The Electric Curtain: Tariffs and the Roadblock to China’s EV Dominance

Just how good are these cars we’re banning?

Kevin Zhang is a founder and investor. He blogs about tech, investing, and geopolitics at East Wind.

With the Biden administration’s latest (and highly anticipated) tariffs on Chinese EVs and batteries, the US is striking what it hopes to be a killing blow to China’s global EV ambitions. These tariffs didn’t come out of nowhere. To understand the Biden administration’s logic, we need to understand how Chinese EVs fare against their competitors.

While America’s car shortage is still a relatively recent memory, China’s automotive dynamics seem very much the inverse of the US’s (and much of the West’s): EVs are actually cheaper than equivalent ICE (internal combustion engine) vehicles. There are a number of reasons for this, including the sheer number of EV brands and general production overcapacity relative to consumer demand.

How do the cars themselves stack up against their Western counterparts (both ICE vehicles and EVs)? Traditionally, Chinese products in general were viewed more negatively (e.g. inferior or lower quality). But Chinese EVs now are quite ahead for the same price point.

In this post, I expand on some of the thoughts from my Substack highlighting US and Chinese technology progress, and compare US to Chinese EVs from the perspectives of price, driving dynamics/feature sets, and longer-term support and sustainability. I argue that Chinese EVs are superior to Western offerings at nearly every price point, and that imposing 100% tariffs on Chinese EVs is a rational tradeoff by the Biden administration to protect America’s auto industry, at the expense of near-term consumer choice.

There are now dozens of Chinese EV/hybrid brands. Source

Price competitiveness — China wins

Chinese manufacturers have offerings at every price point, from ~$10,000 models, like the BYD Seagull 海鸥, to the ~$140,000 Yangwang 仰望 U8 luxury SUV, which is positioned directly against European high-end luxury brands. At the high-end, Chinese manufacturers now have the confidence to list their vehicles at comparable price points to Western rivals, instead of undercutting them.

The most interesting phenomenon is at the mid-range, where there are extremely competent vehicles like the BYD Song 宋 and the BYD Han 汉. These “mid-range” vehicles have similar features and capabilities that Western vehicles priced one tier higher have. The BYD Han, for example, starts at ~$25,000, but would be a better “buy” than sedans like the BMW 3, Mercedes C Class, or Audi A4, which start well north of $40,000 (the BYD Han is a larger sedan as well).

To see why the Biden administration imposed tariffs, then, it’s helpful to look at how Chinese brands map onto US EVs at various tariff levels.

If the US didn’t enact any tariffs, Chinese EVs would compete head-to-head against sedans like the Toyota Camry or Honda Accord, or SUVs like the Honda C-RV or Toyota Rav-4 (which for the highest trims come close to ~$40,000). At this price point, Chinese EVs would absolutely be the better buy.

With a 25% tariff, Chinese cars often are still better buys — you could get a top-of-the-line mid-size SUV from NIO 蔚来 instead of a Tesla Model Y or a gasoline-powered BMW X3.

Meanwhile, at 100% tariffs, mid-range Chinese EVs would need to compete with higher-end offerings from BMW, Audi, Mercedes, and even entry-level Porsches like the Macan. At that point, the brand prestige of something like a Porsche would win out.

Note: Volvo is majority-owned by Geely

Driving dynamics & feature sets — China wins

The actual capabilities of Chinese EVs have started to converge. Models over ~$20-25k have similar features — long range, advanced infotainment and speaker systems, robust ADAS (advanced driver assistance systems) — in other words, things the everyday consumer cares about. Here, the most visually prominent part of modern Chinese EVs is their large screens. The IM Motors 智己 LM7 — a mid-range SUV (shown in the image below) — features three massive screens. In contrast to the laggy infotainment systems of many Western, Japanese, and Korean vehicles (with many drivers needing to rely on Apple CarPlay or Android Auto), Chinese EVs deliver very smooth user experiences. In some EVs, scrolling fluidity is as good as Tesla’s interface, which I consider the gold standard for cars.

Left: Li Auto (most of Li Auto’s vehicles are hybrids, with the Li Mega being the company’s first pure EV offering); right: IM Motors (JV between SAIC, Alibaba, and Zhejiang Hi-tech). The model pictured is the LM7.

What I found especially fascinating is how Chinese designers approached vehicle-design tradeoffs, especially in domestic Chinese markets: there’s much less emphasis on absolute performance (e.g. 0-60 mph times) for competitively priced models. This approach makes sense: most EV drivers live in urban environments, and many areas in China have tons of speed cameras (capping highway speeds at 62-75 mph/100-120 kmph). In contrast, despite speed limits in the US, I regularly see drivers ripping it on the I-280, hitting speeds north of ~85-90 mph/137-145 kmph. Because of these performance “tradeoffs,” more Chinese vehicles are more FWD/RWD (front-wheel drive/rear-wheel drive) for their base/mid-range trims.

Another notable feature of Chinese EVs, especially for cheaper vehicles, is chassis reuse. For instance, some of BYD’s electric SUVs reuse their chassis from their ICE/hybrid vehicles, meaning these vehicles have no front trunk — in contrast to a “native” EV design like the Tesla Model Y.

It’s important to note that Chinese brands didn’t do it alone. NIO, for example, hired designers from prominent Western auto giants to accelerate their own vehicle development. Even so, at this point, Chinese automakers are ahead, especially given that US and European automakers are delaying their EV efforts.

Since Chinese EV manufacturers “poach” Western designers, many people might assume that only the Chinese are stealing product ideas and intellectual property. But in the world of EVs, we’re actually starting to see the Chinese innovate (out of competitive necessity) and Western EV manufacturers starting to “borrow” stale Chinese designs.

In March 2024, American EV maker Rivian was profiled by popular YouTuber Marques Brownlee. In the walkthrough of the Rivian R2, its latest SUV, Rivian CEO RJ Scaringe showcased how the seats in the front and back collapse, making room for an inflatable mattress for an in-car camping experience.

Chinese EVs, however, have had that feature since at least last year. In a June 2023 Bilibili video, some vloggers touring through Yili 伊犁 — an autonomous prefecture in Xinjiang — show off an identical feature in what appears to be a Li Auto 理想 L-series electric SUV (see video starting at 10:36 and 17:59). You can even buy an inflatable mattress for your Li SUV on Taobao, some for less than US$30!

Another subcompact, the Bingo 缤果 (made by Wuling 五菱), had in-vehicle inflatable mattresses back in February 2023. Ironically, Bloomberg reported three days after Brownlee’s Rivian walkthrough that “China EV makers woo buyers with in-car beds, kitchens and drones”; apparently, “electric vehicles with built-in fridges and even in-car karaoke systems are considered passé.”

Longer-term support & sustainability — China loses

Longer-term support is where “legacy” Western, Japanese, and Korean automotive brands have the edge. Due to the competitive intensity of the Chinese EV industry, many brands are not expected to survive. For instance, the IM Motors L7 is a fantastic car — but the company simply isn’t moving enough volume, which might eventually lead its backers (SAIC, Alibaba, and Zhejiang Hi-tech) to pull the plug.

Bankruptcies or suspended operations of several Chinese EV brands have already occurred, including those of Human Horizons and WM Motor 威马. Given China’s brutally competitive domestic auto market, some manufacturers have shifted their sights to global markets — though tariffs are certainly making this global expansion difficult!

Chinese consumers probably weigh these factors heavily as they consider their next purchases. Do they buy one of the “incumbents,” like BYD, or should they take a chance on a challenger brand? My guess is most would choose the incumbents — a choice which makes a death spiral for newer, smaller brands more likely.

Biden is trading consumer choice for American protectionism

Hot off the podcast studio, Jordan had on Brad Setser of the Council on Foreign Relations for an emergency podcast.

Brad highlighted three rationales for the latest tariffs:

• the data collected from Chinese EVs in the US could flow back to Chinese servers;

• China heavily subsidized its domestic EV market;

• it’s a strategic priority for the US to have its own EV industry.

I think the real rationale for the tariffs is that the US EV industry — and the Japanese and Korean automakers that have US manufacturing operations — just doesn’t have very competitive offerings on the market. Therefore, the US has made the strategic decision to prioritize building a competitive EV industry at the expense of the American consumer in the short-term.

One reason for trading away consumer choice is that, similar to the past, these manufacturing plants can be retooled to build weapons systems in times of conflict. As a result, Tesla is pretty much the only current game in town when it comes to relatively affordable, full-featured, mass-market EVs — while Chinese consumers have a number of choices at every price point.

Now, Chinese EV companies may choose to skirt around these tariffs by building plants in the US or Mexico, similar to how Volvo (majority-owned by Geely) is doing it. The issue here, however, is that these tariffs may be a moving goalpost, and subsequent administrations might choose to close any loopholes, rendering any potential expansions not worth it for Chinese EV brands.