The Biden administration is about to dramatically increase import tariffs on Chinese cars. It affects almost no one in the U.S., even people looking for the mythical $10,000 Chinese electric vehicles, but U.S. investors should still know how to make sense of it all.
President Joe Biden said Tuesday afternoon that tariffs on cars imported from China would go to about 100% from 25%, making those vehicles too expensive to compete with domestic car makers such as
and
Tesla
.
This is how it works and why the boost to the rate isn’t likely to make a difference.
The average retail price of a new car in the U.S. is about $47,000, while manufacturers receive about $43,000. A 25% tariff on a car priced like that works out to a bit less than $11,000 per vehicle.
But Ford, GM, and Tesla’s average first-quarter operating profit was about 7% of sales, or about $3,000 per “average” car. That isn’t enough to cover the hit of $11,000 a Chinese car maker would have to cover to sell its vehicles at competitive prices, so few Chinese vehicles are sold here.
Advertisement – Scroll to Continue
A tariff of 100% would make it even more difficult to make a profit, but it wouldn’t affect the flow of vehicles from China to the U.S. The existing 25% tariff has effectively closed the border already.
Who Is Affected
There are no Chinese-branded cars for sale in the U.S., although there are a couple of vehicles built in China.
and
manufacture their EVs at a Geely-owned plant in China. Those would be subject to the tariff.
Still, volumes are small. Polestar sold 2,210 EVs in the U.S. in the first quarter of 2024. Lotus didn’t deliver any but expects to ship some this year.
Advertisement – Scroll to Continue
The (Minimal) Chinese Threat
Even the risk that Chinese vehicles could be sold in the U.S. in the near future is relatively small. Most of the vehicles that are on offer aren’t likely to take off here.
“There are more than 100 EVs for sale in China, but you can narrow it down to three or four that might hit the U.S. market,” says Freedom Capital Markets analyst Mike Ward.
A
Dolphin that costs roughly $16,000 might be one to watch. A GAC Aion S, for around $24,000, might be another. It is important to remember that China also makes plenty of higher-end EVs that cost more than a Tesla.
Advertisement – Scroll to Continue
The Chinese vehicles selling for less than $10,000 don’t really have a market in the U.S., Ward says. Most of those are tiny two-door vehicles, but beyond a few sports models, there are essentially no two-door cars sold in the U.S. Volkswagen discontinued its Beetle in 2019.
The cheapest new cars on sale in America start at around $20,000 and include the Nissan Versa and Kia Soul.
Investors curious about the best-selling EV in China, and how it would do in the U.S., might be surprised to learn it is the Tesla Model Y. Americans like the Y too. It is the second best-selling vehicle in the U.S., not counting pickup trucks. Only the
RAV4 sells better.
Advertisement – Scroll to Continue
How Chinese Automakers Would Tackle the U.S.
If a Chinese auto maker decided to make a go of it in the U.S., it would need both local production capacity and a distribution system. They could build that on their own or look for partners.
Making cars in Mexico might not be an option. At a New Jersey campaign rally over the weekend, former President Donald Trump proposed a tax of 200% “on every car from [Mexican] plants.”
A Mexican tariff would be a different sort of protection, with far greater effects on the U.S. auto industry. The country is part of Trump’s U.S.-Mexico-Canada Agreement, or USMCA, which replaced the North American Free Trade Agreement, or Nafta. Many auto makers including Ford and GM build cars there; about three-quarters of the 3.5 million cars Mexico makes each year are destined for the U.S.
Advertisement – Scroll to Continue
There is one Chinese plant operated by JAC, but the cars it makes don’t end up in the U.S. Globally, JAC shipped about 357,000 passenger vehicles in 2023.
Politics Are the Real Story
Given the reality of how the North American auto industry works, the talk of tariffs appears to be more political than a response to a genuine threat from China.
“The Biden Administration is not imposing higher tariffs on Chinese solar panel manufacturers, so the EV tariff seems to be designed specifically to boost Biden’s popularity in Michigan,” wrote Navellier market strategist Louis Navellier in a Monday report.
Michigan, of course, is a major battleground state.
The Stocks
While the U.S.’s tariffs don’t appear to be holding back a deluge of Chinese-made EVs, Ford, GM, and Tesla need to prepare for potential competition by making more lower-cost EVs.
All three companies are moving in that direction. GM is launching its lower-priced, all-electric Chevy Equinox in 2024. It starts at about $42,000, making it more costly than a base-level Tesla Model 3 and less than a base-level Model Y.
Ford is working on its second-generation EVs, which should be on roads by 2026. Tesla’s lower-priced EV is slated to hit the road in 2025.
So far, news of the higher tariffs doesn’t seem to be moving the car makers’ stocks. Through midday trading, Tesla stock was up about 3% since news of the tariff increase started to circulate. Ford and GM shares were up about 3% and down 1%, respectively. The
is up about 2%.
Shares of Polestar Automotive and
NIO
,
two companies building EVs in China, were up about 3% and 8%, respectively.
Write to Al Root at allen.root@dowjones.com
