Tariffs are rarely a good idea.
Imposing – or increasing – tariffs invariably invites retaliation from the country or countries whose goods or services you target.
They also invariably harm consumers.
donald trumpin trade wars with China made for populist politics, but ended up raising prices for ordinary Americans. Worse still, they tended to hit poorer Americans hardest.
Economic impact
They also have a detrimental effect on the broader economy.
As Martin Wolf, the Financial Times’ chief economic commentator, pointed out in a column this week, tariffs hurt imports, which in turn affects demand for the currency in which those imports are denominated.
This then increases the value of the currency of the country that imposed the tariffs – making that country’s exports less competitive. This, in turn, affects exports from the country that imposed tariffs in the first place.
Wolf wrote: “Exporters are the most competitive producers in the country. Protecting producers from uncompetitive import substitutes at their expense does not seem sensible.”
He points out that, in the 1970s, when India imposed protectionist trade policies, its exports ended up being “crushed”, making its economy “vulnerable”.
EU action
These are the facts of life that we should keep in mind when considering the The European Union’s plansannounced on Wednesday, to impose significant tariffs on the Chinese electric vehicles (EVs) and in assessing whether the UK should follow the EU’s example.
The EU tariffs, introduced in the face of opposition from Germany, range from 38.1% for SAIC, owner of MG, to 20% for Geely, parent of Volvo, and 17.4% for BYD, owner of brands such as Dolphin and Seal.
The taxes, which come on top of an existing 10% levy on imported cars, mean an EU citizen buying a €30,000 entry-level EV could pay up to €11,450 more.
The US and Europe have accused China of overproduction and dumping electric cars on the global market
China’s response
No surprise, China is not happy.
He Yadong, spokesperson for the Chinese Ministry of Commerce, said: “This will not only harm the legitimate rights and interests of China’s electric vehicle industry, disrupt the mutually beneficial cooperation between China and Europe on new energy vehicles, but also will distort the global automotive industry and supply chains, including those in the EU.
“It’s a blatant act of protectionism.”
It would be surprising if the tariffs were not subject to retaliation.
Beijing already has an ongoing anti-dumping investigation into European exports of brandy, mainly cognac from France, one of the main instigators of EU tariffs on Chinese EVs.
Impacts on Europe
It’s easy to see how China could retaliate with tariffs of its own on a whole range of EU products in response. The EU is a major exporter of food and drink products to China and consequently shares in Remy Cointreau, the world’s second largest brandy maker, fell nearly 6% today.
Shares of major German carmakers also fell, most notably Volkswagen, which, with its local joint venture partners, sold 3.2 million vehicles in China last year. Its shares and those of Porsche – controlled by VW – fell more than 5% each.
Spain, Europe’s biggest exporter of pork to China, is also watching nervously.
File photo of electric vehicles charging. Photograph. iStock
Will the tariffs work?
It is also by no means certain that EU tariffs will work.
Industry analysts believe that such is the size and efficiency of Chinese electric vehicle manufacturers that they will likely be able to absorb some or all of these tariffs and still sell their cars at a profit in the EU.
Most currently sell their cars in Europe at a significant premium to the prices they charge in their home market, typically two or even three times as much, giving them plenty of room to reduce prices in the EU in response to the tariffs.
Therefore, imposing tariffs on Chinese EVs is unlikely to provide much support to European EV manufacturers.
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Chinese alternative solutions
And that’s before Chinese electric vehicle makers respond in ways other than cutting prices. Some may base their production more in Europe as a way of designating their vehicles as made in the EU.
This has already happened significantly: more than three-quarters of Chinese foreign direct investment in Europe last year was in battery factories.
BYD, for example, has just revealed plans to build a gigafactory in Hungary – another of the countries that opposed the EU measure – while Volvo is already moving some of its EV production from China to Belgium in order to reduce the impact of EU tariffs.
Hurting Europe
Ironically, the tariffs could also harm European car manufacturers themselves. Renault, for example, makes affordable electric vehicles under the Dacia brand in China for sale in Europe. Its Chinese joint venture partner is expected to be hit by the tariffs.
For the UK, there are no obvious advantages to imposing EU-style tariffs on Chinese EVs, however tempting it may be.
China could almost certainly retaliate by increasing tariffs on top-selling British exports such as Scotch whiskey or, as it currently accounts for 7.2% of UK car exports, UK-made cars.
The United Kingdom
Given the efficiency and lower costs of Chinese electric vehicle manufacturers, tariffs would also not confer any kind of price advantage on British manufacturers. Not when, for example, MG is planning to launch a new entry-level vehicle later this year, the MG2, for around £20,000.
Tariffs rarely have the benefits their proponents claim.
They harm consumers, cost jobs, destroy wealth and create distrust between countries.
That would certainly be the case if the UK followed the EU’s lead in this case.
This story originally appeared on News.sky.com read the full story
