Biden's industrial policy made America’s EV tariffs necessary

Bidenomics favours sustaining persistently uncompetitive industries. (Bloomberg)
Bidenomics favours sustaining persistently uncompetitive industries. (Bloomberg)

Summary

  • Bidenomics aims to do two things that are in tension: Suppress carbon emissions via EV adoption and create high-wage manufacturing jobs. Once he subsidized domestic clean-tech, protectionist trade barriers had to follow. One bad idea after another.

In one sense, US President Joe Biden’s punitive new tariffs on Chinese electric vehicles (EVs) are indeed necessary, just as he argues. What makes them so are the enormous sums that the administration is devoting to expanding US capacity to produce its own EVs. An almost-invariable characteristic of industrial policy is to start with one dumb idea, after which many more then follow—by necessity.

America’s local EV makers are struggling despite generous subsidies. Output and sales are growing, but not as quickly as hoped. Early adopters have adopted and the rest are less enthusiastic. That could change, but the charging infrastructure has been slow to roll out and converting American drivers to EVs isn’t easy. Even after the subsidies, EVs made in the US aren’t cheap. Hence the need for tariffs to make the competition more expensive.

Also read: The US finally has a strategy to compete with China. Will it work?

The high cost of producing EVs in the US is partly by design. Bidenomics aims to do two things that are in tension: Suppress carbon emissions by speeding adoption of EVs and create high-wage manufacturing jobs. Well-paid workers making cheap EVs is a tricky combination. “Good-paying union jobs" of the kind Biden advocates are difficult for a high-wage economy like the US to sustain because the resulting production is likely to be globally uncompetitive. 

A low-wage country can use subsidies to incubate a new industry that might in due course thrive abroad, letting governments withdraw support. In pricey-labour economies, this formula is less successful. As incomes rise, factory employment is apt to decline; work moves to more productive sectors. Just maintaining factory employment requires ongoing government support, which, in turn, retards growth by slowing the flow of resources to better uses.

Bidenomics favours sustaining persistently uncompetitive industries. Sometimes that’s defensible, provided the costs aren’t too high. China’s ability to produce vast quantities of usable cheap EVs seems to have surprised the administration. The subsidies and incentives that the US has offered to this point aren’t enough. 

The US faces another “China shock," as National Economic Council Director Lael Brainard puts it. Tariffs of no less than 100% are needed to protect America’s nascent EV industry. For the sake of good-paying union jobs, Americans must be prohibited from buying cheap imported EVs.

This won’t be the last stupid-but-necessary idea in the sequence. The tariffs will prevent EV prices in the US from falling as quickly as they otherwise would, slowing the market uptake of a much-needed technology. If the administration is to keep its promises on climate change, it will need other ways of inducing Americans to use EVs. 

Also read: Biden's Chinese EV tariffs could spark trouble for Tata Motors

One such policy is in the works: New EPA rules to control the proportion of EVs and gas-powered vehicles sold in the US. Unless demand patterns shift, producers will be induced to lose money on EVs and recover the losses by selling their reduced output of fossil-fuel vehicles at far higher prices. If this arithmetic doesn’t work out, demands for more subsidy may arise.

Support for persistently uncompetitive industries sometimes makes sense. Access to some kinds of goods really is a national-security imperative. Some of the products covered in America’s new bundle of tariffs, such as high-end semiconductors, might qualify. EVs plainly don’t.

Right now, Biden’s officials aren’t really pressing the national-security argument. The China threat lurks in the background, of course, but the main case for high tariffs on EVs and other Chinese exports rests on Beijing’s market-distorting policies. In this view, US producers can’t match their Chinese rivals not because US costs are too high but because China’s exports are artificially cheap, driven down by Beijing’s pursuit of industrial excess capacity.

Also read: India poised to benefit from US tariff hikes

A stickler for consistency might pause at this logic. When the US adopts trade-distorting policies, it’s presented as an overdue recognition of market failures. When China does it, it’s decried as artificial and a threat to global economic stability.

Be that as it may, trade-distorting policies do distort trade. America’s industrial polices can make its trading partners worse off. The same goes for China. The question is whether disputes and imbalances can be resolved cooperatively. Pro-trade, positive-sum outcomes are at least imaginable. But governments, led by the US, have chosen to go the other way. 

Some argue it was a mistake even to hope for cooperation. China, it’s argued, is a cheat and should never have been allowed into the World Trade Organization, a defunct institution. I disagree, but let’s see how the negative-sum alternative of protection, retaliation and counter-retaliation works out.

It’s early days for such policies, and the cycle of error piled upon error has plenty of room to run. ©bloomberg

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