Paul Diggle
Hello and welcome to Macro Bytes the economics and politics podcast from abrdn. My name is Paul Diggle
Luke Bartholomew
And I'm Luke Bartholomew.
Paul Diggle
And today we are talking about the international politics and economics of electric vehicles, and in particular, the enormous global macro repercussions of China's rapid rise to become a global EV superpower, overtaking the US as the world's largest manufacturer of electric vehicles. And this is changing the course of the Chinese economy. It's also impacting the economies and domestic politics of the US and Europe, and it's amplifying global trade tensions. So, it's a really interesting topic. There's a lot to get into. We're delighted to be joined by Robert Gillhooly, who is senior EM economist at abrdn, and Lizzy Galbraith, political economists abrdn. Welcome Bob. Welcome, Lizzie.
Bob Gilhooly
Hello.
Lizzy Galbraith
Good to be back again.
Paul Diggle
So, Bob, let's start with you. Why don't you give us a sense of China's size and scale in EV manufacturing and exports?
Bob Gilhooly
Yeah, well, it's pretty big. So, China manufactures around 30 million autos each year and we've seen electric vehicles rise from, well, virtually nothing back in 2016 to about 1,000,000 in 2019. And that's now up to about 10 million EVs produced every year. Some other stats - China overtook Japan as the world's largest auto exporter in 2023 – so overall export volumes, so the number of cars rather than the value - which includes both EVs and and internal combustion engines - are up by a factor of five since 2019. So clearly making some big inroads there into international markets. And this year in Q1, BYD, which counts the ‘Sage of Omaha’ Warren Buffet as a key large investor, overtook Tesla to become the world's largest single EV manufacturer. BYD, alone made around about 3 million cars in 2023 and actually already has the manufacturing capacity to produce about 4 million cars a year. But, you know BYD is probably the biggest and maybe one of the best or perhaps the only one, known outside of China. But there's a huge breadth, in China. Something around about 300 EV manufacturers fighting for survival right now.
Paul Diggle
So that's, an enormously rapid rise in China's global position in EVs. How did it happen? What drove the speed of that growth?
Bob Gilhooly
Yeah. Look, I mean, these are private companies, but government industrial policy has played a really big role, I think, in kind of turbocharging this, this development. So the Chinese Communist Party, I think saw a bit of a chance here to leapfrog traditional Western automakers and kind of break into a new market. But it also fits in with their other aims too so the dual carbon environmental aims. And it also has the benefit of reducing dependence on foreign oil over the long run so it fits in with their kind of energy security aims and fits nicely in with this kind of broader self-sufficiency drive too. The actual government policies I'd say kind of now follow a reasonably familiar playbook. So cheap loans, tax breaks, consumption subsidies, all help to boost both production demand and encourage then a large number of new entrants into the market. This turbocharges competition and then spurs quite a lot of technical progress as the kind of automakers and their suppliers have to fight it out, eventually resulting, in kind of world class products that can compete on the global stage. There's been a few kind of other parts to this, though. One interesting feature of this kind of strong competition seems to have been a bit of a change in the way the auto industry works in China versus, the rest of the world. So the time from kind of inception of designing an EV to manufacturing has been greatly reduced in China compared to Western manufacturers, something on the order of 9 to 12 months in China versus more of a lead time closer to 18 months the standard in Western auto manufacturers. So they seem to be able to be more effective in maybe using some software for design and then you combine that with China's very deep manufacturing supply chain, lots of capacity on machine tooling and other aspects. And that's kind of been a key reason why we have seen such a rapid emergence. But of course, you know, this isn't a pure auto story, and when we talk about EVs it's really as much about batteries as it is any other kind of manufacturing angle. So batteries make up about 40% of the cost of an EV, and China just clearly dominates global battery production at the moment, including downstream industry. So, a few more stats, if I may, and some of the key points around batteries. So should China owns a bit over 40% of global cobalt mining, which is a key part in making the cathodes within batteries. And then on the refining side. China owns over or around 70% of many of the key mineral refining – so a bit over 70% cobalt, round about 70% of graphite, over 60% of nickel, and this means, the that actually, overall, China makes about two thirds of the world's batteries.
Paul Diggle
And you told a kind of nuanced story there Bob, about both state subsidy tax breaks, cheap loans and competitive pressures, specialization, access to rare earths and dominance of battery technology. And I suppose precisely what's at stake in some of the Western trade investigations into Chinese EVs, which we'll kind of get onto, is how that balance is actually working. Is it a story of state support - which Western countries might take issue with - or is it a story of, just Chinese excellence and the complaints from the West are a case of sour grapes? How do you think of that balance yourself?
Bob Gilhooly
I think this is probably a bit of both. It's probably a bit of both. I think it's going to be, well I'll leave Lizzy to say a bit more about this, but I think, and you know it's not going to be a surprise to anyone, that the EU does find that there has been some unfair subsidization when the they conclude their report. So, it's very difficult to unpick the two aspects and kind of once you unleash that subsidization you know maybe you get competition. But I guess another aspect to this would be, okay, so if this is unfair market dumping, you could look at what's the domestic consumption of EVs versus total production. And there's been a pretty big gap opening up between EV production, running about the 10 million, as I said, versus domestic consumption, which is only running around about the 5 to 6 million mark. So, you know, I think Western countries are rightly worried about where the rest of these EVs are going to be going, and is that going to damage my domestic industry if they get effectively dumped. So Europe seems to be the primary destination for EVs. So we think that's around about 40% of Chinese EV exports going to Europe. We've seen some pretty sharp rises in exports going to Germany, Spain, the UK too. Elsewhere, exports to Saudi and UAE have also been pretty strong. Very negligible numbers going to the US - not even worth reporting. And one reason Europe seems to be a key export market is, well, first of all, DM consumers can afford EVs more easily compared to say the emerging market consumers. Charging infrastructure is also a bit more advanced, helping support adoption too. But then it just reflects Europe's got a fairly open trade environment and also government EV consumption subsidies in Europe kind of don't discriminate on origin, like they have been doing in the US. But then the other reason, is that I guess exports, these are of course exports from China, but they're not really necessarily always quote unquote ‘Chinese’. Western automakers have very substantial operations in China, and they actually account for around about half of Chinese EV exports to the EU.
So Tesla alone, we think is around about 40% of the EVs that are shipped from China to the EU and then other kind of individual or joint ventures between European firms such as BMW and Chinese firms account for probably around about another 10 to 15% or so of those quote unquote ‘Chinese’ exports.
Luke Bartholomew
And, Bob, the rise in EV and battery production that you described there is sort of, I guess, also part of a broader push from China towards green investment, renewable energy and solar production in particular. And I mean that sector, green investment, has become quite a large contributor to Chinese GDP growth now. So, first what has been behind China's broader green investment push? And then second, given the scale of the investment we're talking about and the speed of the switch to this flow of investment hitting the sector, what are the risks of kind of a misallocation or inefficiency there somewhat similar to what we maybe saw around the previous push to real estate investment in China?
Bob Gilhooly
Yeah, it's an interesting question. I think there's probably some risk here that we do see, actually you know we've had effectively like a surge of investment going into electric vehicles, and particularly, if the export channel or avenue for that production is becoming increasingly closed or more challenging abroad, I think we could well see that actually, investment needs to kind of stop flowing or will indeed reverse, therefore kind of weighing on GDP growth. So you might have swapped a bit of real estate investment for kind of EV, even investment that will kind of unwind. The other aspects of it we think are probably more sustainable. So China's had this huge push into domestic, renewable kind of power consumption. We've seen some huge increases in solar and wind capacity being added to the grid. We think that has probably been of a kind of order of magnitude large enough once you combine it with say, EV production, and expansion kind of other green transport, such as railways, has probably been large enough, actually, to offset the drag coming from real estate over the course of 2023. As I said, there's probably still got some legs to go. I think it fits with Chinese policy, both on the decarbonization front, but also on the energy security front to reduce reliance on foreign imports, partly particularly on the oil side there. So that's probably still got a bit of a ways to run. I think it'll be a little bit longer before we start thinking of that as a drag in the same way that real estate is currently.
Luke Bartholomew
All right then. So turning to the different approaches and considerations of the US and the EU, vis-à-vis this rise in Chinese EVs that we've been talking about. And let's start with the US approach. So Lizzy, can you talk us through the latest US tariffs on China and in particular the EV and battery measures, and why is keeping Chinese EVs out of the domestic market so important to this particular Biden administration at this point as well?
Lizzy Galbraith
Yeah. So over the last couple of months, we've had quite a few tariff announcements from Biden actually, all predominantly within this sort of ecosystem of green technology, particularly electric vehicles. So we've had an increase on the tariff on electric vehicles from China to 100%, as well as increasing the tariffs on lithium ion electric vehicle batteries and some kinds of Chinese steel and aluminum imports as well. So a lot of this is directly targeting keeping Chinese companies out of the US electric vehicle market, but they aren’t really there right now to begin with. This is far more a pre-emptive measure and primarily actually a political one than it is something that is sort of targeting a problem that exists right now. So, this is a lot to do with Biden actually facing quite a tricky re-election campaign at the moment. He's behind in quite a lot of the swing states and crucially, he's behind in the three ‘rust belt’ states that he probably needs, to win re-election. The polls, which would suggest that winning back those three states - so Michigan, Pennsylvania and Wisconsin - would probably be his easiest route to retaining the presidency. And in those states, you have a lot of union workers, you have a lot of auto workers. They are potentially fairly concerned about the potential impact of an influx of Chinese cars into the US market. So taking action that the Biden administration can say is protecting those workers from this potential overcapacity issue is likely to be seen as a political win. It's also worth noting that, before Biden introduced this 100% electric vehicle tariff, it was Trump that was actually advocating for it. So he's effectually taken a Trump policy proposal and implemented it himself. Trump, for what it's worth, has effectively just increased his own tariff proposal now to about 200%. So, we've got into a position now where we're seeing a bit of a tariff war, a competition between those two, on who can be the toughest on China, even in some of these areas where maybe actually there isn't too much impact to be found in increasing these tariffs further at this point. But it is principally now a political decision. It is something that is designed to give Biden a boost on the campaign trail as much as it is to address a specific problem that the US auto manufacturers are actually facing right now.
Luke Bartholomew
So Lizzy, while you said there that it was originally a Trump proposal, these tariffs, do you think it would be fair to say that there's sort of a different reasoning or logic behind why Trump might have been in favour of these tariffs versus the Biden Democrats? And I'm not just thinking here in terms of sort of the politics of the situation - which states they need to win - but I guess there was this thinking in the Biden administration that maybe the economic benefits of re-industrialization tied with the green transition and the importance of the green transition, tied with a political constituency, made for a very attractive package, and there was a logic that tied all those together, and hence the importance there of trying to prioritize domestic production. And it's interesting, incidentally, when the trade- offs of green transition versus domestic production ran up against each other, that it was domestic production that was chosen rather than the green transition. But regardless of that, it feels like maybe the Trump people are less interested in the green transition leg of that stool. So why is it that, you know, tariffs on EVs were sort of the kind of thing that Trump was talking about when maybe that set of motivations wasn't in place for him?
Lizzy Galbraith
Yeah, I think you're right. I mean, there was certainly an element of Biden's approach here where he's essentially trying to make good on the public sector investment that he and his administration have made in the electric vehicle sector and battery production itself through the Inflation Reduction Act. They are trying to demonstrate that that level of public investment works and creates a new industrial base in the US domestically. And I think for Biden, demonstrating that they're willing to shut out other countries, other economic rivals, is part of that puzzle particularly in a competitive, re-election campaign. For Trump, he's had a fairly long-standing scepticism of electric vehicles I think it's fair to say. Some of this seems to be concern about the technology itself. But he's also on the record as being very critical of the dominance that China has in the supply chain as well, that even, you know, he's concerned that sometimes even if you have a car that may be manufactured by a US company in the US that maybe actually within that supply chain, you're still using Chinese companies and therefore still, you know, providing some benefit to the Chinese economy. So there's a couple things wrapped up in there. We know that he's been very critical of the subsidies that the Biden administration provides to electric vehicles through tax breaks in the IRA and he has spoken a few times now about potentially looking at reversing those in office. But I think it is a combination of this scepticism of the technology, you're right Luke to point out maybe a de-prioritization of the transition agenda as a whole under a potential Trump administration, and, again, this broader national security concern as well, that maybe the supply chain isn't quite as clean cut as some US policy makers would like it to be.
Paul Diggle
There's also maybe just a kind of US heritage, even verging into a machismo type argument about the US auto industry I suspect playing into that as well, but Bob, do we have a sense of how China might respond both to the latest Biden measures but also to what Trump could do on EVs and indeed more broadly on trade. Of course, when we talk about trade measures, we also must think about retaliation.
Bob Gilhooly
Yeah. I mean, no real sign of retaliation by China to the Biden tariffs so far. So I guess I'm taking that as being kind of relatively safe to assume that the Chinese aren't going to respond to tariffs this time round. I mean, it could be that Biden's latest tariffs aren't really moving the dial that much on the kind of, small yard, high fence. So the latest tariffs hit around 18 billion dollars-worth of battery and battery part exports. That's a relatively small share of total Chinese exports to the US. I'm not sure that's necessarily a super strong reason, though. 100% EV tariffs are effectively shutting the door to future exports to Chinese EVs. So I’d probably put a bit more weight on this coming at a time when foreign direct investment is exceptionally weak in China. You know, they're trying to convince multinationals to stay in China, not to re-shore operations elsewhere and obviously because essentially, you know, they don't want to give Trump extra ammunition for a kind of trade war. I mean, for the potential actions taken by Trump, not really clear that say 200% tariffs on EVs from Trump would make much difference above and beyond 100% tariffs. But the one I’m really watching out for is this kind of broader trade war risk for Trump. And I think that's much more likely to kind of spark retaliation. I mean, first of all, it's worth noting what we saw during the first trade war was the Chinese currency depreciating by roughly the rise in average bilateral tariff rates. So it seems that that's a likely pressure valve that they will use this time round too. But then, you know, the potential scale of the Trump tariffs in a second trade war, if they really do put it across the board at 60%. I think that makes an explicit policy reaction across several dimensions pretty likely. Back in 2018, China targeted tariffs on goods produced in congressional districts where Republicans are actually facing some pretty tight races in the mid-terms. Maybe we'll see something, along those lines. But I think maybe this time the biggest lever they reach for might well be kind of restrictions on critical mineral exports or other key semi-finished inputs. So this could really hurt US manufacturing and maybe cause more significant supply chain disruption. So really just raising the cost for any sort of Trump Trump actions that he would take.
Paul Diggle
So let's maybe pivot into the US approach to Chinese EVs Lizzy. There's a live investigation going on. What's that likely to result in? What's the state of European tariffs and restrictions on Chinese EVs? Where might they be heading?
Lizzy Galbraith
Yeah, so there is an anti-subsidy investigation that's been ongoing for, for some time now into electric vehicles in the European Union. We're expecting that to conclude pretty quickly. Actually, there's a deadline of the 4th of July to impose provisional tariffs as a result of that investigation which we think is pretty likely to happen. The EU’s been dropping some pretty heavy hints in recent weeks that it is going to conclude that there are subsidies involved that hurt European domestic manufacturing and that it will introduce, tariffs. Now this is a provisional period. Definitive tariffs, final tariffs, would have to be introduced by the 2nd of November. So, we have a bit of an interim period here where they basically going to trial these tariffs, and then we'll have a sort of a more permanent state of affairs by the end of the year. So we're expecting at the moment that the Commission will announce a provisional tariff of between something like an additional 15 to 20% on Chinese electric vehicles. There's some indication that they may target specific manufacturers, to try and get around this issue of a lot of European manufacturers actually using China as a manufacturing base and then exporting those cars back to the European Union. But overall, that should take tariffs on Chinese electric vehicles to something like 25 to 30%. Will that really narrow the gap, that we've seen open up between the cost of a Chinese brand electric vehicle versus a European one? It doesn't appear so, but we don't think the European Union is really willing to go much further. It's a far more complicated policy picture for the European Union.
[Hello listeners, Paul here – two days after we recorded, the EU did indeed impose tariffs on Chinese EVs – Lizzy was bang on in her analysis, as they averaged about an additional 20%, varying by specific manufacturer. OK, let’s get back to the podcast.]
Paul Diggle
Why don't we get into some of those kind of complex considerations then? Why does the EU want to stop at a tariff level that's deliberately lower than US levels? What are the various considerations?
Lizzy Galbraith
So firstly there are quite a range of views among European member states about exactly how to approach this, this issue. On the one hand, you have countries like Germany and Hungary that are either beneficiaries of Chinese investment into their countries or they have quite significant exports to China. In the case of Germany, there's quite significant auto exports going to China. There's quite a significant manufacturing base within China of some of these German auto manufacturers as well. And they're concerned about the risk of Chinese retaliation in this case. They're concerned that their market share, may face downward pressure in this scenario. On the other side of the table, you have countries like France and Spain, which are, actually really supportive of the idea of introducing tariffs. and this isn't because they're not necessarily ignoring the risk of retaliation, but what they think could happen in the instance of tariffs being introduced is that you actually encourage manufacturing to move from China to the European Union and that is something that they're they're far more amenable to than to have these exports, come directly from China itself. So, from the position of the French, for example, they believe it could help shift the manufacturing base into the European Union itself. And that would obviously come with job benefits, even if you're still actually seeing a base for Chinese companies themselves within the European market it feels slightly less politically one-way to the French, in particular. Germany doesn't necessarily agree with that position. So what we've got is a relatively small tariff increase in the scale of things. Certainly, when you compare it to the US, but it seems to be the level that everyone can get behind that would avoid a major Chinese retaliation. Although I think the European Union are expecting that there will be some form of retaliation from China when these tariffs are introduced, in part because as Bob mentioned, there isn't really any direct market impact to the Chinese in the US instance they don't have a market share there anyway. In Europe it's different, they do have a market share that potentially is damaged by this.
Luke Bartholomew
So Bob, we talked a little bit about the prospects of Chinese over-investment and over-capacity. We've now said that both the EU and the US are attempting to shield and develop their domestic industries to varying degrees, and perhaps for somewhat different reasons. So I'm wondering what is the risk then, at a global level, that we could see overcapacity in the EV and broader green industries as a consequence of all this domestic-driven production? And, you know, should we fear that overcapacity? I mean, to us, maybe a somewhat basic question, what is it that makes quote unquote ‘overcapacity’ a bad thing? What does it mean to have too much capacity, and what might that mean at a global level for the economy as a whole?
Bob Gilhooly
Thanks. Yeah. I mean, it's an interesting one from a kind of global perspective. We quite often worry about these kind of trade barriers, deglobalization pressures, being inflationary. But as you said, if you're kind of building up lots and lots of excess capacity, then actually, you know, the price pressures could be moving in the opposite direction. And as we said, at the current juncture, that might be kind of welcomed given where inflation is globally. But, you know, this is also going to potentially raise the costs for Western countries. So, if they're really trying to reduce dependence on Chinese inputs, really boosting supply and therefore lowering prices is really going to raise the cost of independence, raise that fiscal cost associated with trying to reduce your reliance on China. So I think that potentially is going to really test the political will of policymakers to actually continue and keep going. Batteries is an interesting example here. So at the moment, Bloomberg NEF is tracking almost eight terawatt hours of annual battery manufacturing capacity potentially coming online for the end of 2025 with China being almost six terawatt hours of that. That is way above the demand which they project at only about 1.6 terawatt hours and that assumes steady EV demand growth, and also a very rapid increase in batteries for storage unrelated to autos. So potentially we could see those kind of battery prices coming down very sharply. So again, if you're the US economy, to take one example, and you're kind of very much trying to protect your own domestic, manufacturers, you're effectively going to end up, raising the cost of consumption, for your consumers versus other countries, quite notably. So there is a definite trade off here between supporting your domestic manufacturers, but indirectly, or there's a kind of hidden cost, if you will, of doing that, which is going to damage consumption to some extent.
Luke Bartholomew
All right. Well, I think that is all we have time for this week. I think this is being an extremely interesting conversation, because it touches on so many different themes that are at play in the global economy and geopolitics at the moment, from green transition as a driver of economic activity, the changing nature of globalization away from this sort of previous liberal vision around free trade and open markets towards policy activism, protectionism, fostering domestic champion sectors if not quite domestic champion firms, the rise of China, Western divergence to that approach of China. So I think this is all fodder that we will be coming back to in the future. But for now, as ever, please do let me ask you to like and subscribe wherever it is that you listen to your podcasts and all that remains is for me to thank Bob and Lizzie for joining us today, and thank you for listening. So thanks very much and speak again soon.
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