The May 14 White House announcement that the United States will quadruple tariffs on Chinese electric vehicles (from 25% to 100%) and EV and non-EV lithium-ion batteries and components (from 7.5% to 25%), double duties on solar cells (from 25% to 50%), and impose new tariffs on natural graphite, permanent magnets, and some critical minerals (from zero to 25%) is the latest move in an intensifying economic struggle between Washington and Beijing. Yet as the Biden administration works simultaneously to compete with China, to strengthen manufacturing supply chains, and to promote various clean energy systems, U.S. policy is increasingly exposing the tension among these three goals. And that as in so many other areas, Washington is unlikely to succeed by acting alone.

The administration’s new tariff policies follow many other measures that seek to protect or promote clean energy in the United States, including Inflation Reduction Act tax credits for EVs and most sources of clean power as well as various investments through the bipartisan Infrastructure Investment and Jobs Act. The two laws and the CHIPS and Science Act, focused on domestic semiconductor manufacturing as well as some energy-related research, incorporate various provisions to support domestic manufacturing; one such, the IRA’s EV tax credit, offers a useful illustration of the challenges that America faces.

The EV tax credit provides up to $7,500 to Americans who purchase eligible electric vehicles. Half of the credit depends on meeting a battery component requirement, while the other half depends on a critical mineral requirement. The former rewards battery manufacturing in North America (the United States, Canada, and Mexico), while the latter encourages mining, processing, and recycling critical minerals in the broader category of U.S. free trade partners (Canada, Mexico, and 18 others). The administration negotiated an unusual sectoral trade agreement with Japan expressly to ensure eligibility for critical minerals from Japan, a leading automobile and battery manufacturer.

In addition to offering financial support, the IRA includes recently finalized Foreign Entity of Concern rules that block or limit certain foreign companies from participating in or benefiting from these taxpayer-funded efforts. (The infrastructure law, the CHIPS and Science Act, which funds domestic semiconductor manufacturing and various scientific research programs, and recent defense spending bills incorporate analogous provisions.)

In concrete terms, the IRA denies eligibility for the EV tax credit if battery components or critical minerals come from a Foreign Entity of Concern. The regulations, released by the Internal Revenue Service, define this to include companies and other entities that are owned, controlled, or directed by governments, key political parties, or political figures in China, Russia, Iran, or North Korea and set out detailed guidelines to determine this. In practice, Russia, Iran, and North Korea have extremely limited or nonexistent roles in global EV markets (and other clean energy markets, except Russia’s global leadership in nuclear energy exports); in the IRA, the rules aim at China’s dominant role in battery supply chains.

Denying tax credits to vehicles incorporating battery components or minerals from China makes sense both politically and practically. Amid today’s protectionist political mood, providing tax credits to help Americans buy more Chinese-powered EVs would likely be damaging to both President Biden and Congressional Democrats, who negotiated the IRA’s contents among themselves and passed the law on a party-line vote. Likewise, providing taxpayer funds to help America’s principal commercial rival—a rival that successive U.S. administrations have found to be employing unfair trade practices and that already holds a commanding position in this industry—would make little sense.

Much the same could be said for the politics surrounding President Biden’s decision to quadruple tariffs on EVs imported from China. Though a single manufacturer accounted for all the (only) 2,217 EVs exported to America by Chinese carmakers in the first quarter of 2024, Biden and other U.S. officials appear worried that $10,000  and $12,000 Chinese models could capture a substantial market share in the United States, where the average EV price is over $70,000. This has already begun in Europe, where Chinese EV brands are expected to win 11% of the market in 2024 and Chinese-made EVs (including those made in China for Tesla, BMW, and other Western firms) could hold a 25% market share by year’s end. (Tesla also sells EVs in China, where the company has the second position in the market, and is building a battery factory there too.) Earlier in 2024, Tesla’s CEO, Elon Musk, dramatically stated that “if there are not trade barriers established, [Chinese automakers] will pretty much demolish most other car companies in the world.” While President Biden often disagrees with Musk, the two seem firmly aligned on this point.

Notably, America’s Big Three auto manufacturers—Ford, GM, and Stellantis—are not the sole beneficiaries of the EV tax credit or the tariffs in the U.S. market. Indeed, any carmakers that are not Foreign Entities of Concern can theoretically qualify their vehicles for the tax credit if they follow the guidelines in sourcing critical minerals and manufacturing battery components. All manufacturers that are not Chinese companies will gain (in relative terms) from more expensive Chinese EVs in the United States.

This complements a wider U.S. effort at friend-shoring, moving strategic supply chains to companies in and from allied or friendly countries. As home to three of the world’s top 5 EV battery companies, which together accounted for almost one-third of the global market in 2023, South Korea has been a key partner for the American auto industry, despite some early fears about IRA tax credit eligibility. Ford is working with SK, GM with LG Energy Solutions, and Stellantis with LG Energy Solutions and Samsung; Hyundai is also an LG Energy Solutions partner in the United States.

Nevertheless, the administration’s policies to advance its three goals—competing with China, securing manufacturing supply chains, and promoting clean energy—are often in tension and pose other problems too. Consider some examples:

-While the IRA’s EV tax credits aim to accelerate EV deployment to reduce greenhouse gas emissions from transportation, the EV tariffs cannot but make EVs more expensive and slow deployment. The same is true of new solar tariffs as well as tariffs on batteries and battery materials, which raise the costs of grid-scale energy storage needed to balance variable solar and wind power generation. Tariffs on permanent magnets could have a similar impact on many products with electric motors (EVs) or generators (wind turbine nacelles).

-Conversely, subordinating America’s competitive and supply chain goals to emissions reductions (something both Biden and his rival Donald Trump have refused to do) could provide China with even greater economic and political leverage over the United States and other EV and clean energy markets than it already enjoys.

-Though the United States and South Korea are allies, and U.S. firms have only a limited place among global battery companies, American and Korean auto makers are direct competitors. If U.S. car manufacturers lose market share to Korean firms, they will be weaker in competing with China too.

-More narrowly, U.S. allies like South Korea face the same challenges that America confronts in securing supply chains: in the first nine months of 2023, Korea imported almost 97% of EV battery cathode precursor chemicals and nearly 94% of synthetic graphite for EV battery anodes from China.

-Friendshoring solves some problems but creates others. For example, even as IRA solar tax credits have spurred South Korea’s Hanwha to make massive investments in solar manufacturing in the United States, some in the country have expressed concern that the pull of America’s larger market is “hollowing out” Korea’s domestic capacity. In interviews in Seoul, smaller Korean suppliers expressed this concern starkly—and hoped for new U.S.–South Korea cooperation to support solar exports to other markets, such as those in Southeast Asia.

-The United States is striving to compete with China not only economically, but militarily. Even with 102.5% tariffs, some Chinese EVs will be considerably cheaper than U.S. offerings. Can taxpayers afford to support new EV and battery industries, a new military, a new semiconductor industry, and myriad other necessary investments? America might increase its EV battery manufacturing capacity to roughly twenty times 2022 levels by 2030—and could still have only a fraction of China’s EV battery capacity by that time.

-Finally, tariffs and other steps to protect America’s domestic market might help U.S. manufacturers survive a tidal wave of imported products from China’s subsidized and over-developed manufacturing sector. What they cannot do alone is to make American products more competitive in other places. Companies and consumers in allied or friendly countries may well choose U.S. products in some cases for geopolitical reasons, but this argument loses force as goods appear less strategic. If Mr. Musk is right, China’s EV makers could “demolish” their American—and European, and Japanese, and Korean, and Indian, and other—competitors everywhere outside their home markets, while firms in markets shielded from Chinese EVs compete bitterly with one another in those places.

Many of these challenges highlight the extent to which the United States will be in a much weaker position to compete with China if it seeks to do so unilaterally. Biden administration officials and many of their Trump-era predecessors recognize that cooperation with America’s allies, partners, and friends is no less important in trade, investment, and technology policy than in defense and security affairs. Unfortunately—because we are competitors in these areas—it is also harder. The task is nevertheless an essential one.

About the Author: Paul J. Saunders 

Paul J. Saunders is President of the Center for the National Interest and a member of its board of directors. His expertise spans U.S. foreign and security policy, energy security and climate change, U.S.-Russia relations and Russian foreign policy, and U.S. relations with Japan and South Korea. Saunders is a Senior Advisor at Energy Innovation Reform Project, where he served as President from 2019 to 2024. He has been a member of EIRP’s board of directors since 2013 and served as chairman from 2014 to 2019. At EIRP, Saunders has focused on the collision between great power competition and the energy transition, including such issues as energy security, energy technology competition, and climate policy in a divided world.

Image Credit: Creative Commons.