A Lukewarm Defense of Tariffs

Last updated:8 décembre 2024

Europe’s economic struggles have been evident since the pandemic. The once economically powerful continent has taken a backseat as China and the US are fighting for economic supremacy. Draghi, in a report titled « On the Future of European Competitiveness » has dissected the current economic model of the EU and pointed out that there are some core issues facing Europe that need addressing, if Europe wants to avoid a slow and steady decline. Early stages of this decline are visible in the struggles of the European car industry as shown by the stock prices of European carmakers compared to their foreign competition.

After long deliberation, at the end of October 2024 the EU Commission approved countervailing duties on Chinese produced Electric Vehicles (EVs). These tariffs come after an examination and are calculated with different rates depending on the subsidies received by the Chinese government. Crucially, they aren’t dependent on the company and apply to all imports whether the company is US, Chinese or European.

The goal of these measures is to counter these unfair subsidies in the boundaries of WTO rules. But, especially given the current international climate, there are people calling for more tariffs to protect the European car industry. The question therefore is: will these tariffs revitalize the European car industry and could tariffs be a good economic instrument?

What Are Tariffs?

Tariffs generally aren’t well received in economic circles. The argument against tariffs is straightforward: tariffs increase the price of imported goods, forcing consumers to pay more and leaving them worse off. Some imports might disappear entirely, leaving consumers with fewer choices. This reduces competition further increasing prices and limiting options. Additionally, tariffs may slow economic growth as domestic producers face higher costs for imported inputs.

On the other hand, proponents argue that tariffs protect domestic industries from ruinous competition, save jobs, prevent deindustrialization, promote self-sufficiency, and generate government revenue.

In the case of EVs, the EU’s tariffs aim to counteract unfair subsidies provided by the Chinese government. The perception is that these subsidies distort prices in the European market, harming EU manufacturers by undercutting costs. Whether this approach aligns with WTO law is a matter for legal experts to determine.

The idea that tariffs can help revitalize the sector is worth examining. Protectionism has returned to the global agenda, as liberal arguments for free trade no longer resonate as they once did. Both Canada and the US, for instance, have effectively banned Chinese EVs. Meanwhile, Donald Trump’s championing of high tariffs has reintroduced protectionism as a politically viable strategy. Given the importance of Europe’s car industry, could tariffs be part of the solution?

The Costs of Tariffs

The most obvious downside of EV tariffs is the impact on consumers, who face higher prices and reduced choices. However, another often-overlooked drawback of tariffs is their downstream effects. For example, the Bush steel tariffs in 2002 had negligible benefits for the domestic steel industry and employment but significantly hurt steel-consuming industries, where higher costs forced some businesses to close. Fortunately, EVs are a final product rather than an intermediate good, making such effects less relevant here.

Climate Impacts

Another critical concern is the effect on climate change. As part of its CO₂ reduction goals, the EU aims to significantly cut road emissions, with EVs playing a central role. Such tariffs could slow the adoption of electric vehicles, jeopardizing the EU’s emission reduction goals. Even worse, relaxing these targets could encourage a resurgence of combustion engines, further undermining progress. To avoid this, state intervention—such as consumer subsidies—may be a more effective approach.

Strategic Independence

Strategic independence is another key factor. The case of drone manufacturer Skydio, which struggled after Chinese sanctions cut off battery supplies, was a wake-up call concerning Western dependency on China for critical goods. While EVs themselves may not be critical technologies, their components—particularly batteries—are. Batteries are essential for the green transition, and the technologies underpinning EV production are equally significant.

Can EV Tariffs work in Europe?

All these factors are important and can, in endless debates, be weighed against each other to come to some sort of conclusion. But there is one main point that shouldn’t be very controversial. Right now, Europe’s automotive sector is struggling, and the problems go far beyond foreign competition. Rather than causing issues, competition has exposed existing flaws. Many of these challenges, as Draghi highlighted, are systemic across the European economy.

Europe is lacking investments, which drives up costs in key areas like energy. Its reliance on cheap Russian gas left it vulnerable, and its decision to abandon leadership in renewable technologies, like solar power, compounded the problem. These issues—along with skill shortages, low productivity, and bureaucratic red tape—cannot be resolved by quick fixes like tariffs.

They can however do two things. First, they can buy time, providing temporary relief for struggling industries while more comprehensive reforms are enacted. Second, they generate revenue—optimistically valued at €3 billion These funds could support investments or offset higher consumer costs through subsidies. Using Tariffs as a simple one size fits all solution, as Donald Trump champions is misguided, but there is still a case here.

The Historical Case for Tariffs

There is considerable evidence suggesting that tariffs can aid industrialization by protecting domestic industries from foreign competition. They provide the time needed for firms to become competitive by developing technologies and achieving economies of scale. Historically, many countries protected their industries in this way while catching up to the West. Now, with the roles reversed, the EU might need to draw on this strategy. Recent developments, such as technology-sharing initiatives, suggest this line of thinking.. In this context, tariffs could act as a force multiplier, amplifying the benefits of broader industrial policies and therefore be a smart policy solution. However, this ultimately depends on Europe’s political willingness to take bold action.

Jonas Bruno