How Biden’s Tariff Increases on Chinese Products Will Affect the U.S. Economy

The White House announced on Tuesday, May 14, 2024, that he will raise tariffs on electric vehicles (EVs), from the current 25% to 100% to take effect in 2024.

In addition, the tariff rate on lithium-ion EV batteries will increase from 7.5% to 25% in 2024, while the tariff rate on lithium-ion non-EV batteries will increase from 7.5% to 25% in 2026.

The tariff rate on battery parts will increase from 7.5% to 25% in 2024. Tariffs on steel and aluminum products will increase from 7.5% to 25%, and tariffs on solar cells will increase from 25% to 50%. The tariff rate on semiconductors will increase from 25% to 50% by 2025. In addition, the White House imposed a duty of 25% on port cranes. 

“Senior Biden administration officials said they delayed the start of some of the tariff increases to give U.S. industries time to rejigger their supply chains. The White House said the new tariffs would apply to $18 billion in products from China, with EV batteries, critical minerals, and medical products among the other goods targeted. The tariff rate for Chinese semiconductors would double by 2025—to 50% from 25%.” 

Potential Courses of Action for China

Here’s a synopsis of how China may retaliate against the United States and its interests globally and in China specifically.

China is likely to respond to Biden’s tariffs on Chinese electric vehicles (EVs) from Mexico in several ways:

China may impose retaliatory tariffs on U.S. goods, targeting sectors that are strategically important to the United States. This approach would mirror the U.S. tariffs on Chinese EVs and other products. 

In addition, China may put in place non-tariff measures to hinder U.S. companies operating in China. For example, they could increase regulatory requirements, scrutinize companies’ imports, exports, and other operations, delay approvals, or create administrative obstacles for American businesses.  

China may also set up a production facility in Mexico to avoid direct U.S. tariffs, if they meet local production requirements. As a matter of fact, despite U.S. pressure on Mexico’s government not to offer any incentives to China for its plan to build EVs in Mexico, according to Reuters, China’s BYD launched a hybrid pickup in Mexico as the United States increased tariffs on EVs. 

Stella Li, CEO of BYD in the Americas, stated that those trucks will be built for the Mexican market to satisfy the growing demand, and that BYD “has no plans to go to the U.S. market, so this announcement (the increase in tariffs) does not impact us at all.”

In addition, China may exert diplomatic pressure on the U.S. government, urging them to reconsider the tariffs. This could involve high-level discussions or negotiations between the two countries.

As a last resort, China may request that its consumers boycott U.S. goods including but not limited to EVs made in the USA. Such a boycott could impact the sales of U.S. companies in the Chinese market.

The Biden tariffs’ impact is not limited to large corporations. The increase in tariffs on EVs will impact small businesses and entrepreneurs as well.

Starting with the negative effects, inflation is front and center. The ultimate users will face higher prices which may prevent them from purchasing EVs, therefore, a decrease in demand. As a result, dealers, distributors, and solopreneurs will be affected negatively.  

In addition to inflation, financial disadvantage will affect small businesses and entrepreneurs who rely on lower-cost Chinese parts and who may not have the financial advantage (deep pockets) that allow large corporations to withstand cost increases.   

Add to that the supply chain disruption as small businesses and entrepreneurs may not have any alternatives to find suppliers/sellers who may offer competitive prices to match those of the Chinese manufacturers and sellers.  Even if they did, the minimum quantity required may be prohibitive to them financially and capacity wise. 

VUCA (Volatility, Uncertainty, Complexity, and Ambiguity) created by the tariffs produces much larger headwinds for entrepreneurs and small businesses than for large corporations who may be able to absorb cost volatility and product availability. 

When it comes to domestic positive effects, small businesses and entrepreneurs may see an upside from the tariffs as domestic manufacturers may gain market share. This is welcome news to small businesses and entrepreneurs who are in the production, distribution, or sale of domestically manufactured EVs and parts. 

This market share gain may result in an increase in employment for small businesses and entrepreneurs who are involved in manufacturing, maintenance, or assembly.   

Moreover, the increase in domestic sourcing will put an upward pressure on cost due to higher domestic wages caused by the increase in tariffs which will force importers to procure locally from U.S. manufacturers and suppliers, or internationally from countries where the import tariffs are much lower than those imposed on Chinese products. In both scenarios, the cost reduction will benefit small businesses and entrepreneurs. 

The increase in tariffs may increase the stock value of clean energy startup companies. Due to the decrease in Chinese competition, and the increase in domestic demand (if the current consumers’ behavior changes), clean energy startups will be better positioned to innovate.  This will lead to new patents and additional product launches to the market, which, in turn, will lead to an increase in investors’ confidence. 

This situation is complex. China’s response will depend on various factors, including political considerations, economic interests, and the U.S.-China relationship at large.

Diplomatic channels and negotiations will likely play a crucial role in determining the outcome.