Tesla calls for higher tariffs on Chinese EVs lest they 'demolish' rivals

Chinese cars have become popular in Europe partly due to their low pricing

American and European bodies are investigating whether to apply further tariffs to cars imported from China

Tesla remains the world’s global leader on EV sales, but such is the competitiveness of China’s EV industry that CEO Elon Musk has called for import tariffs to protect the remaining global car industry. 

“Chinese car companies are the most competitive car companies in the world,” Musk said on Tesla's fourth quarter earnings call. “Frankly, I think if there aren't trade barriers established, they will pretty much demolish most other car companies.”

Both the US and the EU are investigating whether to apply further tariffs beyond those already imposed on cars imported from China.

However, the UK's standpoint is less clear, as it grapples with the need to both protect its car makers and encourage the sale of cheaper EVs to boost their appeal to less affluent private buyers. 

The US needs to do more to protect its car industry from the dominance of China in EVs, the country's trade representative, Katherine Tai, said earlier this month. 

Her comments – which suggest the US is thinking of increasing its tariffs on Chinese EVs from the current 25% – follow the EU’s announcement in September that it was opening an investigation into the extent of Chinese state support for the industry. 

"Global markets are now flooded with cheaper electric cars, and their price is kept artificially low by huge state subsidies," said European Commission president Ursula von der Leyen at the time.

Vehicle exports out of China rose sharply in 2023, up 58% to 4.9 million, according to the China Association of Automobile Manufacturers, making it the largest exporter in the world, ahead of Japan and Germany.

Of those, the majority are still combustion-engined cars, but the share of ‘new energy vehicles' (electric cars and plug-in hybrids) rose even faster, at 78%, to account for 1.2 million of that total.

Not all of those exported vehicles are made by Chinese brands. Many come from Tesla's Shanghai plant – the source for all right-hand-drive Teslas shipped to the UK.

Aside from MG, Chinese brands are still in the early stages of market acceptance in Europe and last year accounted for just 3% of the western Europe car market, at 350,000 units, according to data from market analyst Matthias Schmidt.

Whether that number grows further depends very much on the results of the EU investigation into state aid and any subsequent decision to raise barriers to Chinese EVs. A decision is expected in May ahead of the European elections in June.

“History tells us they tend to find something, which may well result in increased trade barriers into Europe,” said Mike Hawes, CEO of the UK's Society of Motor Manufacturers and Traders. “Then the question is 'what happens to the UK market?'.”

It would leave the UK in a tricky position. An increase levied by the EU on the current 10% tariff already applied will automatically make the UK a more attractive place for Chinese car makers to do business. 

Norway (which is also outside the EU) has zero tariffs on Chinese EVs and has thrived as a destination for them, but then it has no native car industry to protect. 

On the other hand, Brexit was partly sold as a way that the UK could cut all tariffs to make imported goods much cheaper. Raising the price of cheap EVs from China simply because the EU did it wouldn't be a message the UK government is likely to countenance, particularly when it’s urging us to switch from ICE cars.

The SMMT said it wasn't pushing for increased tariffs on behalf of its members (which include some of the Chinese car makers themselves), and indeed those car makers that would surely be keen to close the door to cheaper rivals have mostly been silent.

That’s partly because this is a two-way street. “China has been a very successful market for so many, certainly the European brands,” Hawes said.

China has shown that it's perfectly willing to retaliate in the time-honoured way of trade wars, by targeting another sector entirely. For example, earlier this month, it began an "anti-dumping" investigation into brandy imported from the EU. 

Since France accounts for almost 100% of brandy exports to China, the threat was understood to be in retaliation for France’s support for increased tariffs on Chinese EVs, which had backing from Stellantis’ CEO Carlos Tavares back in 2022.

“We should ask the EU to enforce in Europe for Chinese manufacturers the same conditions under which we the western manufacturers compete in China,” Tavares said back in 2022, referencing the fact that China imposes higher tariffs on European cars than the EU does on Chinese cars. 

Stellantis has since embraced China’s EV cost advantage, last year inking a €1.5 billion (£1.3bn) deal with Leapmotor that has it booking all revenue from Leapmotor cars exported from China.

Being seen to reward China by leaving tariffs as they are is increasingly problematic. The EU is known to be angry with China over its growing ties with Russia – the destination for many of the 4.9 million exported cars last year after Western firms pulled out in response to the Russian invasion of Ukraine.

However, it might be that barriers for Chinese car makers into Europe (tariffs, shipping costs, homologation) are already high enough to make them choose the solution that will mollify all sides: build cars in Europe, whether that’s in the UK or the EU.

BYD has already signed a deal to establish a car plant in Hungary and MG owner SAIC has said it's looking for a location, possibly even the UK. Meanwhile, Geely is already a big investor in the UK, with its ownership of LEVC, its majority stake in Lotus and its sizeable shareholding in Aston Martin. 

China’s cost advantage on EVs is still huge, though. While Tesla has grafted its way to a sizeable lead when it comes to lowering the cost of building EVs at scale, China controls far more of the EV supply chain.

Protecting local manufacturers from this advantage while still allowing buyers to benefit from its savings will be a difficult tightrope for governments to walk as they continue to legislate for increased EV sales.