Why This Matters: Section 301 Tariffs on Electric Vehicles

Today, the US government announced 100 percent tariffs on electric vehicles imported from China, along with other restrictions on inputs into clean energy supply chains. This action offers critical support to the historic public and private sector decarbonization investments under the Inflation Reduction Act (IRA), CHIPS and Science Act, and Bipartisan Infrastructure Law, ensuring they will not be threatened by imports that violate fair trade laws and will be viable in the future.

A Tool to Deal with Economic Imbalances

Today’s announcements came after a multiyear review, in which the Office of the US Trade Representative (USTR) concluded that specific actions of the Chinese government are unreasonable or discriminatory and burden or restrict United States commerce under Section 301 of the Trade Act of 1974 (as amended multiple times in the years since). Section 301 allows the US government to restrict trade or negotiate trade agreements when it determines that a foreign country’s subsidies or other practices do one or more of the following: represent a persistent violation of labor rights, constitute anticompetitive behavior, deny fair and equitable trading opportunities for US producers, or constitute an effort to increase penetration of export markets. However, the definition of “unreasonableness” is open-ended, so other problematic behaviors can also be targeted. The latest action builds on an investigation begun in 2017, and USTR’s statutorily mandated four-year review catalogs a variety of old and new US concerns with China’s policies, ranging from intellectual property rights violations to excessive control of supply chains.

Section 301 of the statute was developed as the US economy was facing significant competitive challenges in the 1970s, including trade deficits and worries about energy security (much like today). As the Congressional Research Service notes, the Senate Finance Committee stated in 1974 that Section 301 will:

serve as negotiating leverage to eliminate those barriers to, and other distortions of trade which Title I of this bill gives the President broad authority to harmonize, reduce or eliminate on a reciprocal basis. The authority in this section should not be used frivolously or without justification. The Committee feels, however, that there must be a credible threat of retaliation whenever a foreign nation treats the commerce of the United States unfairly [emphasis added].

In other words, Section 301 was designed as a backstop for when trade agreements or other trade laws are not working as intended or are not securing fair trade. As USTR said in 2019 in response to the Senate Finance Committee’s questions on why the US used Section 301 rather than dispute settlement at the World Trade Organization (WTO), the agency answered that, after extensive review and consultation, “No stakeholder suggested any concrete means to address the issues under investigation through WTO proceedings [and] that three of the four issues under investigation involved Chinese Government-directed conduct that could not be addressed through application of WTO rules.”

Adapting Section 301 for the Clean Energy Era

As noted, the latest action builds on an investigation begun in 2017. But today’s decisions have a different strategic focus than those of previous administrations. For instance, in the 2009 American Recovery and Reinvestment Act, the Obama administration declined to impose Buy American rules as part of its (more limited) clean energy investments, which failed to prevent recipients of federal funds from offshoring production. And the 2017 investigation focused mostly on the fate of US companies doing business in China.

The US has now decided that its domestic industrial policy is of such strategic importance that it must expand the set of trade measures against China. In particular, the tariff on China’s electric vehicles was previously 25 percent; now it will be 100 percent. Other tariff hikes will go into effect for semiconductors, solar cells, lithium-ion batteries, battery magnets, critical minerals, steel, aluminum, cranes, and certain medical products. This comes as numerous economic studies have concluded that China is producing far more than it needs domestically in these sectors and in some cases, more than is needed in the world.

To some analysts and climate activists, it can seem counterintuitive that China producing “too much green stuff” is a problem. After all, doesn’t the world need to decarbonize as rapidly as possible? Isn’t climate change a massive market failure (in economic terms, a “positive externality” problem)? If China is willing to fix the market failure, isn’t that a win-win?

But the reality is more complicated, and cuts to a central tension in the clean energy transition that I discussed earlier this month in testimony before the USTR: Climate change is a global problem, but its solution will necessarily come from national governments. This means that each country’s national strategy needs to keep domestic workers and industries “whole” during the green transition. That does not mean that there is not a considerable role for friendshoring, nearshoring, foreign direct investment, and even strategic trade with countries like China: Green industrial policy does not mean autarky (no trade), or anything close. Rather, inattention to these economic development and resilience needs (and lack of robust planning for meeting them) risks making climate commitments less credible. Moreover, reliance on a single source of supply (which China is currently in many supply chains) risks replicating the problems of the fossil fuel era, with economies depending on a few geopolitical hotspots. That is not good for energy price stability, the economy, or climate.

Indeed, industrial policy–backed climate solutions will of necessity have a trade backstop: This is how the government avoids wasting public dollars on industries that could risk getting offshored. The new tariffs on $18 billion of products amount to an insurance policy on the over $860 billion in new public and private sector investment that the US’s new industrial policy is encouraging. The White House made this linkage explicit in its press release, stating that the US:

is making a nearly $53 billion investment in American semiconductor manufacturing capacity, research, innovation, and workforce. This will help counteract decades of disinvestment and offshoring that has reduced the United States’ capacity to manufacture semiconductors domestically. The CHIPS and Science Act includes $39 billion in direct incentives to build, modernize, and expand semiconductor manufacturing fabrication facilities as well as a 25% investment tax credit for semiconductor companies. Raising the tariff rate on semiconductors [from 25 to 50 percent] is an important initial step to promote the sustainability of these investments [emphasis added].

Moreover, the trade measures encourage foreign direct investment in the United States, so foreign companies can employ US workers to make cars to sell to US consumers. The latest union campaigns at foreign-owned automakers in the south show the promise (though not guarantee) that these investment flows will be an engine of middle-out growth.

A Foreign (Trade) Policy for the Middle Class (and Climate)

Going forward, the US should build on today’s announcements by doing more to promote unions at firms that benefit from subsidies and trade protection. New trade investigations under Section 301 and other statutes could take a deeper look at how labor rights violations abroad impact commercial flows. Moreover, new rules of international trade can help accommodate reasonable and balanced subsidies that are aimed at both shoring up national resilience and addressing positive externalities. (And not, as I testified before the House Financial Services Committee in March, for securing geopolitical dominance, as seems to be China’s goal.)

Taken together, tools like the IRA, tariffs, Defense Production Act, and green steel trade negotiations are part of a comprehensive strategy to shape markets to ensure sustainable economic growth and transitions. They can be a foundation to deepen the state’s capacity to promote good jobs, a healthy climate, energy security, and democracy in the years to come.