China confronts a new tariff war
China’s duel with some of its biggest trading partners has intensified anew as they unleash fresh tit-for-tat tariffs on exports, a repeat of heightened trade tensions that began in 2018 with the US.
The renewed trade war in 2024 now involves hefty duties on China-made electric vehicles (EVs), an expansion of the list of heavily taxed imports under former US President Donald Trump. With the return of Trump to the White House for a four-year term this January 2025, the déjà vu moment will be complete as he aims to impose a 60 per cent tariff for other China-made goods once he is back in power.
The Biden administration was first to slap a 100 per cent tariff on China-made EVs in May, up from the prevailing 25 per cent, claiming that manufacturers from the Mainland are unfairly selling the vehicles for much cheaper by using state subsidies to price out foreign counterparts. Following suit is the EU which began imposing tariffs on Chinese electric cars ranging from 17 to 35.3 per cent, including extra duties on foreign brands like Tesla and Volkswagen which are assembling units in China. Canada was the latest to place a 100 per cent tariff on China EVs which took effect in October 2024.
Taxing EVs
It appears that the US, EU, and Canada want to hit China where it hurts by imposing higher duties on electric cars and parts. In 2018, the US under Trump tried to gut China by banning Huawei gadgets and software. At the time, Huawei was closing in on Apple in terms of global smartphone sales.
China is the biggest EV manufacturer globally to account 58 per cent of total sales in 2023, according to the International Energy Agency (IEA), with Europe and the US trailing behind. The domestic market is booming, with one in three new cars registered with Chinese authorities being an electric unit. Meanwhile, China’s EV exports totalled 1.2 million in 2023, making it the world’s largest exporter.
China-made EVs are generally produced by state-owned enterprises and are focused on churning out smaller cars priced below USD 10,000, per IEA data. In contrast, those made in the US and Europe lean towards the sports utility and luxury vehicle segments that fetch an average price of USD 30,000 and often higher. Despite the bigger tariffs, Chinese EVs would likely end up cheaper or at least still competitively priced than their foreign-made counterparts, especially in the compact car and sedan segments, and this is what is keeping the US and EU producers at bay.
In theory, US-China trade wars are expected to shake up global trade and may even stoke greater trade within Asia. US and EU policymakers hope that the tariffs would encourage manufacturers to relocate their factories onshore to create more jobs, but this is easier said than done. For one, Volvo, a Swedish car maker that is now owned by Chinese brand Geely, said it is considering either to shift production of EV units out of China and into Belgium or stop the sale of China-made EVs in Europe altogether to avoid the sky-high tariffs. The latter leaves everyone worse off, but both interventions will most likely push EV prices higher worldwide.
Retaliation
Like before, China responds to fresh tariffs with higher duties on foreign-made products as well.
The 2018-era tariff war saw the US charging higher taxes on Chinese solar panels, washing machines, steel, and batteries, to which China retaliated with additional duties on American imports like soybeans, which are the top US exports to Beijing. Now, China is exacting its revenge with higher duties on European brandy, while dairy and pork products from the region could be next on the list.
The duel on import duties is likely to cover more products pending progress in negotiations. Despite this, China equities have weathered these adverse events quite well. Graph 2 shows that listed Chinese EV manufacturers recovered in October on the back of strong sales volumes, attributed to Chinese government subsidies for households to replace their old gasoline-fuelled cars with a brand new EV.
However, shares at BYD Co. Ltd., a privately held Chinese automaker, outperformed its counterparts to surge by 43 per cent in 2024. This bucked the trend of double-digit declines in share prices of other EV makers in the same period – for one, NIO shares plunged by 53 per cent last year. In contrast, BYD reported a USD 28.24-billion revenue in the third quarter that beat Tesla’s USD 25.2 billion during the same period – a first in history.
Another source of optimism is China’s role as a market leader in the production of EV components, such as parts for car display screens and semiconductors for autonomous driving. We see Chinese manufacturers remaining as the dominant player in EV production and are likely to keep seeing exponential growth in the exports of vehicles and parts despite the bloated import duties.
Renewed tariff war aside, we continue to stand bullish about China’s path to recovery as the Chinese government has unleashed a series of monetary and fiscal interventions to bring the economy out of its property sector-driven slump. We maintain overweight risk towards China and believe that the provision of support to the stock market has lifted the overall sentiment towards Chinese stocks to be up 23 per cent in the first 10 months of 2024. Further clarity regarding the size and rollout of these stimulus measures would boost market appetite further in China’s favour, which will unlock greater private spending and capital investments.
This original article has been produced in-house for Lundgreen’s Investor Insights by on-the-ground contributors of the region. The insight provided is informed with accurate data from reliable sources and has gone through various processes to ensure that the information upholds the integrity and values of the Lundgreen’s brand.
