The escalating EV trade war and risks for manufacturers

Navigating trade tensions and strategic challenges in the global electric vehicle market

EV trade war
Credit: Pixabay

The global electric vehicle (EV) market is at the centre of an escalating trade war between major economic powers. This brewing conflict threatens to disrupt the worldwide transition to clean transportation, posing significant challenges for the manufacturers of EVs and their parts.

US-China tensions flare up

The United States has recently imposed a 100% tariff on Chinese-made EVs, aiming to protect its domestic automakers. This protectionist move extends beyond EVs to include tariffs on solar cells, steel, and aluminium imports from China. Although the US currently imports only a small fraction of its cars from China, these tariffs could severely disrupt the global EV supply chain. China is the world’s largest EV producer and exporter.

China has hinted at retaliatory measures, which could spark a full-blown trade war in the EV sector. This could stifle innovation and slow the adoption of clean vehicles, undermining efforts to combat climate change. However, whoever wins the presidential elections in the US in November, the US government is unlikely to change the confrontational approach to China.

If Trump, a climate change sceptic, wins, it will be interesting to see how his government handles the EV industry, especially since Musk, the founder and CEO of the world’s largest EV company, appears to be a Republican voter now.

EU’s difficult balancing act

The European Union imported nearly 500,000 Chinese EVs in 2023, accounting for almost a third of China’s total EV exports. Affordable Chinese EVs have been a major driver of EV adoption in Europe, crucial for the EU’s ambitious green mobility goals. However, the EU is now considering whether to impose its own tariffs on Chinese EVs, following the US lead. A trade war could lead to significant price hikes for EU consumers, derailing the bloc’s clean transportation transition.

The EU faces a complex dilemma. While China’s domestic EV production subsidies warrant attention, the bloc may not afford to become entangled in the escalating US-China trade battle. Striking the right balance between protecting domestic industries and fostering a global EV transition will require negotiations and innovation.

Parties further to the right on the political spectrum are expected to do well at the EU elections in June and aim to create a hard-right force that will change Brussels. These parties tend to be nationalist and unsupportive of EVs.

UK’s dicey position

The United Kingdom finds itself in a precarious dicey position amidst these escalating trade tensions. With domestic economic issues dominating the agenda, the UK risks missing out on the potential opportunities arising from the reshaping of future industries by major blocs like the US and EU. There are concerns that the substantial incentives offered by the US Inflation Reduction Act could lure investments away from the UK.

Under the post-Brexit trade deal with the EU, EVs with less than 45% UK/EU content face tariffs, potentially hampering the UK’s EV progress as a major consumer of European EVs.

The Labour government likely to win the July elections is expected to rethink the current protectionist measures and be friendlier to the EV industry.

Risks for EV and EV part manufacturers

As this trade war expands, manufacturers face risks that could impact their operations and profitability. Below are some of them:

  • Supply chain disruptions: tit-for-tat tariffs and protectionist policies could fragment the global EV supply chain, leading to parts shortages, production delays, and higher costs across regions
  • Regulatory divergence: fragmented trade blocs may adopt divergent EV standards and regulations, hindering economies of scale and raising compliance costs for manufacturers
  • Investment uncertainty: the unpredictable trade environment could deter investments in new EVs, batteries, and charging infrastructure needed to accelerate the EV transition
  • Consumer affordability: higher EV prices due to tariffs and supply chain disruptions could price many consumers out of the EV market, slowing mainstream adoption
  • Clean energy goals: trade conflicts jeopardising EV adoption could undermine national and regional targets for reducing transport emissions and mitigating climate change

As EVs transform the automotive industry, manufacturers must proactively manage these emerging risks through robust strategies, innovative solutions, and comprehensive risk transfer mechanisms like insurance.

Finding a sustainable path forward

Policymakers in the US, EU, China, and UK face a critical choice: prioritise short-term protectionist measures or focus on the long-term environmental and economic benefits of a global clean transportation future. Increased investments in domestic EV ecosystems could create more sustainable and self-sufficient supply chains within regions like the US and EU. However, a full-blown trade war is likely to be counterproductive, raising costs for consumers and slowing the vital transition to EVs needed to mitigate climate change.

Negotiations between major powers, coupled with continued innovation in EV technologies and manufacturing, could help find a middle ground that fosters healthy competition while avoiding destructive trade conflicts. A collaborative approach is crucial to ensure the global EV revolution remains on track while managing the emerging risks for manufacturers but, unfortunately, it is geopolitically rather unlikely at present.

Final thoughts

The global electric vehicle (EV) industry is at a critical juncture, with the potential for significant growth or harmful fragmentation. The decisions made by major economic powers in the coming years will determine the future of clean transportation and its role in addressing climate change. EV manufacturers, their parts suppliers, and cleantech investors must navigate these uncertain times with a commitment to sustainable progress and strategic foresight that takes into account the complex geopolitics of the industry.

 

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Mauro Tortone

View posts by Mauro Tortone
Mauro helps financial services, technology and mobility businesses manage change and leads the Strategy & Finance practice. His expertise is in strategic change, capital markets and more. Mauro has over 25 years of experience working with banks such as UBS and Deutsche Bank, smaller financials, fintechs and others across Europe, the US and Asia. He sat on the CISI Corporate Finance Forum Committee for ten years and is passionate about sustainability.
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