Opinion
Biden's Chinese EV tariffs could spark trouble for Tata Motors
Summary
- For India's Tata Motors, the fallout appears immediate and challenging, while power industry firms stand on the edge of unexpected benefits
When a butterfly flaps its wings in the Amazonian jungle, it could cause a tornado in North America's central plains, noted a mathematician, observing that minute differences in his model’s initial conditions resulted in enormous changes in weather outcomes. US President Biden’s 100% tariffs on Chinese electric vehicles (EVs) could cause a similarly unpleasant butterfly effect on Indian EV makers. Watch out, Tata Motors.
First, let's understand what has happened. Biden is locked in a close race with his presidential rival Donald Trump. Trump has been wooing auto union workers with the promise of 60% import duties on China-made cars. Biden has trumped Trump by a margin of 40%.
Penal duties have also been announced on imports from China of solar cells, semiconductor chips, steel, aluminium, EV batteries, and some critical minerals. The tariffs are expected to crimp imports that amounted, pre-tariff, to $18 billion, which is just 4.2% of total US merchandise imports from China.
China is likely to reciprocate with higher tariffs on imports from the US.
A likely target with lots of political charge but little actual effect on the ground is planes from Boeing, for which China has been a major market. Boeing is already in trouble because of its own internal quality problems and is not in a position to meet orders.
So, restricting aircraft imports from the US would please those looking for a major showdown between the world’s largest and second-largest economies over unfair trade practices without causing much actual damage to either party.
The US has announced the trade restrictions under Section 301 of its Trade Act of 1974. Section 301 allows the US government to restrict trade or negotiate trade agreements when it determines that a foreign country’s subsidies or other practices represent a persistent violation of labour rights, constitute anticompetitive behaviour, deny fair and equitable trading opportunities for US producers, or constitute an effort to increase penetration of export markets.
There are no objective criteria for making such a determination, and the US has defanged the World Trade Organization’s Dispute Settlement Mechanism by blocking the appointment of judges to its appellate body. A bilateral trade war will, therefore, ensue.
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A major beneficiary is likely to be Mexico, where Chinese EV makers are likely to locate production facilities to make products for export to the US under the US-Canada-Mexico free trade agreement.
When Chinese producers of EVs and other goods find access to the US market closed, they will want to step up exports to other markets. India is a prime target for the entire range of goods whose entry to the US now stands restricted. Indian producers of these goods are likely to feel the heat.
This would be most acutely felt in the EV segment. India has created an EV import policy that slashed import duties from 70-100% to 15% on completely built-up units (CBU), provided the importer promises to invest $500 million in a domestic production facility and the price of the imported CBU is at least $35,000 or ₹29 lakh.
The US restriction could well be the trigger to catalyse large-scale manufacturing in India to bypass the high tariffs India has on imported cars. Since Chinese EV makers produce some of the cheapest parts and components, including batteries, these could produce extremely low-cost EVs in India for the Indian market.
Tata Motors' share of the Indian EV market was 72% in 2023. That dominance makes it the prime target of price competition from cheap EV makers from China who invest in plant and machinery in India.
While India has domestic EV producers demanding and receiving protection from Chinese EV makers, other countries that lack similar local champions could see more EVs entering their markets than would have happened if the output of Chinese EV factories had been shipped to the US.
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The net result would be many smaller countries seeing a larger share of their domestic passenger car market shifting to climate-friendly EVs than the US or India. Their challenge would be to generate the power, at the requisite high load, needed to meet the electricity demand arising from a rising EV population. This, in turn, would generate additional demand for power generation equipment, grid management software, and energy pricing models from these economies.
It would make sense for Indian providers to gear up for this demand, ranging from solar cell producers to software service providers and integrated engineering solutions providers like KEC Ltd.
