James Kim
Associate ArentFox Schiff LLP
International Trade & Investment practice and Electric Mobility Group
The widespread adoption of electric vehicles (EVs) is reshaping the global
auto industry, and Chinese manufacturers are leading the charge. With their
dominance in EV production and battery technology, Chinese automakers like BYD,
Geely, and Nio are setting the pace, often at prices Western manufacturers
struggle to match. As the U.S. faces decisions about how to respond to potential
new market entrants from Chinese EV companies, the stakes are high: economic
security, global climate change policy, and geopolitical competition all hang
in the balance.
The hardline approach: Keeping China out
For years, the U.S. has taken a hardline stance against Chinese EVs
entering the market. The Inflation Reduction Act (IRA), passed under the Biden
administration, included a Clean Vehicle tax credit with Foreign Entity of
Concern (FEOC) provisions, explicitly excluding vehicles using Chinese battery
components from qualifying. On top of this, special tariffs of 100% on Chinese
EVs and 25% on Chinese batteries were imposed, further dampening prospects for
Chinese EVs entering the U.S. market.
These measures pushed Chinese automakers to consider building in Mexico,
where they could exploit the U.S.-Mexico-Canada Agreement (USMCA) to export
cars duty-free to the U.S. Yet, some Chinese companies, wary of the U.S.
regulatory environment and the hawkish political climate toward Chinese
investment, have hesitated to build on U.S. soil.
Proposals like Senator Marco Rubio's bill to bar Chinese entities from evading
special tariffs by shifting production to third countries and the Bureau of
Industry and Security (BIS) rule which would ban the import and sale of Chinese
connected vehicles have only added to the headwinds for Chinese EV companies.
As Tesla's CEO Elon Musk
has pointed out, without such trade protections, Chinese EVs are poised to "demolish" the U.S. auto industry.
A policy reversal? Welcoming Chinese EVs
A surprising shift may be on the horizon, however. Despite
tough-on-China rhetoric, President-elect Trump has signaled openness to
allowing Chinese EV manufacturers to establish operations in the U.S.,
particularly to deter them from building in Mexico. Trump has even proposed a
trade deal of sorts, where Chinese EV companies could open factories in Michigan,
Ohio, or South Carolina, creating American jobs in exchange for avoiding potential
200% tariffs on Mexico-made EVs.
This policy shift could benefit U.S. consumers by increasing access to
affordable and tech-forward EVs and pushing the domestic auto industry to
innovate. Advocates for this approach compare it to how Japanese automakers
entered the U.S. market in the 1980s, forcing Detroit's "Big Three" to improve vehicle quality and competitiveness.
Inviting Chinese companies to share their advanced technical expertise through
local production could also help onshore the U.S. EV supply chain, reducing
reliance on imports and enhancing domestic capabilities.
Challenges: Trump's mixed bag of policies
Trump's EV policy is far from cohesive. On one hand, he
has criticized the IRA as a "scam" and signaled intentions to roll
back EPA tailpipe emissions regulations to meet Biden's ambitious
zero-emissions targets. He has also suggested eliminating subsidies for EV
manufacturers, including the $7,500 consumer tax credit that has been a
cornerstone of U.S. EV policy.
These moves could weaken the domestic EV ecosystem and create
uncertainties for Chinese manufacturers considering U.S. investments. The
Chinese government, too, may be cautious about sharing its industry-leading
expertise with a country that could reverse course in the next election cycle.
Still, both Trump and China's President Xi Jinping may recognize the mutual
benefits of a deal. For Trump, bringing billions of dollars of investment and
thousands of jobs to the U.S. would represent a significant political and
economic victory. For China, establishing a foothold in the U.S. market would
be the lynchpin in claiming full global dominance in the EV sector.
Finding the middle ground
Increasingly, some observers consider the adoption of a middle-ground
approach to be the most pragmatic solution. By allowing Chinese companies to
operate in the U.S. under strict conditions, policymakers could balance
economic, environmental, and security concerns. For example, Chinese investments
could be subject to rigorous Committee on Foreign Investment in the United
States (CFIUS) reviews, which would allow for conditions to address national
security risks and oversight of transactions, including those involving real
estate near certain sensitive facilities.
Chinese companies could also be required to source a significant portion
of their components domestically and adhere to U.S. labor standards to qualify
for incentives such as IRA production tax credits. This mirrors the approach
taken by Japanese automakers, who successfully localized production and supply
chains decades ago. Furthermore, market segmentation may help mitigate direct
competition. U.S. EV automakers like Tesla could focus on the luxury market,
leveraging strong brand recognition, while Chinese manufacturers could cater to
budget-conscious buyers with affordable options like BYD's Seagull, which retails for $12,000 in China.
Meanwhile, removing the EPA emissions rule could enable U.S. automakers to
continue selling vehicles with internal combustion engines, which remain the
most popular powertrain domestically.
Looking ahead
The road ahead for U.S. policy on Chinese EVs is fraught with challenges and opportunities. Striking the right balance will require threading the needle between protecting domestic industry, achieving climate goals, and maintaining geopolitical leverage. As Trump prepares for his second term, the auto industry--and indeed the world--will be watching closely to see whether his bold overtures to Chinese EV makers result in a historic trade agreement or another chapter in the long-running saga of U.S.-China economic rivalry.