Monday 16 / December / 2024
China is currently riding high on the buoyant demand for electrical vehicles, producing about 60 percent of the EVs manufactured globally and digging furiously in different corners of the world in search of lithium for the manufacture of lithium-ion batteries; now controlling 75 percent of the total battery cell manufacturing capacity.
In their anxiety to establish total control over the EV market in the world, mandarins of the Chinese Communist Party have overlooked the emerging global scenario under which buyers may lose interest in EVs, the plants producing EVs and the mines from which lithium is extracted may be left high and dry. All the fixed investments sunk in EV plants and lithium mines may be without a return.
The EV market has grown globally because of the emphasis on climate protection and the urgency to control vehicular emissions, the foundations for which were laid in the Paris Agreement of 2015; a legally binding international treaty on climate change. To abide by the terms of the agreement, governments in different countries have imposed stringent restrictions on vehicle emission standards and have also offered subsidies to encourage buyers to opt for EVs.
China has managed to dominate the global EV market as the Chinese government offers subsidies to manufacturers of EVs, thus violating the principle of fair competition under the General Agreements on Tariff and Trade.
Two recent developments threaten the future of EVs; and as a consequence of lithium mines too: the re-election of Donald Trump as the U.S. President and the limited success of COP 29 climate talks, held at Baku in Azerbaijan in November.
The disdain of Donald Trump for climate protection is well-known. He refuses to accept global warming as a phenomenon. Even before taking over office, Trump has vowed to roll back or eliminate many vehicle emission standards under the Environment Protection Agency of the U.S. government. He has condemned EVs, saying they are being forced upon consumers and will ruin the U.S. automotive industry. Analysts have said that large U.S. automakers like General Motors, Ford and Chrysler will be the biggest winners in a second term for Trump and Republican control of the U.S. Congress. With buyers in the U.S. opting for vehicles with conventional internal combustion engines, the market for Chinese EVs and batteries in America will suffer.
Donald Trump is also likely to further increase the tariff on the import of Chinese EVs and batteries in the U.S. These imports are already facing enhanced tariff introduced by the Joe Biden administration. The tariff on the import of Chinese EVs was raised by the Biden administration from 27.5 percent to 100 percent and on lithium-ion EV batteries from 7.5 percent to 25 percent earlier in 2024.
EV manufacturers in the U.S. are dependent on Chinese batteries and a tariff hike on their imports will delay electrification of the vehicle fleet in the U.S., but that should not worry Donald Trump. In the long run, the battery-manufacturing capacity in the U.S. will also increase.
Between 2018 and 2023, before the increase in the tariff barrier by the Joe Biden administration, U.S. EV imports from China increased from $7.2million to $388.8 million, says the U.S. International Trade Commission. With Mexico having a free trade agreement with the U.S., now leading Chinese EV manufacturers like BYD are setting up manufacturing facilities in Mexico to access the American market from there. Their efforts may not meet with much success as Donald Trump is likely to impose duties on the import of EVs from Mexico. He has announced that after taking over office he will impose a blanket duty of 25 percent on all imports from Mexico.
The export of Chinese EVs to the European Union has soared in recent months but the European Commission announced last year that it was planning to raise the tariff on EVs manufactured in China from 10 percent to 50 percent. Now the impending U.S. action will also induce the European Commission to raise import tariffs on Chinese vehicles further.
The EU had plans to phase out the sale of fossil-fuel vehicles by 2035. But the limited success of the COP 29 climate talks is an indicator that the climate crisis has slipped down the agenda of many world leaders. With developing countries rejecting as “paltry sum” and “joke” the target set in COP 29 of a climate finance fund of $300 billion per year as against an expectation of $1.3 trillion, governments around the world may not attach much significance to offering incentives to car buyers to opt for EVs.
Many developing nations which are emerging markets for Chinese EVs have already emphasized that smaller than expected commitments of finance from rich nations will hamper their transition to emission-free energy. India has in place a Faster Adoption and Manufacturing of Hybrid and Electrical Vehicles Scheme, with budgetary support for incentives. The EV manufacturers in China may lose their markets in all these countries, too, if the emphasis on climate protection is less pronounced. The demand for lithium-ion batteries will also suffer.
The shortage of infrastructure for running EVs, like plugging in facilities for recharging batteries, in most countries stands in the way of car buyers opting to switch over from internal combustion engine vehicles to EVs. Public charging facilities are limited to urban areas. This restricts the adoption to EVs outside of cities. Buyers also worry about the mileage obtained in long drives after recharging the battery of the vehicle. The possibility of running out of charge before reaching a charging station is there. Even in the U.S., as against the target of 500,000 public charging ports, now there are only about 80,000 public chargers active across the country.
The Chinese EV and lithium battery manufacturers in the coming days may have to fall back more on the domestic market. With the Chinese economy facing a slugging growth rate and consumers not willing to spend in view of falling property prices, here, too, the prospects are not bright. The Chinese EV factories and lithium mines may in the coming days be saddled with large excess capacities.
