The rise of Chinese EVs is dividing the West

The U.S. is closing its borders to Chinese EVs before they even launch. The Biden administration last month raised the total tariff rate to 102.5% on Chinese EVs, despite extremely low imports. Canada, whose car industry is tightly integrated with the U.S., is considering new tariffs too, Bloomberg reported on Friday.

In case sky-high import duties don’t keep Chinese EVs away—for example if they are built in Mexico to benefit from the country’s free-trade agreement with the U.S. and Canada—Washington also launched an investigation in February to assess their security risks. This could be an even more potent blocking tool. If President Biden loses November’s election, a second Trump administration would likely be even more hawkish.

Meanwhile in the European Union, additional tariffs announced by Brussels this month will only slow the influx of Chinese EVs. The products need to overcome consumer resistance to unfamiliar brands, which will take time, but the market is open.

The proposed levels of duty are relatively modest: an additional 17.4% in the all-important case of Chinese market leader BYD. On top of a longstanding 10% tariff, that might close most of the company’s cost advantage compared with European peers, but it probably wouldn’t throw its growth plans off course. Assuming that the company splits the cost impact of the proposed tariff with consumers, Citi estimated that it would still make higher margins in Europe than in brutally competitive China.

And the final tariffs could be lower still. The EV probe is part of a negotiation: China responded last week with its own antidumping investigation into imports of EU pork products. Both initiatives invoke World Trade Organization rules that allow so-called “countervailing duties" on subsidized products. The “Section 301" tariffs used by Washington, by contrast, are a uniquely American tool that is unlikely to lead to any kind of bilateral deal.

The key effect of EU tariffs would be to speed up an existing trend toward localizing production, as happened when the Reagan administration placed tariffs on Japanese cars in the 1980s. Andrew Bergbaum, a partner at consulting firm AlixPartners, already counts eight planned Chinese EV factories in Europe. As long as they also use a high enough proportion of local parts, they will be able to sell into the region duty-free.

There are no more car buyers for these new factories, so the tariffs being introduced to protect European industry against excess Chinese capacity will simply create excess European capacity. This is good news for consumers, who will get deals and wheels, but bad for old-school car manufacturers in what was already a tough market.

The incumbent industry could help itself by sharing plants with the newcomers. Stellantis, which owns brands such as Fiat and Peugeot as well as the Chrysler business in Detroit, last month formed a European joint venture with a Chinese automaker, Zhejiang Leapmotor Technology. The business is starting to use a Stellantis factory in Poland to manufacture Leapmotor vehicles for the European market, according to a recent Jefferies note. In some ways, the approach is a mirror image of the Chinese JVs through which most Western automakers still access the Chinese market.

The U.S. is borrowing different tactics from China. Tariff increases need to be seen alongside the Biden administration’s Inflation Reduction Act, which kicked off a new era of Chinese-style industrial policy backed by massive state spending. If the elaborate combination of carrots and sticks works, it will create a whole new EV supply chain to run alongside the Chinese one that dominates today’s industry.

But this, too, is a recipe for overcapacity, particularly as it will be tough to keep the supply chains totally separate. Regardless of its growth potential, the EV industry is doomed to low returns by its political sensitivity.

Write to Stephen Wilmot at stephen.wilmot@wsj.com