On May 14, President Biden announced a wide range of tariffs on electronics-related items, as well as electric vehicles imported into the U.S. from China. In particular, lithium batteries of all varieties are targeted, and that would include lithium battery packs used in golf car-type vehicles (GCTVs). These tariffs could have a significant impact on the market for GCTVs, although at this point in time it is not altogether clear what will be taxed and what will not be.
Will LSVs be assessed the same tariff rate as on-road electric vehicles (EVs)?
As explained elsewhere in this column, the lithium batteries now widely used in golf car-type (GCT) vehicles will be assessed an increased tariff under the Biden administration’s tariff initiative against China. That rate would jump from 7.5% to 25% of landed value.
The additional issue, and likely to have a far greater impact than the tariff on lithium batteries, is whether LSVs would carry the same tariff rate as on-road EVs. If this were to be the case, then LSVs would be taxed at the 100% rate, which, obviously would have a dramatic effect on relative costs between imported LSVs and domestically manufactured LSVs.
Census Bureau guidance and the implications
Guidance received by SVR from Census so far makes a clear distinction between LSVs and golf cars, emphasizing the fact that the former is allowed to operate on public roads, under certain conditions. The apparent differentiation between LSVs and golf cars would imply that LSVs will be considered EVs for purposes of applying the tariff rate. Here is a quote from the guidance SVR was able to obtain:
An LSV/NEV as of now is a vehicle that has min speed of 20 mph and max speed of 25 mph. To be driven on a public road with a low mph limit, they must have the same safety features as a regular car. YOU ALSO NEED TITL REGISTRATION, and INSURANCE. Under the present definition, an LSV is an EV. The difference here is that most EV cars can be driven on highways with varied speed limits, and an LSV is restricted to roads/ 35 mph (45 mph in some states). Other than that, an LSV is an EV., unless the definition of EV is revised.
Note the last few words of this paragraph, “…unless the definition of EV is revised.” (Italics added.) It appears that things are still somewhat in flux. The definition actually raises additional questions, suitable for another column. One such issue would be, when a GCTV lands at a port, how would you determine whether or not it would be used on public roads? That could only happen, legally, if a title were issued by a State with the obligation to obtain insurance. This information could not be forthcoming until well past the date of entry.
Another thing to note is that the current HTS import code covers both golf cars and LSVs. A further indicator of how the tariff rules will be applied would be if a new HTS code were created, specifically for LSVs.
Clearly, it is one thing to establish the legal basis for a tariff, and another to iron-out the exact rules, as applied to specific products and their HTS codes. SVR will be following developments regarding these issues.
Regarding lithium batters: Winners, losers, and maybes
One thing is clear, lithium battery packs will be affected, such that the current tariff of 7.5% will be raised to 25%, starting in the fall of this year (2024). Assuming the landed value at the port of a 48v 105 Ah battery is $2,000 and for 210 Ah battery by half again as much, then the tariff would increase the price by $500 in the first case and by $750 in the second.
Given the fact that the tariffs apply only to lithium batteries produced in China, GCTV manufacturers sourcing from elsewhere would not be affected, and therefore could be considered “winners” in the tariff policy fallout.
For those companies sourcing batteries from China, the new tariff regime delivers a competitive disadvantage. So, these companies, for the most part the collection of new entrants that have transformed the industry structure, they would be the “losers”. There are uncertainties, however, with regard to whether lithium batteries embedded in various products would be subject to the tariff increases.
Lithium batteries in imported GCTVs
What is a little unclear is whether battery packs embedded in completed golf cars will be taxed, or, for that matter, batteries imported as a component of a partially-assembled unit will be subject to the new tariff. Unofficial guidance from a contact in the Census Bureau suggests they will be. This, under the premise that they are a significant component of the landed value. It should be stressed that this is not the position of the Census Bureau at this time.
Another way around: Imports from Mexico
An option that may get around the tariff bite, is to import from Mexico. Various countries, including China, have followed the strategy of exporting to Mexico, where the final product is manufactured. This product is then exported to the U.S. The final product is, however, subject to an original content inspection; that is, the product’s value must be comprised of a certain level of original content. Original content means a certain proportion of project value must originate from the three countries that form the USMC trade bloc. Presently, 75% of the product’s value must originate from within the bloc. (See the Financial Times–https://www.ft.com/content/92e9ce0a-c55f-11e8-bc21-54264d1c4647.)
The 75% rule would imply that a lithium battery from China could be no more that 25% of the GCTV value. Given that MSRPs range between $8K – 12K and above, it would seem that vehicles manufactured in Mexico would escape the tariff. (That, of course, assumes that the rest or the parts, or most of them, would be made within the trade bloc region.
The change in trade policy
Historically, the United States has maintained a policy of free trade. The departure from this policy during the 1930s in the vain attempt to protect the domestic workforce, was generally viewed as counter-productive, worsening the impact of the Depression, rather than improving it. Thus, the post war period, United States strongly endorsed GATT, the General Agreement on Tariffs and Trade and its successor organization, the World Trade Organization. The major thrust of these two bodies was to reduce barriers to trade and avoid the retaliatory trade measures of the Thirties.
Now, it appears that this longstanding policy is being reversed. And the reversal is being driven by a U.S. domestic policy aimed at creating and protecting an emerging electric vehicle industry, as well as domesticating the sources of the key parts and components of electric vehicles. So, this is not simply a warning shot across the bow of some relatively isolated dumping practice that needs correction, but rather, a systemic policy change embracing one of the largest global industries.
Such a policy change invites retaliation, so we are in danger of repeating the mistakes of the 1930s. As Mark Twain famously said, “History may not repeat itself, but it sure does rhyme.”
In the broader scope of things what does this imply for the transition to an electric powered transportation system?
In the course of attempting to protect autoworkers, secure Michigan’s electoral college votes and establish electric vehicles and their components as a home grown industry, the pace of change will certainly become slower. Parts and components readily available in the global market will now be obtainable from domestic sources only at a higher price—and it is possible, unavailable until domestic capacity builds up.
Impact on the GCTV market
The diagram from economics 101 shows the impact of tariffs on any particular market, including the GCTV market. Price is on the vertical axis, quantity on the horizontal axis.
P* is the world price for lithium batteries. The intersection with the domestic supply curve gives the amount of product produced by domestic manufacturers. At the intersection on the demand curve, we determine the quantity actually sold. The amount of product supplied by foreign (Chinese) suppliers is amount given between the two intersections.
The imposition of a tariff raises the price line to Pt, with the result that more product is sourced domestically, but the downside is less quantity sold. This is indicated by the leftward point arrow. Because there is a one-to-one relationship between the vehicle and its batter. Shrinkage in the market is the same for both.
Battery cluster in central Mexico—another way around the tariffs
Even before the new tariffs, the Mexican government announced its intention to create a lithium battery manufacturing cluster in the center of the country. Battery production here would supply automotive plants in located in the states of Puebla, Queretaro, and Guanajuato.
Even more recently, from the Financial Times, January 24, 2024: On the outskirts of Monterrey, Mexico, Chinese auto-parts makers are rapidly setting up plants to supply Tesla Inc.’s next factory. They join the ranks of Chinese manufacturers that opened Mexican facilities in response to Trump-era tariffs — and this new surge has set off alarm bells in Washington.
Alarm bells, indeed! It is one thing to impose tariffs on Chinese lithium batteries made In China, but another when the batteries are made from scratch in a member country in the USMC free trade area. Even more so as the lithium mineral itself is probably sourced from Mexico’s own lithium deposits. Not only would Mexico be likely to file an official protest with the World Trade Organization were the batteries sourced from its plants be subject to the new tariff policy, but could also contend that U.S. subsidies to battery manufacturers within its borders were yet another violation of the USMC trade pact.
“O what a tangled web we weave…” when protectionist policies we first conceive.
