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Electric Vehicle Tax Credit Highlights WTO China Folly

October 29, 2020

By Charles Benoit, CPA Trade Counsel

By the end of 2020, thousands of Chinese electric cars will have descended onto American streets. Everyone who buys one gets a $7,500 tax credit courtesy of Uncle Sam. But if you want to buy a current American-made electric car, like a Tesla or a Chevy Bolt, you get nothing.

How did we wind up in this mess?

Electric vehicles (EVs) cost more to make than gasoline cars, so back in 2008, to encourage manufacturers and consumers to invest in EVs, Congress created the $7,500 tax credit. The credits aren’t unlimited, however. Once a manufacturer sells 200,000 EVs in the U.S., the credit phases down to zero over the next two quarters for that manufacturer’s brands. Both Tesla and General Motors have now delivered 200,000 EVs and were phased out in 2019.

Along come the Made-in-China cars.

Just a year after Tesla and GM used up their allotment, Chinese car makers are diving into the U.S. market, now under their own brands, eager to benefit from the tax credit. Electric vehicles are one of the ten key sectors of Beijing’s “Made-in-China 2025” industrial policy.

First up is Polestar, a new brand by China’s Geely Auto Group. The Polestars will be made at the “Luqiao Super Factory” in China’s Zhejiang Province, where Geely also makes Volvos (Geely now owns Volvo, FYI, pour one out for the Swedes). Gregor Hembrough, head of Polestar USA, tells Electrek that the most “highly competent Volvo dealers” were selected to open dedicated Polestar dealerships. Dealerships will be open in LA, the Bay Area (two), and New York City by the end of the year, with dealerships in Texas, Boston, Denver, DC, and Florida shortly thereafter, according to a company statement. Polestar tells Forbes they expect to deliver “several thousand” cars by the end of 2020, and Hembrough said that they had already pre-sold 75% of their U.S. allotment for the year.

Hembrough also told Electrek that even though Polestar and Volvo are both owned by Geely, Geely has structured its enterprise in such a way that both its Volvo and Polestar brands will each benefit from a respective 200,000 tax credits. Electrek noted this seemed “a little controversial” – after all, GM used up its 200,000 through both Chevy and Cadillac sales.

Polestar isn’t alone among Chinese newcomers. In February 2019, Chinese car maker Kandi received U.S. approval to sell some of their cars here. The first two models to come to the U.S. will be the Kandi K27 and K23. The K27 will list at $17,499, making the car just $9,999 with the $7,500 EV tax credit.

Keep in mind, these Made-in-China cars are arriving on our shores even while absorbing Trump’s 25% tariff. Imagine American car makers’ prospects if we didn’t have that 25% tariff? Hard to see how they could compete in a segment China included in their top ten “make it here” policy. The WTO ruled in September that our 25% tariff on China is illegal, but the Trump Administration is undeterred. Good.

The Chinese Communist Party is our number one adversary, and they say openly they want to dominate the future of automotive manufacturing. The Coalition for a Prosperous America documented twenty years’ worth of broken WTO promises by China specifically in the automotive space. The sane thing to do would be not to extend our $7,500 credit to Made-in-China cars. After all, China forced all our car makers to form Joint Ventures with their car makers. Tesla was the only one to refuse, but they had to build their factory outside of China’s customs territory (in a ‘Free Trade Zone’, where they’ll still have to pay Chinese tariffs on every car they sell in China).

How the WTO is wrecking our ability to sustain an auto industry.

The WTO has two core principles: the Most-Favored Nation (MFN) principle, and the principle of ‘National Treatment’.

Our 25% tariffs on China were ruled illegal for violating the MFN principle, as we’d committed to the whole world a measly 2.5% MFN tariff on cars. We’re not supposed to go higher than 2.5% for any WTO country.

The National Treatment principle is what’s forcing us to subsidize the cars of our adversary. Under the principle, you have to treat products of other WTO countries no different than your own ‘like’ products. That’s why you can’t, for example, have a 0% sales tax on bourbon, but a 10% sales tax on Scotch Whisky. That’d be considered discriminating against ‘like products’. The principle makes sense. The principle is not the problem. After all, a 10% sales tax that discriminates against imported versions of a product is no different than a 10% tariff. So you need the National Treatment principle to be part of any tariff agreement. The problem is that the WTO is a trade agreement with the whole world, minus North Korea.

Some countries are better than others at screwing over imports in a WTO legal way, without violating National Treatment. Germany got cute in 2017. They didn’t want American-made Teslas getting any benefit from their €4,000 EV credit, so they put in a rule saying the price of the car had to remain under €60,000 – just enough to eliminate the Tesla models being exported to Germany at that time. A Tesla spokesperson told The Drive “The incentive price was intentionally set by the German Government at a level that was specifically intended to prevent Tesla cars from qualifying for it.” Shenanigans ensued. Canada did the same, excluding all Teslas from their $5,000 credit. This kind of gimmicky rule-making gets results, gives their local manufacturers time to respond, but it’s nothing compared to China’s tactics, which involve getting deep into the corporate structure of foreign industry and flipping them against their home countries.

The problem with the WTO is that it’s a tariff agreement with the whole world. It’s unsustainable. It’s a suicide pact at this point. Time to say goodbye, au revoir, adios (the WTO’s three official languages).

What Congress should do

At a minimum, Congress and/or the Administration should let Geely know that whatever loophole they think they’ve found to double-dip with their Volvo and Polestar brands won’t fly. All brands owned by Geely should count towards their threshold. One enterprise, one threshold.

But really, we shouldn’t be giving the credit to any Made-in-China cars.

Some say end the credit entirely, but that’d be a really bad idea right now. In 2021, we’re going to see three brand new all-American car companies begin deliveries: Rivian, Lordstown Motors Corp., and Bollinger Motors. All Made-in-the-USA. That’s an extraordinary, massive achievement! (Interestingly, not only will the three be benefiting from the EV tax credit, but they’re all making pickup trucks, so will also be protected by our 25% MFN tariff, versus 2.5% for cars… hmmmm…. it’s almost like tariffs and industrial strategy are actually good at making things happen here!).

Congress could renew the tax credit for all so that Tesla and GM aren’t excluded versus their Chinese competition, and that wouldn’t run afoul of WTO rules. But we still have the issue of the credit negating the necessary effects of Trump’s extra 25% tariff on Chinese cars.

Given that we’ve already essentially given up on the WTO with the Trump Administration’s 25% China tariffs, Congress should join the fight, and simply disqualify Made-in-China vehicles from the credit. Or if they don’t want to be so blatant, find some too-cute by half way like Germany.

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