In Depth: Why Biden’s Tariffs Increases Won’t Cause China Much More Pain

07 Jun 2024

By Du Zhihang, Lu Yutong, Zhang Erchi, Luo Guoping, Zhao Xuan, Zhai Shaohui and Wang Xintong

Washington’s sweeping tariff hikes on Chinese imports will have a largely limited impact on domestic manufacturers, experts told Caixin, as many have moved production overseas and because similar moves in the past have already reduced Chinese exports to low levels.

On May 14, the Biden administration announced tariff hikes on $18 billion worth of Chinese imports across 14 categories including electric vehicles (EVs), semiconductors, lithium-ion batteries and solar cells. Nine of those, including a fourfold rise on EVs to 100%, are proposed to be implemented on Aug. 1.

The move is part of a broader strategy said to prevent Chinese manufacturers from undercutting their U.S. competitors and threatening American jobs. U.S. President Joe Biden hopes the move will help him win more votes from blue-collar workers and manufacturers, especially in swing states such as Pennsylvania, as he aims to defeat his rival and predecessor Donald Trump in November’s election, said Liu Tianyi, CEO of North American policy consulting firm Policy Nexus.

Compared with the last round of tariff hikes, the overall impact of the latest round on the world’s two largest economies will be limited due to the smaller number of industries and products affected, several analysts told Caixin.

The targeted products account for only 4.2% of total U.S. imports from China and less than 1% of China’s total exports, Nomura Holdings Inc. analysts said in a May 15 report.

They also predicted that the new tariffs will have a limited short-term impact on Chinese exporters, but warned that the possibility of other regions imposing similar trade restrictions was more of a worry.

After Biden’s move, Canada is examining whether it needs to raise tariffs on Chinese-made EVs, Trade Minister Mary Ng said. Facing pressure from Washington, the Mexican government is also considering tariffs of 5% to 50% on imports from China and other countries lacking trade agreements with Mexico, an international trade expert told Caixin.

The EU is still conducting an anti-subsidy investigation into EV imports from China and could impose new tariffs as early as July.

Compared with the incremental hikes, analysts are calling for more attention to be paid to the cumulative impact of trade barriers. Brian Coulton, chief economist at Fitch Ratings Inc., told Caixin that the U.S. will likely continue to increase tariffs on China in the future, regardless of who wins the November election.

Lithium-ion EV batteries

While the tariff hike on lithium-ion EV batteries and battery parts, which include non-lithium-ion batteries such as lead-acid ones — from 7.5% to 25% — is not the biggest, analysts told Caixin that they expect Chinese manufacturers of these products to be hit the hardest.

China accounted for 71.5% of all U.S. lithium-ion battery imports by value in the first quarter of 2024, data from S&P Global Market Intelligence showed.

Analysts expect the hike to have a further impact on Chinese exporters of EV lithium-ion batteries, which already face headwinds from U.S. subsidy policies in place. This could give their Japanese and South Korean rivals a greater edge in the U.S., they said.

But the move could benefit Chinese battery-makers that have built or are building plants in the U.S. — including the battery arm of Envision Group Inc. and Gotion High-tech Co. Ltd. (002074.SZ -2.13%), a person from a leading Chinese battery company told Caixin.

In March, Japan-based battery-maker ASEC Group Ltd., in which Envision holds a roughly 80% stake, announced plans to build a second EV battery manufacturing facility adjacent to the first building that it broke ground on in June 2023 in South Carolina. The first and second plants are scheduled to be up and running by 2026 and 2027, respectively.

In late December, Gotion said its first U.S.-made battery pack had rolled off the assembly line at its plant in Fremont, California.

Medical devices and gear

In the first three months of this year, China made up nearly 20% of U.S. imports of medical devices by value, according to S&P data.

However, the impact on Chinese companies is likely to be limited. Many manufacturers of medical devices, a category that includes gear like face masks, have shifted to other industries after demand plummeted with the end of the Covid-19 pandemic.

“The industry is currently in a major depression and [we] cannot survive,” said one manufacturer who shifted from producing protective clothing to sanitary wipes.

Customs officers inspect medical devices to be exported at a medical technology company in Binzhou, Shandong province, on June 15, 2023. Photo: VCG

Steel and aluminum

Tariffs of up to 25% on certain steel and aluminum products won’t have much of an impact on their future exports, as previously imposed tariff hikes by Washington that began in 2018 have already pushed down exports to the U.S. to low levels.

China accounted for 13.5% of U.S. iron, steel and aluminum imports by value in the first quarter, S&P data showed.

In particular, the tariff increase will result in stacked rates of more than 100% for some aluminum products, high enough that it will no longer be profitable to export them to the U.S., industry insiders said. Others warned of the impact on private and smaller firms, which supply the U.S. with the most Chinese-made aluminum products.

Given China’s competitive advantage in the production of general-purpose aluminum products, the increased tariffs will also lead to higher associated raw material costs, which would ultimately be borne by U.S. consumers, Yuan Yuan, a senior aluminum analyst at industry consultancy Beijing Antaike Information Co. Ltd. told Caixin.

Chipmakers

Similarly, the U.S.’ decision to double tariffs on semiconductors to 50% won’t have a serious impact on domestic producers, which have already reduced supplies to the U.S. since the Trump administration imposed tariffs on them in July 2018.

Only 3.1% of processors, including semiconductors, imported into the U.S. by value in the first quarter came from China, S&P data showed.

Chinese chipmakers entering the U.S. market won’t be much affected by the new tariffs, as they have adopted a tactic of integrating most chips into finished products like electronics and home appliances and before exporting them, thus circumventing the levies, a chip industry analyst told Caixin.

U.S. and South Korean chipmakers are actually more affected, according to the Semiconductor Industry Association. Because many of them complete their chip production on the Chinese mainland to reduce costs, they have been the biggest payers of U.S. tariffs since 2018, the association said.

Increasing tariffs only reduces the volume of Chinese chips exported directly to the U.S., so the hikes will not free the U.S. from its dependence on Chinese products, the chip industry analyst pointed out.

U.S. imports of semiconductors from the Chinese mainland fell 26% from July 2018 to August 2022, while import volumes from the rest of the world grew only 5% during the period, according to a 2022 report from the Peterson Institute for International Economics.

One reason for this difference was that other chipmakers were not able to step in and replace Chinese chipmakers that produce specific types of semiconductors, the report said. The mainland’s foundries specialize in high-volume “legacy” chips — defined as those made on process nodes of 28 nanometers or larger. However, overseas chipmakers typically produce more advanced, higher-margin semiconductors.

“Given that legacy chips are not particularly profitable to manufacture, and if the United States does not want to import them from China, then who will produce them? That is the question facing America’s industrial consumers — like the auto sector — of large volumes of legacy chips,” the report said.

Xu Daquan, president of German auto parts supplier Bosch China Investment Ltd., told Caixin that with the development of EVs, the lack of investment in legacy chip production by major global suppliers over the past few years could lead to a repeat of the worldwide chip shortage seen during the pandemic. But that in turn could create opportunities for Chinese chipmakers, which have been rapidly expanding capacity for producing these low-margin chips, he said.

Electric vehicles

Even the impending new tariffs of up to 100% on China-made EVs will have little impact on their exports, as trade restrictions already in place have led manufacturers to shift the focus of their expansions away from the U.S. market.

New-energy vehicles ready to be exported at Suzhou Port in Suzhou, Jiangsu province on April 19. Photo: VCG

China accounted for only 0.3% of the U.S. imports of EVs and plug-in hybrids by value in the first three months of 2024, S&P data showed. The Center for Strategic and International Studies (CSIS) said China only exported 12,362 EVs to the U.S. in 2023, of which about 10,000 were from a single firm, Polestar, which has Swedish origins and is controlled by Zhejiang Geely Holding Group Co. Ltd.

Instead, American EV-maker Tesla Inc. is expected to take a bigger hit, as data from the Ministry of Commerce shows the company accounted for more than one-third of China’s new-energy vehicle exports last year.

Tesla CEO Elon Musk has spoken out against the U.S. action. “Neither Tesla nor I asked for these tariffs,” he told a tech conference in Paris via video link. “Tesla competes quite well in the market in China with no tariffs and no deferential support. I’m in favor of no tariffs,” he was quoted by foreign media as saying.

Tesla cars made in China are not able to receive subsidies from the U.S. government under the Inflation Reduction Act, so most of its models are exported to other countries, said Sun Xiaohong, secretary-general of the auto branch of the China Chamber of Commerce for Import and Export of Machinery and Electronic Products.

Solar cells and panels

Nomura’s analysts expect the new 50% tariffs to have a limited near-term impact on Chinese-made solar panels, as they estimate that the U.S. accounts for only 0.2% of China’s total exports of these products.

That’s because Chinese solar-panel makers have shifted their supply chains to several Southeast Asian countries, such as Malaysia, Cambodia, Thailand and Vietnam, to circumvent existing U.S. restrictions, the analysts said. The four countries have been granted a two-year tariff exemption that runs out on Thursday.

Tan Youru, a photovoltaic (PV) analyst at BloombergNEF, agreed that direct exports of Chinese-produced PV cells and modules to the U.S. have been almost negligible in recent years.

The Chinese producers’ tariff evasion tactics have raised complaints from their U.S. competitors, with some petitioning the Department of Commerce in April to impose new duties on imports from these Southeast Asian countries.

In response to the petition, the department announced on May 15 that it is investigating whether imports of crystalline silicon PV cells from the four countries have been dumped or subsidized. Based on the findings of the investigation, the department and the International Trade Commission could issue countervailing or antidumping duties by February.

On May 16, the White House said the tariff exemptions for the four countries “will end as scheduled,” and Chinese manufacturers have been found to be circumventing duties by exporting solar modules to the U.S. from the countries.

Tan expects the cost of exporting PV modules to the U.S. to surge if these tariffs are fully implemented. But he also warned that this would push up the price of these products in the U.S. market, harming local PV plant developers and increasing the cost of building solar projects and capacity in the country.

Other lithium-ion batteries

The new 25% tariff on lithium-ion batteries that aren’t used in EVs, such as those primarily used for energy storage, looks like it will be implemented on Jan. 1, 2026, which means there will be no impact on their exports in the short term.

But the person from a leading Chinese battery company told Caixin that 2026 could be a watershed year, when the cost advantage of Chinese battery storage exporters over their U.S. counterparts could be eroded to a concerning degree, as the former are subject to higher tariffs while the latter could benefit from an up to 40% investment tax credit offered by the government under the provisions of the Inflation Reduction Act.

Natural graphite, rare earths

Tariff increases from zero to 25% on natural graphite and permanent magnets, including rare earth magnets, have been proposed to take effect in January 2026. Graphite and rare earths are indispensable to the EV supply chain.

The U.S. is delaying the rollout of the new tariffs because it needs time to reduce its relatively high dependence on Chinese imports of graphite and rare earths, industry sources told Caixin.

A rare earth industry veteran said the current U.S. rare earth industry is unable to compete with China’s in terms of cost, processing experience and supporting capabilities.

Gracelin Baskaran, director of the Project on Critical Minerals Security at the CSIS, also said that “the United States needs a significant amount of graphite for domestic electric vehicle production,” but “there’s simply an insufficient supply of non-Chinese graphite in the world.”

While the short- to medium-term impact remains unclear, Baskaran warned in a May 14 analysis that if EVs ultimately become unaffordable, it will be the U.S. auto industry that suffers.