trade wars between China, the US, and the EU open up a new opportunities for British businesses. Producers that build in the UK like Nissan and Aston Martin depend on Chinese parts, and new tariffs could threaten those supply chains. Moreover, British carmakers could increase their sales in China if their retaliatory tariffs exempt the UK.
Despite the benefits, policymakers on both sides of the Atlantic have claimed Chinese automakers should pay a price for their country’s unfair trade practices, particularly subsidies. Chinese automakers including BYD did benefit from subsidies, but their advantage today stems more from their superior technology and vertical integration. For years, Western automakers have cut costs by outsourcing the most expensive components, including batteries and semiconductors, which has allowed component producers to charge large premiums. Their short-sighted strategy has allowed Chinese companies to not only manufacture the requested technology but overtake their design quality. While the West outsourced, BYD and other Chinese automakers kept their battery manufacturing and other component development in-house, lowering the cost premiums they now face.
A UBS study testing the theory found that even if BYD transferred production to Europe, it would still have a 25% cost advantage over European manufacturers thanks to their streamlined supply-chain.
Demands that we levy tariffs are drowning out the more important question: can Western manufacturers build EVs affordable enough to compete with their Chinese counterparts?
The solution: Why aren’t Western automakers building cheap EVs?
There are a few reasons why Western manufacturers have rejected affordable EVs. While there are the legacy costs of converting existing petrol plants to build EVs, the bigger issue is based on supply chains. As Ben Norman, auto sector researcher at Unite the Union explained to me, “European and American car companies have been fragmenting their supply chains and logistics for thirty years to drive down costs, but they’ve lost control. The big totemic issue has been semiconductors, and there’s been a scramble for those. At BYD, semiconductors, drive units, batteries, they’re all done in house. They have direct control over their supply chain which no one else has.”
At the same time, western manufacturers have focused on the luxury market. Over the past few years, Ford, Tesla, and GM reduced their investment in affordable EVs, pivoting from volume-led production to high-end cars and SUVs. Others like Aston Martin and Nissan have kept prices well above £25,000. Between 2019 and 2022, net profit earned per car by European brands increased by up to €7,000 (£5,875). At the same time, cars were getting larger, with expensive SUVs making up an increasing share of sales. As one advisor warned, “We see that the European carmakers still tend to focus on the bigger models. The question is really how to ensure we get those smaller models and how to ensure that European carmakers are also going to make them.”
2024 was meant to be the year EVs met price parity with traditional vehicles. Instead, the vehicles have gotten larger. While Chinese competition has motivated manufacturers including Nissan and Ford to develop cheaper EVs, they are still far behind. A French policymaker involved in the EV transition explained this delay. “There is a competition [with China] because manufacturers are late. They are late for launching new models of EVs, and this is the result of their strategy.”
Seen this way, cheap Chinese EVs are not outcompeting rivals, but filling a gap in the market left by Western automakers’ choices. Tariffs cannot solve this problem, but industrial strategy can.
While the US and European administrations have recently flirted with green protectionism, they generally favoured domestic subsidies and regulations over tariffs. These policies were designed to help Western manufacturers compete with global firms rather than isolate from them. As Ben Norman suggests, “The answer is not tariffs but industrial policy. There should be more vertical integration of the supply chain designed in the UK and Europe.” Government can play a role by providing subsidies and regulations for manufacturers to follow. But unless European industry shifts gears, the lower end of the market will be filled by Chinese vehicles, no matter what kind of tariffs are imposed.
In 1914, Henry Ford blamed production costs for making cars too expensive for the mass market. He confronted the problem by building assembly lines and integrating supply chains, lowering prices to a level more consumers could afford. 110 years later, Chinese EV manufacturers are taking the lead by adopting the same strategy. It remains to be seen whether Britain’s auto sector will keep up, but by holding off on tariffs, Reynolds is forcing them to compete.
Leave a Reply