Business school teaching case study: how electric vehicles pose tricky trade dilemmas

Western governments wanting to curb greenhouse gas emissions are encouraging greater use of electric vehicles to help achieve their aim. But it is also becoming clear that offering support involves solving dilemmas.

Two of the most pressing are: how to balance domestic political concerns with geopolitical tensions; and how to encourage citizens to buy electric vehicles without undermining key national manufacturing industries.

In the US, the Biden administration set out three years ago that EVs should comprise half the number of vehicles being sold in the US by 2030. In Europe, the EU aims to have at least 30mn zero-emission vehicles on its roads, also by 2030.

Such targets are likely to spur innovation and generate employment, but achieving the prime aim — EVs replacing petrol vehicles — has been slower than anticipated, and they are nowhere near mainstream. 

Even those western users that are not persistently reluctant to give up the internal combustion engine hit the twin problems of limited availability and non-affordability of domestically made electric vehicles. China’s BYD, on the other hand, has made inroads in Europe with more affordable versions of electric vehicles.  

The question for US and European governments is: what steps can they, or should they, take to protect their automakers, which are so important to their wider economies?

Subsidies

One tactic is to use subsidies to make electric vehicles more affordable to buyers, especially at a time of rising inflation.

Germany chose to offer a €6,750 (reduced from €9,000 in 2022) tax incentive for pure battery-electric vehicles and €6,750 for plug-in hybrids. 

The US Inflation Reduction Act (IRA) in 2022 brought in an electric vehicle tax credit of up to $7,500 — but this is subject to increasing strictures on where battery components and critical minerals are sourced.  

These subsidies have helped boost sales. In the US, nearly 1.2mn electric vehicles were sold in 2023, representing 7.6 per cent of total sales in 2023, up from 5.9 per cent in 2022. In the EU, sales of pure battery electric vehicles similarly passed 2mn, up from 1.6mn.

However, the rules on subsidies can become complex to the point where buyers may be put off. 

In April 2023, the US Treasury announced that certain foreign-brand electric vehicles assembled in the US — Audi, BMW, Hyundai, Nissan, Rivian, Volkswagen and Volvo — would no longer qualify for even partial tax credits. To reach the full incentive requires at least 40 per cent of the battery critical minerals to be extracted or processed within the US or in countries with which it maintains a free trade agreement, such as Mexico or Canada, and / or to come from materials recycled in North America. 

In December 2023, the US Treasury additionally announced that, from 2024, no US-manufactured electric vehicles that include Chinese-made battery components would be eligible for the full subsidies offered by the IRA.

Tariffs

Some governments have used import tariffs to shield domestic electric-vehicle manufacturers. The US imposes a 27.5 per cent import duty, while the UK and EU levy a 10 per cent duty on foreign-made cars.

The EU’s more open trade policy has empowered European automakers to produce electric vehicles in China, export them to Europe and offer them at competitive prices. For example, although MG Motor is headquartered in the UK and owned by China’s SAIC, its MG5 and MG ZS are made in China and exported.

Nevertheless, in September, the European Commission, the EU’s executive arm, announced an anti-subsidy probe into Chinese electric vehicles that may be “distorting” the EU market, and said it will consider raising import tariffs to prevent an influx of cheaper Chinese models that could harm local manufacturers. China’s BYD, for example, surpassed Tesla as the world’s top-selling maker of fully electric cars at the end of 2023. BYD reported sales of 526,000 battery-only vehicles for the fourth quarter, while Tesla delivered 484,000 cars.

But while higher import tariffs could help protect against Chinese electric vehicle exports, they would also slow down EV adoption in the EU. It would be very difficult for European manufacturers to produce the tens of millions of electric vehicles required to meet the EU’s 2030 target solely from domestic plants. Their challenges would include China’s three-quarters share of global battery cell production capacity and its dominant position in supply chains for critical raw materials, such as cobalt and lithium. 

Even within the EU, France and Germany disagree on tariffs on electric vehicles. France supports a protectionist curb on imports from China, while Germany worries about potential retaliation from China that would hurt its own exports. 

In the US, efforts to safeguard domestic manufacturers also face increasingly complex challenges. 

There is pressure on costs, for instance. To settle the United Auto Workers’ strike in November last year, GM, Ford and Stellantis (formed by the merger of Fiat Chrysler and PSA in 2021) have agreed to offer a pay rise to UAW workers of 25 per cent over the next four years. The resulting substantial pay rises and the extension of union protection to plants making electric vehicle batteries are likely to drive up prices.

Moreover, GM and Ford have been concentrating on making bigger and higher-priced electric SUVs and pick-up trucks, but sales for those have been relatively sluggish. In October, GM announced a one-year delay in expanding production for all-electric trucks at its Orion Assembly plant in Michigan.

The tax credits are both complex and yet shrinking, while tariffs need fine calibration. For those reasons, both tactics create challenges for the EU and the US policymakers trying to bring accessible, affordable electric vehicles into the mainstream.