FOR PROFESSIONAL INVESTORS – 28 June 2024

Chi Flash
TARIFFS ON CHINESE EVS AND IMPLICATIONS ON ENERGY TRANSITION
The only thing we have to fear is fear itself.
Franklin D. Roosevelt
In May, the US announced tariffs of 102.5% on imported Chinese electric vehicles (EVs). One month on, the EU
has also announced provisional tariffs on Chinese EV imports and Canada is considering raising similar levies.
Such measures will not only create economic winners and losers but could also have profound implications on
the world’s transition to a net-zero economy.
Tariffs’ benefits uncertain
Generally, the net impact of tariffs on the economy of the country that imposes them, in terms of output andemployment, could be uncertain.
Tariffs provide protection for some domestic industries and encourage import substitution. That could increase
employment and domestic income. However, those industries with large exposure to the tariffs could suffer adecline in employment due to rising input cost and possibly become subject to retaliatory tariffs. If these downside
effects were to negate or even overwhelm the positive impact from import tariff protection, that could result in anet negative effect on growth. Indeed, the US Fed’s research using the 2018 US tariffs found that the net impact
on US growth and employment was negative, ceteris paribus.
EU tariffs & China
China exports no EVs to the US at this point. So, the Biden administration’s EV import tariff is essentiallysymbolic. However, the EU’s provisional tariffs could have material impact: Chinese EVs accounted for almost
20% of the EV market in Europe in 2023, and the share is expected to rise to 25% in 2024.
Furthermore, the estimated 40% cost advantage of Chinese EVs in the European market is much smaller than inother markets (Exhibit 1). If the EU goes with a 35%-40% tariff rate, that could eliminate China’s competitive
advantage in the European market.

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The EU’s new tariffs are provisional because they might be reduced if Chinese producers prove that they get
lower subsidies than the EU has estimated. Furthermore, if China could reach an agreement with the EU toreduce the volume of Chinese EV exports to Europe, the new tariffs may not be implemented at all.
Winners and losers
The tariff obstacle many prompt some Chinese EV makers to consider locating their production facilities to the USand export from there. That could help create jobs and boost manufacturing and tax revenues in the US.
However, such incentive of the Chinese firms could be offset by the US government’s hawkish policy on Chinese
investment in the US.
So, the primary victims of the tariffs appear to be Chinese EV exporters in terms of profits and jobs. But the tariffs
will likely also hit European and American consumers as domestic producers could raise EV prices, or keep themhigh, in the face of less competition. Producers from smaller countries could also suffer as they could face higher
competitive pressure from China if it diverts its exports to Europe and the US to other markets. There may also be
a higher risk of larger countries imposing protectionist measures.
Impact on energy transition
Crucially, by making EVs dearer in Europe and the US than they would otherwise be, the tariff protection would
delay the transition from conventional air-polluting fossil-fuel powered cars. Since EVs can play an important in
the world’s transition to a net-zero economy, arguably, some subsidies for EV production are a second-bestpolicy.
Furthermore, in the absence of a sufficiently high global carbon tax to incentivise energy production andconsumption transition, a globally efficient subsidy rate for EV production should be set high enough toencourage the transition. From this perspective, tariffs on EVs are a distortion to this balancing policy act and theglobal initiative of net-zero transition.
Finally, the new tariffs could create two opposing forces in the global markets. On the positive side, shutting
Chinese EVs out of the European and US markets could prompt China to export EVs elsewhere, especially to theBelt and Road Initiative countries, enabling those countries’ consumers to access cleaner transportation and thus
supporting the net-zero initiative.
On the negative side, although the diversion of China’s EV exports to countries with small domestic automobile
industries will only have a limited negative impact, the adverse effect on countries with a large automobile
industry could be significant as their EV manufacturers would come under greater competitive pressure. TheseTariffs on Chinese EVs & implications on energy transition – 28 June 2024 - 3

countries may feel the need to follow the European and American tariff moves, which will erode the global energy
transition initiative.
Net-zero, a secular trend
Despite the ebb and flow of government policy, net-zero transition is a secular trend. It will get stronger with aclearer direction than it does today when the global powers finally find a way to cooperate on a common energy
transition policy via a combination of an EV subsidy scheme, a common tax on carbon emissions, and a common
mechanism for allocating the emissions.
The private sector can play a critical role in the energy transition process. As pools of capital that can beallocated across a range of assets, investment funds can be used to direct substantial financial resources
towards sustainable and green initiatives.
Market estimate puts the financing needs for the net-zero transition at over USD6 trillion a year between now and2030, with transportation and energy systems having the biggest funding needs. However, global climate
financing was estimated at only a little over USD1 trillion in 2022. The huge funding gap underlies the attraction ofenergy transition as a long-term investment theme.
Chi Lo BNP Paribas Asset Management

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