The American car industry is at a crossroad, experiencing a possible change that it has never experienced since the oil crisis of the 1970s. Consumers who were struggling with fuel shortages and inflation then wanted efficient and affordable cars, and Japanese car manufacturers seized the opportunity to gain a large market share in the U.S. Today, history seems to repeat itself, as a newcomer is threatening the scene, an army of insanely cheap but high-quality Chinese electric cars, which will redefine the very principles of the American car market.
The growing challenge of EV affordability in America
This looming change is a deep quandary, with the pressing need to speed up climate ambitions against the longstanding protectionist policies and national security issues. This tension is brought to the fore in the present reality of U.S. consumers. Although there is an increasing demand in electric vehicles, most American families cannot afford to purchase an EV, and some of the most popular brands such as Tesla are usually more expensive compared to the internal combustion engine models.
In fact, new EVs are not cheap in the United States. Although the price of electric vehicles has decreased by 10 percent compared to the previous year, the average price of the vehicles remains at around 54,000, as per Kelley Blue Book. This gives us a market that is full of luxury electric SUVs, the filet mignon of the automotive market, but a notable lack of small, affordable models, the hamburger meat that a lot of ordinary Americans are so desperate to have.
Take the case of Arvind Srinivasan who recently went on a hunt to find an EV that cost less than 25,000. He had to search through new and used inventories, but eventually, the only possible option was a new Chevy Bolt, which he bought at the price of 23,500 dollars with a tax credit. His remark, “‘OK, it is not a great car, but it is cheap,’ highlighted the sheer absence of affordable options in the market, as the Bolt itself is no longer in production, and General Motors is going to switch to its older battery technology.
Equally, Bonnie Dixon, a tight-budget research scientist, is very frustrated. She requires a long-range, low-cost EV to substitute her older gas pickup, which is essential to her long-distance traveling requirements. Nonetheless, her quest to find a new, cheaper, long-range electric car has not borne any fruit, and she has to continue using her gas-guzzler truck even though she is deeply conscious of the fact that there is an urgent need to cut carbon emissions.
China’s expanding electric vehicle power
In the meantime, elsewhere in the world, there is an emerging market of cheap Chinese-made electric cars that promises to cause a tectonic plate of disruption in the global automotive production. Chinese electric car manufacturers are not just competing, but doing well, even competing with European giants in their own country. China has also become the largest EV exporter, having exported 1.6 million vehicles in 2023, a phenomenal 1,016 percent increase in exports compared to 2018 to 2023.
BYD and the rise of affordable Chinese EVs
Chinese EVs are spread globally to Asia, Europe, and South America, but they are conspicuously missing in the United States. The companies such as BYD that have developed out of a small battery manufacturing company in the early 2000s are spearheaded by this formidable presence as the largest battery-powered electric producer in the world. The success of BYD can be emphasized by the fact that this company was able to earn 28.2 billion during the period of July to September this year, which is the first time that this company has surpassed the revenue of Tesla.
The success of BYD, as well as many other competitive Chinese EV brands, is explained by a set of factors such as ridiculously efficient batteries, vertically integrated supply chains, and, most importantly, affordability. The BYD Seagull, as an example, sells in China at only 10,000 Yuan. Economist Sue Helper, who a few years ago had considered BYD vehicles to be terrible, recently test-drove a Seagull in Detroit and said it was impressive and cute.
The Seagull even after being modified to comply with the U.S. safety standards and increased twofold would still be a steal. Actually, doubling its price with the existing tariff of 27.5% would still be lower than all the EVs that are already on sale in the United States. To a great extent, this impressive affordability is attributed to the small size of the vehicle, which is rather rare in the U.S. market, combined with the economies of scale in China and clever design solutions.
The barrier of U.S. tariffs and trade policies
Nevertheless, the road leading these incredibly competitive Chinese EVs to the U.S. market is full of insurmountable challenges, most of which have been established by policy. These vehicles have always been blocked by a prohibitive 27.5% tariff, which was first introduced by the Trump administration and renewed by the Biden administration. More recently, in September 2024, the tariff directly on Chinese EVs was increased fourfold to an outrageous 100 percent, which is effectively the closing of the door.
This is a vigorous tariff policy that is a direct reaction to the underlying fears of national security and economic protectionism. Although the cheaper EVs are beneficial to the climate strategy of the Biden administration, the U.S. jobs are also explicitly prioritized, which, according to the policymakers, could be devastating to one of the primary sectors of the American economy: auto manufacturing, and may cause massive job losses and the destruction of American communities, as it was stated by Scott Paul of the Alliance of American Manufacturing.
Geopolitical tensions and security concerns
The problem is complicated by geopolitical tensions. The rising U.S.-China competition, which is driven by the increasing threat of the Chinese economy to U.S. hegemony, has led to such preemptive actions as these tariffs to discourage the growth of Chinese EV brands. The recollection of the 1970s and 1980s when American automakers were losing a lot of market share to their Japanese counterparts is a powerful driving force behind the American corporate executives, autoworkers, and politicians with a nationalistic mindset who support the protectionist policies.
In addition to economic, there are national security issues that are looming. The U.S. Commerce Department initiated an inquiry on whether the navigation and communication capabilities of the Chinese vehicles could be used to spy on Americans. This has prompted politicians such as Sen. Josh Hawley (R-Mo.), who wants even more tariffs and Sen. Sherrod Brown (D-Ohio), who would ban Chinese vehicles altogether.
The Alliance for Automotive Innovation, which represents large automakers, recognizes the risk, but in a less dramatic manner. Its president, John Bozzella, said that the widespread competitiveness of the auto industry in the U.S. will be negatively affected in case it is heavily.
The Chinese vehicles will be sold at subsidized prices to the U.S. consumers. However the organization refused to take a stand on the prohibition of the Chinese autos which is understandable given the complex global nature of the major automakers, where China is both a competitor and the largest market in the world as well as a key supplier.
Climate goals vs. industrial strategy
In the eyes of Chinese manufacturers such as BYD, it does not make much sense to export to an unfriendly nation with high tariffs, and possibly unwilling consumers at the moment. The American consumers who have never encountered a Chinese EV do not have good perceptions; they think of American cars as patriotic, Japanese cars as reliable, and German cars as luxurious and have no positive attribute that they associate with Chinese cars in the U.S. market.
The other major cause is the difference in consumer preferences. The remaining world is more inclined towards smaller cars, which the Chinese manufacturers can make cheaply taking advantage of reduced or non-tariffs. Conversely, the U.S. market has always been more inclined to larger vehicles, and Chinese EVs have not yet gained a strong foothold in this segment.
Hiding under the veil of tariffs and trade tensions is the most important and yet contradictory relationship between climate goals and industrial policy. The move by President Biden to increase tariffs on Chinese EVs fourfold, even though they could hasten the process of switching to clean energy, has been criticized. Democratic Governor of Colorado, Jared Polis, termed it as horrible news to American consumers and a big blow to clean energy, and trade expert Robert Lawrence said it highlights preference to trade protectionism to decarbonizing the economy.
Lessons from China’s industrial policy
Nevertheless, these actions are seen by the Biden administration as aligning with its climate objectives, which focus on an industrial strategy to create a domestic industry and technologies that are central to the clean-energy future. Heather Boushey of the White House Council of Economic Advisers pointed to the Chinese chokehold on such essential materials as graphite to EV batteries, saying that, policy-wise, it does not make sense to give up control over such important industries. This position suggests that it is concerned with ensuring the U.S. supply chains and manufacturing capabilities.
Climate activists are also in a tricky situation. Although the necessity of cheaper EVs is undeniable, Katherine Garcia of the Sierra Club points out that they should be built in the most sustainable way. She notes that American firms tend to be superior to Chinese firms in greener steel and electricity production, which results in an argument that giving U.S. automakers time to switch to cleaner supply chains would actually be more beneficial to the climate.
China has had an incredible success story with EV, which can be used as an interesting case study in industrial policy, which the U.S. could study, despite the political issues. The strategy of China has been described as the use of enormous government subsidies, which amount to at least 1.73 percent of its GDP in 2019, nearly twice as much as the U.S. does in dollar amounts. Such subsidies are in different forms, such as subsidies to EV manufacturers, subsidies on purchases, and subsidies by local governments, such as subsidized land and tax breaks.
In addition to financial support, Chinese policy is persistent, which is not a characteristic of the U.S. A country like China would rather go on a doubling down spree when an industry is in a rough patch, according to a Princeton researcher known as Kyle Chan. This is unlike in the U.S. industrial policies, which may change with the change of political power or financial losses, as witnessed with the reserved attitude following the Solyndra bankruptcy.
The strategy of China also creates manic competition. Having more than a hundred EV manufacturers, compared to about five hundred in 2019, the oversaturated market has forced the companies to fiercely reduce the cost and prices, which benefited the consumers and increased sales. This is in sharp contrast to the U.S. market where Tesla was, to a large extent, uncontested by domestic EV makers in the last decade as the Big Three concentrated on gas-guzzlers and pickup trucks.
Economist Sue Helper notes that this is not pure central planning but a mixture of planning and competition in which a large number of companies are planted and only the most competitive ones survive. This combination of market forces and strategic direction has been very useful in the creation of innovation and cost cutting, a lesson that any industrial strategy can learn.
The road ahead for U.S. auto industry
Lastly, the Chinese strategy focuses on flexibility, such as promoting local companies to collaborate with foreign ones. According to analysts such as Ilaria Mazzocco of the Center of Strategic and International Studies, the U.S. might want to follow suit and enable American car makers to join forces with Chinese companies that have technology that is ahead of theirs instead of starting all over again.
In fact, other American manufacturers like Ford and Tesla have considered collaborating with the Chinese firms only to face a lot of political resistance. On one occasion, when Ford had planned to construct a lithium-ion-battery factory in Michigan under licensed technology by CATL, a major Chinese battery manufacturer, the Republican opposition had initially blocked the plan, but a scaled-down version is currently underway. Helper considers such partnerships a sensible course of action, as long as there are good agreement[s] and the Chinese will disclose the secret sauce.
This is reminiscent of the history of the 1980s when the Reagan Administration, having been threatened by the cheap, fuel-efficient Japanese cars, finally permitted the Japanese companies to construct plants in the United States. This allowed the American carmakers to learn and get better, which eventually led to the creation of a more robust domestic industry. Chan proposes that the same strategy with Chinese EV companies might have similar advantages.
But in the present political environment, this kind of cooperation is not likely. The fact that there is widespread politicization of anything touching on China implies that most Americans see the economic growth of China as a threat and not an opportunity. The general sentiment of the population is in favor of shielding vital industries of the U.S. against Chinese competition, which leaves American buyers of affordable EVs with few choices.
In the meantime, U.S. consumers have to decide between such vehicles as the Nissan Leaf, whichcosts about $28,000 and has a shorter range than the BYD Dolphin Mini, or waits on the long-awaited Tesla Model 2 mass-market model, or waits on new domestic entries to pay off. The future remains unclear, and it is a complex road full of trade policies, geopolitical realpolitik, environmental demands, and the long-term struggle to remain economically competitive. The U.S. car market as we know it is admittedly on the brink of radical transformation, and the question is no longer whether, but how, it will bid its farewell to its old paradigms and enter a new, more complicated world.
Finding a way through a new global automotive reality
The increasing convergence of the economic protectionism, climate ambition, and industrial strategy has put both the United States and China on a pivotal junction in the history of electric mobility. Whereas the aggressive industrial policy in China has helped it to control the world EV production, the U.S. has opted to focus on its domestic security, production, and employment through high tariffs and strategic trade barriers. Such decisions, despite being based on the national interest, can slow the process of green transition and restrict consumer preferences. The final result will be determined by the effectiveness with which the U.S. will strike a balance between protectionism and innovation-to be able to maintain competitiveness, sustainability, and affordability in the fast evolving automotive world.
