Car Wars

Remote Visualization

Over more than 100 years, the automobile has assumed a central role in the global economy as a means of transportation of goods and people, and in the process it has become an important part of many national economies. The auto industry in the United States employs about 1 million people and sells about 13 million new vehicles annually. In China, those numbers are roughly 4 million and 30 million, and in the European Union, 3 million and 13 million. Many other countries, including Japan, Korea, Canada, Mexico, Malaysia, and Uzbekistan, make cars, and many other countries specialize in automobile parts and components which are incorporated into long and complex supply chains.

The ubiquity of the product and its economic importance means that when the auto industry sneezes, a lot of others catch a cold. That has happened before in the United States—geezers like me remember the “car wars” with Japan in the 1980s and the political fuss that stirred up. The U.S. government has, on occasion, bailed out an auto company, and other countries have not been shy about subsidizing their companies. Currently the most notorious example is China, where the European Union last week determined that Chinese auto companies had received subsidies as high as 38.1 percent—rates vary by company, and some were substantially lower.

The European Union’s action was prompted by the rapid growth of Chinese cars, particularly electric vehicles (EVs), being imported into Europe. The European Union has seen imports of Chinese brands increase from 1 percent in 2019 to 8 percent in 2022 and is warning that they could reach 15 percent by 2025. As with many trade issues, it is not the actual amount of sales but their rapid growth that alarms people.

The EU tariffs are controversial, particularly in Germany, where the larger companies, including auto manufacturers with a significant presence in China, worry about retaliation—not an illogical concern in view of China’s past behavior. The European Commission took pains to make clear that its intent is not to block China’s access to the market but to make sure it occurs on fair terms consistent with international rules on subsidization. If the commission’s goal is not to block Chinese access, it will probably achieve it, as most observers believe the Chinese cost advantage is so large it would take substantially higher tariffs to keep them out.

The United States is taking a different route, although it may end up in the same place. The Biden administration has not sought to use U.S. anti-subsidy law to justify tariffs but instead has simply increased the Trump-era Section 301 tariffs to 100 percent on EVs. That will put the United States on shakier ground at the World Trade Organization, since the Section 301 tariffs are already the subject of litigation there, but the tariff is probably large enough to block direct imports of Chinese EVs.

In both cases, however, we should recognize that Newtonian physics also applies to economics. For each action there is an equal and opposite reaction. In Europe it will probably be Chinese establishment of manufacturing facilities inside the European Union, just as the Japanese did in the United States in the 1980s. That won’t help European automakers, but it will create jobs in the European Union. In the United States it will likely be Chinese manufacturing in Mexico for export across the border. Chinese cars made in Mexico will most likely not qualify for the Inflation Reduction Act tax credits nor United States-Mexico-Canada Agreement (USMCA) tariff-free treatment, but, absent further action from Congress or the president, they will only be subject to the normal 2.5 percent tariff, which would leave them with a significant cost advantage. In that case, the next move would be the Biden administration’s, which is already seeing pressure from Congress to impose similar large tariffs on Chinese autos coming from Mexico. Such an action would violate our USMCA obligations and could jeopardize the agreement’s future when it comes up for review in 2026.

There are two interesting things about this episode. The first is that both the European Union and the United States are for once trying to get ahead of the game and address a problem before it becomes a crisis. That is because they have seen this movie before—Chinese overinvestment leading to overcapacity, overproduction, and dumping products on the rest of the world. Steel, aluminum, wind turbines, and solar panels are all recent examples. The new development is earlier and more widespread awareness of the problem, as other countries, including Brazil and India, are trying to decide what they want to do about it. That is good news because multilateral action is the only effective way to address overcapacity. One country squeezing the balloon only leads to it popping up somewhere else.

The second issue is what this episode says about national security and industrial policy. Like virtually every other trade issue, the administration has played the national security card on autos by suggesting that connected vehicles pose a risk because the autos could transmit data back to China and possibly enable the Chinese to interfere with a vehicle’s operation. This needs to be explored, but at this point it looks a lot like the TikTok risk—something that could happen but which is not very likely.

Protection for the domestic auto industry is clearly an industrial policy issue and compelling evidence of a turn in favor of greater government intervention in the economy. Government efforts to “save” an industry have a mixed record at best, but the process should begin with a decision about what is worth saving. The Carter administration essentially surrendered the U.S. footwear sector to imports despite an International Trade Commission recommendation for relief, implicitly, though not explicitly, deciding it was not important enough to save. The auto sector gets better treatment, probably because of the large number of jobs at risk, but once the government starts down this road, the line of supplicants gets very long very quickly. It would be wise for both the Biden administration and the European Commission to be clear about their criteria for industries to receive relief.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.