Julien Chaisse is professor of law at City University of Hong Kong and president of the Asia-Pacific FDI Network. X: @jchaisse

The Biden administration’s imposition of sweeping tariffs on Chinese-made electric vehicles (EVs), solar panels, steel and other goods in May 2024 represents a significant shift in global trade. The 100% border tax aims to counter China’s trade practices and protect US jobs, and is triggering chain reactions that reshape global supply chains, foreign direct investment (FDI) decisions and geopolitical relations.

To meet its objectives, the US chose tariffs over other regulatory measures due to their ability to provide immediate economic protection. This urgency reflects the government’s priority to deliver quick results amidst growing geopolitical tensions and economic competition. In response, the EU imposed its own tariffs on Chinese EVs, capped at 48%. While less severe than the US measures, these tariffs signal a coordinated effort to address concerns about Chinese state subsidies and market distortions. The US’s aggressive approach provides strong political and economic protection, whereas the EU’s balanced strategy aims to reduce Chinese imports while attracting more FDI from Chinese firms. 

In the short term, affordable Chinese EVs are likely to flood developing markets in south-east Asia, Africa and Latin America where there is growing demand. Countries like Indonesia, Thailand and Mexico are already seeing a surge in Chinese EV imports as these markets offer new opportunities for manufacturers facing high border taxes in the EU and US. 

Other consequences of these tariffs include shifts in production locations and supply chain strategies. Stellantis, for example, decided to move the production of some Chinese-brand EVs to Europe. After initially planning to import Leapmotor EVs directly from China, Stellantis will now assemble a portion of these vehicles in its European plants, allowing it to avoid EU tariffs. This strategic pivot is just the beginning, with more companies likely to follow suit. 

The effect of Chinese EV tariffs on global supply chains, FDI location choices and geopolitics is set to accelerate. For example, Chinese companies may invest more in Europe to avoid tariffs and benefit from more lenient FDI screening compared with the US. However, China’s response will be crucial. Beijing has threatened retaliation, which could trigger a tit-for-tat trade war with the EU.

Any retaliatory actions must navigate international trade law complexities. The EU argues its tariffs are compliant with World Trade Organization rules, after concluding that China is illegally subsidising its EV manufacturers. Meanwhile the US views Chinese claims against its tariffs as weak, given the levies are intended to respond to China’s unfair subsidies and market practices, potentially leading to prolonged trade tensions.

Despite their joint embrace of EV tariffs, a significant divergence in US and EU regulatory approaches regarding China is emerging. The EU fosters closer economic ties, allowing investments in its clean energy sectors, while the US maintains a cautious stance, focusing on decoupling from the Asian superpower. This divergence will lead to different strategic and regulatory alignments, with the EU benefiting from Chinese investment in technology and economic growth, while the US prioritises national security and economic independence.

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This article first appeared in the August/September 2024 print edition of fDi Intelligence.