Forget Chinese EVs. Biden’s Tariffs Will Hit The Cheapest Tesla Model 3.

A higher tariff on EV battery imports will make Tesla’s cheapest car, the Model 3 RWD, more expensive to produce. Other EVs may be affected too.

Of all the hefty tariffs against Chinese goods that President Joe Biden’s administration announced this week, the 100% tax on electric vehicles has gotten the most buzz. That the White House felt the need to effectively double the price of any Chinese EV coming to U.S. shores underscores just how vulnerable the world’s automakers are right now.

But other parts of Biden’s anti-China trade agenda will have a more significant and immediate impact on the U.S. EV landscape. Case in point: A higher tariff on EV battery imports will make Tesla’s cheapest car, the Model 3 RWD, more expensive to produce.

Tesla makes the U.S.-spec $38,990 Model 3 RWD in California using battery cells from CATL, one of China’s biggest producers of EV batteries. Biden’s new tariffs will raise the tax on imported Chinese EV batteries from 7.5% to 25%. 

Gallery: 2024 Tesla Model 3 (Highland)

Tesla will need to either eat the higher costs, find a new battery supplier or deprioritize the entry-level Model 3, said Sam Fiorani, vice president of global vehicle forecasting at AutoForecast Solutions. But he said consumers are unlikely to feel the pain of these higher costs in an era of slackening EV demand. Manufacturers are having trouble selling EVs at their current prices, so price hikes aren’t a winning strategy, he said. 

“They need to get these vehicles sold,” Fiorani said. “And until a balance is made between supply and demand, there’s very little upward pressure on pricing.”

Aside from the Polestar 2 and the upcoming Volvo EX30, there are no Chinese-made electric cars for sale in the U.S. So quadrupling the existing tariff on them is a largely symbolic move, some experts say. It may be more about shoring up the Democratic vote in manufacturing hubs like Michigan and Ohio than it is about Chinese cars, although the U.S. government would dispute that. Still, some EVs with China-sourced batteries or battery components could get hit here as well, whenever these price increases actually go into effect.

Thanks to lavish government subsidies for the EV industry and years of intense R&D and internal competition, China has become a battery-manufacturing titan. It’s also a global leader in the refining of raw materials like lithium and graphite, which are critical to batteries. It’s particularly dominant in the production of EV batteries that use a lithium-iron-phosphate (LFP) chemistry. Those batteries offer less range and slower charging speeds than cells with other makeups, but are cheaper. They’re widely seen as key to bringing down the cost of electric cars, which remain more expensive than conventional cars in the U.S. Tesla uses LFP batteries in the Model 3 RWD.

“It’s safe to say there’s no EV being put on the market anywhere in the world that isn’t dependent in some way on materials processing and manufacturing that’s taking place in China,” said Jay Turner, a professor of environmental studies at Wellesley College and the author of Charged: A History of Batteries and Lessons for a Clean Energy Future.

The Biden Administration has made it a priority to build up domestic battery manufacturing and disentangle the U.S. auto sector from Chinese supply chains. Hence the beefed-up 25% tariffs on Chinese batteries and critical minerals announced on Tuesday. Additionally, the longstanding $7,500 tax credit for EV purchases was revamped through the Inflation Reduction Act and now only applies to cars made in North America without any Chinese battery components. When that provision kicked in in January, the Model 3 RWD was booted from eligibility, along with some other vehicles. 

It’s not immediately clear if any other U.S.-made EVs would be vulnerable to battery tariffs like the Model 3 RWD is. It may be the only one. The Model 3 Long Range has significant Chinese content (40% of its value, according to U.S. government records) and doesn’t qualify for the EV tax credit. However, the independent Tesla researcher Troy Teslike tells InsideEVs that its batteries are made in South Korea with Chinese components. 

Ford has said that it would introduce LFP batteries to the F-150 Lightning pickup truck, but those don’t seem to be in production yet. The truck is still eligible for the full EV tax credit, indicating it doesn’t contain Chinese battery components. Ford plans to start domestic production of LFP batteries (using licensed CATL technology) by 2026. Until then, it would have to source them from China. Ford didn’t respond to questions about all of this. 

There are some other U.S.-market EVs that contain Chinese batteries, like the Ford Mustang Mach-E and the all-wheel-drive variant of the Toyota bZ4X. But since those vehicles are assembled in Mexico and Japan, respectively, they aren’t subjected to the tariffs, a U.S. Office of the Trade Representative official told InsideEVs. (In other words, if a Chinese battery pack is already in a car when it arrives in the U.S., it’s not taxed independently of that vehicle.) The U.S. is looking closely at those kinds of vehicles, as well as the potential for Chinese companies to circumvent the tariffs by setting up factories in Mexico, the official said. 

The taxes on batteries and minerals may be more consequential than the Chinese car tariff in the short term. Still, experts polled by InsideEVs did not believe that the tariffs on batteries and minerals would have a lasting impact on the prices EV buyers see. 

Any automaker selling EVs in the U.S. is likely working to make its cars eligible for the $7,500 tax credit, said Chris Harto, senior policy analyst at Consumer Reports. That would involve backing away from Chinese content anyway, regardless of any tariffs. 

Batteries and raw materials may become more expensive for U.S. battery and car manufacturers, said Ingrid Malmgren, senior policy director at Plug In America, an EV advocacy group. But that would only result in short-term price increases for cars, she said. 

“We expect to see prices stabilize as the domestic supply chain is built out,” Malmgren said. 

Contact the author: tim.levin@insideevs.com

Read more