The global electric vehicle market is currently experiencing a significant shift, with underlying currents that are reshaping the landscape for car manufacturersOver recent years, a combination of insufficient supply in international markets and an explosion in demand for new energy vehicles, particularly from China, has led to China's automotive industry gaining unprecedented opportunities for overseas expansionIn 2023, China surpassed Japan for the first time, emerging as the world's largest automobile exporter.

However, a cloud looms over this growth as multiple countries and regions have begun adjusting their tariffs on cars imported from ChinaThe sharp increase in tariffs has cast a shadow over Chinese automakers' ambitions abroad, complicating their efforts to capitalize on burgeoning global demand.

Take the European Union as a case studyAs of July 5, 2023, new tariffs on cars imported from China came into effect

The first month following the implementation of these tariffs marked a notable decline in the sales of Chinese automakers in the EUOther countries including Brazil, the United States, Turkey, and Canada have also announced new tariffs on imported automobiles.

During this critical transformation period, where the Chinese automotive industry is shifting from being 'big' to 'strong,' local manufacturers are employing strategic acumen to adjust their overseas strategies in light of these rising tariffs.

To put the figures into perspective, tariffs for imports starting in 2024 are projected as follows: Brazil 35%, Turkey 40%, EU up to 46.3%, USA 102.5%, and Canada 106.1%. These are not just arbitrary numbers; they represent concrete challenges facing Chinese electric vehicles in foreign markets.

Beginning January 2023, Brazil's tariffs on imported pure electric vehicles, hybrid vehicles, and plug-in hybrids were raised to 10%, 12%, and 12% respectively

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By July 2024, these rates will change to 18%, 25%, and 20%. By July 2025, they further increase to 25%, 30%, and 28%, and finally escalate to 35% by July 2026.

On May 14, the U.Sannounced a staggering increase in tariffs on electric vehicles imported from China, raising the rate from 25% to 100% plus an additional 2.5% special duty—making the total tariff an astonishing 102.5%.

On June 10, Turkey decided to impose an additional 40% tax on cars imported from China, with a minimum extra charge of $7,000 for each vehicle, effective from July 7. The EU followed suit on August 20, announcing a draft for additional countervailing duties that could go as high as 36.3% for companies such as SAIC MotorThis brings the effective cost for Chinese electric vehicles exporting to the EU to a staggering 46.3% when factoring in the original 10% tariff.

A few days later, Canada declared intentions to impose a 100% additional tax on all electric cars made in China starting October 1, 2023, on top of the existing 6.1% tax

These seemingly retaliatory policies against Chinese electric vehicles have been brewing for quite some time.

For instance, the EU initiated an anti-subsidy investigation against China's electric vehicles in September 2023, and after nine months, it acted on July 4, introducing temporary tariffs up to 37.6% on July 5. By the end of August, the details of these tariffs became even more explicit.

Several factors are at play behind this escalating trade tensionAs China's automotive sector, especially its electric vehicle market, experiences rapid growth, its manufacturers are beginning to carve out a larger share of the European marketThis expansion imposes competition on local EU manufacturers, prompting the imposition of tariffs as a protective measure for local interests to curb Chinese automakers' market penetration.

Moreover, the EU appears to be concerned that Chinese companies may employ dumping tactics and other unfair trade practices to monopolize market share, thus disrupting the competitive landscape of Europe

Implementing tariffs is seen as a way to safeguard against such competitionNonetheless, these practices may trigger disputes and retaliation, undermining the principles of fair and open international trade.

The long-term ramifications may inhibit the healthy evolution of the global automotive industry and may also detrimentally affect EU consumers, who stand to miss out on accessing competitively priced products and services offered by Chinese manufacturers.

Industry experts assert that to excel in an increasingly competitive environment, companies should rely on disruptive technological innovation rather than tariffsThe steep tariffs have had an impact on the sales of Chinese electric vehicles in certain regionsIn July, car manufacturers from China reported a decline in electric vehicle sales within Europe, although the drop did not amount to a collapse.

According to data from the research institution Dataforce, the number of electric vehicles registered by Chinese companies in Europe fell to below 14,000 in July, down from over 23,000 in June, marking a year-on-year decline of 9.7% compared to the same month in 2023.

In cumulative terms, from January to July, sales of Chinese new energy vehicles in the EU decreased by 17%, with similar declines of 10% noted in North America

Though both the U.Sand Europe rank as the largest automotive markets globally, the overall impact of rising tariffs on Chinese exports appears to be marginal.

One significant factor is that the share of vehicles from Chinese brands sold in the EU and North American markets is relatively smallData from the China Passenger Car Association indicates that from January to May 2024, the electric vehicle sales proportions in EU member states for companies like BYD, SAIC, Geely, and Great Wall were 4.6%, 6.6%, 0.4%, and 0.5%, respectivelyIn the first seven months of 2023, China's total exports of new energy vehicles to the U.Sand Canada fell to only 28,000 units, representing a mere 2.4% of the total export volume.

On the flip side, several countries and regions across the globe have adopted policies that lower or even eliminate tariffs on Chinese new energy vehicles, providing a counterbalance to decreases in sales forced by high tariff regions.

For example, in May 2023, the Indian government opted to significantly cut import taxes on electric vehicles, planning to reduce the rate to 15% for cars priced over $35,000, capping imports at 8,000 vehicles per year

Prior to this policy shift, vehicles priced under $40,000 faced a staggering 70% tariff, while those priced above faced 100% tariffs.

From January to July 2024, China's exports of new energy vehicles to India reached 44,000 units, reflecting a year-on-year growth of 24%. In July alone, exports to India saw an increase to 8,213 units, up 20% from the previous year.

From a global export perspective, analysis from the Secretary-General of the China Passenger Car Association, Cui Dongshu, indicates that in the first seven months of 2024, China exported a total of 1.17 million new energy vehicles, representing a year-on-year increase of 25%. In July alone, 168,000 new energy vehicles were exported, marking a 23% increase.

This suggests that despite the increases on tariffs, China's total export volume of new energy vehicles has not witnessed significant fluctuations yet

However, the long-term consequences of tariff hikes remain highly significant.

The reasons behind the differing tariff approaches from the U.S., Canada, and the EU vary widelyU.Smedia indicated that the American tactic is influenced by notions of “national security” and “political correctness,” aimed purely at preventing Chinese electric vehicles from entering the marketOn the other hand, Canada shows increased apprehension towards free trade, believing that imported Chinese electric vehicles harm key Canadian industries and could eventually lead to job losses among Canadian auto and metal workers.

The EU’s approach appears to be more about using tariff barriers to incentivize Chinese automakers to invest in local manufacturing, transfer technologies, and share supply chains.

For instance, in Turkey, the government’s official gazette outlined rules effective July 2023 which exempt imported cars from extra tariffs if manufacturers engage in investment-promoting policies

This allows automakers establishing production facilities in Turkey to enjoy a significantly reduced tariff rate of only 10% instead of the original 40%.

Additionally, Brazil's current administration under President Lula da Silva aims to revamp the country's automotive supply chain through various policy adjustments, encouraging foreign automakers to deepen local investmentsDuring a visit to China, President Lula even met with BYD's Chairman Wang Chuanfu, promising relevant investment incentives that ultimately led to BYD establishing a factory in BrazilAutomotive companies building plants in Brazil can benefit from tax breaks, national treatment policies, and market openness, among other incentives.

The Indian government’s strategy is more transparent than many others; the significant reduction in tariffs on imports is contingent upon related manufacturers making substantial investments within the country, committing to commence local production within three years, and sourcing at least 25% of their components from local suppliers.

The driving force pushing many nations to attract Chinese enterprises to establish local manufacturing is undoubtedly the massive competitiveness of China's automotive brands.

A U.S

automotive analytics firm, Caresoft Global, conducted a teardown on a BYD Seagull and was astonished by its $12,000 price tag, stating that “With U.Smanufacturing standards, the same car would cost more than three times as much!”

Even Elon Musk, CEO of Tesla, has openly commended Chinese electric vehicles several times: "Chinese electric vehicles are excellent; if other countries do not erect trade barriers, they could virtually destroy most car companies globally."

In fact, many Chinese companies had already anticipated risks and began proactive planningBoth BYD and NIO have established factories in Hungary, a member of the EU, which allows them direct access to the European marketA number of other brands such as BYD, Chery, and Great Wall Motors are exploring opportunities for factory setups in MexicoUnder the United States-Mexico-Canada Agreement (USMCA), cars produced in Mexico can be directly exported to both the U.S

and Canada without tariffs, provided at least 75% of components are locally sourced.

Furthermore, brands like Dongfeng Motor, Changan Automobile, Great Wall Motors, and XPeng Motors are also planning their own ventures into establishing production bases within Europe.

However, establishing overseas manufacturing is not without its challenges.

In Europe, the first hurdle is the high cost of labor, particularly in nations like Germany, France, and Italy where wages are considerably elevatedThis raises the costs associated with setting up manufacturing facilitiesFurthermore, these countries are already home to formidable local automotive brands, creating a fiercely competitive landscape that presents a daunting challenge for new entrants aiming to secure market share.

Additionally, established European markets maintain rigorous quality standards for automotive products, necessitating companies to continually enhance their products to meet European consumers' expectations

Meanwhile, as subsidies for new energy vehicles in Europe gradually decline, automakers must seek new avenues for growth within the market.

It is important to emphasize that the decision by Chinese companies to establish manufacturing plants abroad is not merely a reaction to tariff pressures but rather a strategic decision based on their individual situations.

Taking SAIC as an example, the group had already indicated back in 2019 that their objectives in the European market involved not only selling vehicles but also establishing manufacturing facilities at suitable momentsAlthough plans were stalled due to the pandemic, senior SAIC officials resumed discussions on locating a factory in Europe last yearBy July 2023, reports from Spanish media suggested that SAIC is considering setting up its first European production plant in Spain, following discussions with the Spanish Ministry of Industry regarding the details.

In summary, the increased tariffs cannot deter Chinese enterprises from venturing abroad

In light of reduced dependency on any single market, Chinese companies are also constructing diversified overseas market strategies, actively exploring emerging markets and developing countries, thus achieving a more varied and global market layout,” posited Jiang Han, a senior researcher at the Pangoal Institution.

Looking back through history, the trade frictions faced by automotive manufacturers venturing overseas are not newA few decades back, Toyota experienced similar challengesTo grasp these lessons, it’s essential to consider Toyota’s expansion into the U.Sin the 1980s.

In February 1981, in a bid to protect its domestic automotive industry, the U.Smandated Japan to implement voluntary export restraints, capping the annual import of Japanese passenger vehicles to 1.68 million units for a three-year periodSubsequently, influenced by the U.S., Canada and various European nations followed suit with their own restrictions on Japanese vehicle imports.

To break free from new trade frictions and quota restrictions, Toyota began exploring plans to establish local manufacturing facilities

Toyota initially considered partnering with Ford to set up a plant; however, when it became clear the target vehicle models would compete with Ford's compact cars, negotiations quickly broke downEventually, Toyota entered into discussions with General Motors, and by 1984, both firms jointly funded a factory in California, initially importing essential components from Japan before gradually shifting to local procurement of parts like glass, interiors, and paint.

By July 1985, Toyota announced plans to establish its own factories in the U.Sand Canada, aiming to produce around 200,000 vehicles per year in the U.Sequipped with 2000cc engines and an additional 50,000 vehicles annually in Canada with 1600cc enginesBoth projects were set to begin production by 1988.

This collaborative and independent factory establishment strategy resulted in nearly half of the Toyota vehicles sold in the U.S