MNI INTERVIEW: U.S. Will Find Replacing China EV Parts Difficult

The U.S. will find it hard to substitute China in the electric vehicle supply chain, a policy advisor told MNI, noting exports will continue to support the Chinese economy this year despite rising trade tension.

Chen Wenling, chief economist at high-level government-backed think tank the China Center for International Economic Exchanges, said the U.S.’s recent tariff hikes targeting China’s new energy products, including a 100% tariff on electric vehicles and a 25% levy on lithium-ion EV batteries effective Aug 1, will fail to hurt Chinese companies substantially. U.S. EV parts importers, however, will bear the additional costs, she added. (See MNI EM: WTO First Step For China In US Tariff Response - Advisors)

“The U.S. has been replacing Chinese suppliers as much as it can, and it will be more difficult to further decouple with China especially in battery components and key minerals,” added Chen, a former director of the research office of the State Council.

While Chinese lithium-ion batteries accounted for about 70% of U.S. imports, the country has also dominated in multiple core supply chains, with shipments of positive-negative electrode materials, electrolyte and lithium battery separators accounting for about 90%, 85% and 80% of global market share.

“A small number of companies have begun to produce battery modules in the U.S., but this cannot change the current situation of relying on Chinese battery cells,” she added.

Meanwhile, Chinese exporters will accelerate shifting production to Mexico, Vietnam and elsewhere to avoid the new tariffs, she said. “They have accumulated a lot of experience thanks to the previous trade war initiated by [President] Donald Trump in 2018,” she explained, not ruling out possible escalation such as imposing import restrictions on new energy products using more than a fixed proportion of Chinese parts.

The manufacturing shift will also help accelerate the country’s industrial upgrade by leaving research and development centers of key technologies at home, Chen argued. “Chinese companies should learn to allocate resources globally like multinational companies in other countries,” she added.

SINO-EU RELATIONS

Chinese EV makers have their sights set on the European market. Exports to the U.S. accounted for about 10,000 units last year with Geely the only Chinese automaker selling electric cars there in Q1.

The U.S. tariffs will set a bad precedent for the EU, which is also weighing options as it aims to buy time for its own EV transition by slowing the entry of Chinese vehicles with an anti-subsidy investigation, Chen warns.

The EU is investigating China's use of subsidies and cheap financing within its EV industry, which has fuelled a rapid export increase. (See MNI: China Plans EU EV Production To Avoid Trade War)

Chen argued Europe suffered from misunderstanding and misjudgment about China, with some EU politicians mimicking U.S. lawmakers. She urged Beijing to strengthen bilateral and multilateral cooperation with different European countries in energy, finance, the digital economy and green transformation.

ECONOMIC GROWTH

Chen said exports will likely continue with the current solid momentum amid robust external demand despite the lingering trade frictions, as Chinese capital goods still have strong competitive advantages.

Exports returned to growth in April, rising by 1.5% y/y after a 7.5% fall in March which marked the first contraction since November, dispelling concerns about faltering momentum.

Rapid increases in manufacturing investment will also likely continue to support economic growth, while the issuance of special treasury bonds to fund major national projects will lift infrastructure investment, she said.

The trade-in scheme aimed at boosting sales of big-ticket items, such as cars and home appliances, will help underpin consumption, however, further improvement to consumer demand will require better supply of higher quality goods and services, she continued.

“Achieving the 5% growth target this year still requires hard work,” Chen added, noting authorities will need to defuse real-estate risk and mobilise the enthusiasm of investment by private capital.