How Chinese EVs and UK tariffs would affect the UK economy


James Fan

(Edited by Sevin Karabulut)

Chinese electric vehicles (EV) manufacturers are rapidly expanding in the global market, significantly challenging traditional petrol car manufacturers. To protect local vehicle businesses, many governments have started acting against these changes in the automobile industry. For example, the EU has set provisional tariffs of up to 37.6% on Chinese EVs (The Economist, 2024). Meanwhile, China’s Ministry of Commerce has criticised these barriers, claiming that the EU is creating trade barriers through protectionism (The Economist, 2024). This blog will explore the impact of Chinese government subsidies and UK government tariffs on Chinese EV imports, analysing their broader effect on the UK economy.

Chinese EVs have greatly benefited from significant government support in the Chinese market. For example, in 2015, each unit of BYD’s e6 model sold in Beijing received a cash subsidy of US$ 8,646 (Masiero et al., 2016). This substantial support enabled Chinese EVs to rapidly develop and compete with traditional petrol vehicles. Therefore, due to the competitive advantages that Chinese companies benefit from, such as battery technologies, low production costs, and subsidies, Chinese EVs could capture a large market in the UK automative market. The UK vehicle manufacturers are losing profit or even making a loss due to competition from new Chinese entrants. Such pressures could result in local British workers suffering from job losses as company sales decline.

One approach the UK government could use to protect the automobile industry is imposing tariffs on Chinese EVs. As shown in the left graph, tariffs could increase the selling price of Chinese EVs from P1 to P2, reducing their cost advantage. Therefore, local businesses within the automobile market could benefit, with producer surplus increasing (highlighted in yellow). Hence, British companies’ profits and workers’ job opportunities could be secured. However, one drawback of tariffs for the UK economy is that UK consumers lose their consumer surplus by facing higher market prices at P2 (highlighted in red on the right graph). This trade-off highlights a drawback of tariffs: while they protect local producers, they reduce consumer welfare.

Overall, Chinese subsidies have given EV manufacturers a significant competitive advantage, potentially damaging British businesses and workers. While UK tariffs are one approach to counter Chinese protectionism, they come with the trade-off of reduced consumer welfare. Chinese EVs have been supported by national incentives, creating competitive advantages in the UK market. The UK government could raise tariffs to protect the local industry from damage. However, UK customers would suffer from higher prices as a result.

Reference:

The Economist. (2024.). The EV trade war between China and the West heats up. [online] Available at: https://www.economist.com/business/2024/07/10/the-ev-trade-war-between-china-and-the-west-heats-up.

 Masiero, G., Ogasavara, M.H., Jussani, A.C. and Risso, M.L. (2016). Electric Vehicles in China: BYD Strategies and Government Subsidies. RAI Revista De Administração E Inovação, 13(1), pp.3–11. doi:https://doi.org/10.1016/j.rai.2016.01.001.

About the Author

James Fan is a Year 2 Business Management student with a strong interest in economics, game theory, and poker. Recently, I have started diving deeper into research and reading on game theory, particularly as it relates to poker strategy and decision-making. Feel free to reach out if you share similar interests. My email address is bs23563@qmul.ac.uk.


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