China EV battery tariffs could sting U.S. electric vehicle sales

A simmering trade war with China may hinder America's transition to electric vehicles.

That's one conclusion from a new research note issued by global research firm Interact Analysis, which examined the ramifications from a slew of tariffs instituted in May by the White House.

The U.S. auto industry relies heavily on Chinese batteries — more than half of American's lithium ion battery imports originate in China, according to the report.

As the tariff on those batteries more than triples from today's rates of 7.5 percent to 25 percent this year, the increased prices risk "further slowing down the electrification process," the report said.

Electric vehicles are already less affordable than their conventional gasoline-powered counterparts. The average transaction price of an EV was $55,252 in April, according to Cox Automotive, while the average for cars with internal combustion engines was $48,510. The prices do not include shipping charges or state and federal government incentives and tax credits.

Any tariff-related EV price increase passed down to consumers would exacerbate that disparity. The prospect of such headwinds runs counter to broader federal efforts to accelerate an electrification transition.

One part of that involves a fervent push to establish a domestic supply chain for batteries and their raw materials through passage of the Inflation Reduction Act in 2022. But it may take three to five years for mines and factories spawned by that legislation to begin production.

Until then, experts expect a pinch point.

"The U.S. is currently highly dependent on Chinese imported products," Shirly Zhu, principal analyst at Interact Analysis, told Automotive News. "It takes years to build local battery supply, and it may not be easy for OEMs to switch fully to other suppliers in South Korea and Japan in short time."

Meanwhile, China's Ministry of Commerce has promised a "resolute" response to the tariffs. Those could include "retaliatory measures," according to S&P Global Mobility, such as reciprocal tariffs or export restrictions. China has signaled it's ready to unleash tariffs as high as 25 percent on imported cars with large engines, as trade tensions escalate with the U.S.

China controls more than 80 percent of the global supply chain on mining and processing of critical minerals, S&P said.

America's thirst for these batteries has been growing. Overall, the U.S. imported $18.8 billion worth of lithium ion batteries in 2023, according to international research firm Interact Analysis. Imports from China accounted for $13.2 billion of that total, a 42 percent year-over-year increase, the report said.

Although the tariff increase is new, China has sought to diversify its export connections since the U.S. signaled its intent to fast-track domestic supply and passed the Inflation Reduction Act. Chinese lithium ion battery manufacturers have forged manufacturing bases across Europe and southeast Asia.

That activity will blunt the impact of any decreases that come from the U.S. market, the Interact Analysis report said. Seventy percent of the planned battery capacity of Chinese battery manufacturers is in Europe, the report said. That production is destined for European markets.

Chinese companies are exploring adjacent products for further growth.

They "are looking for diversified applications to grow business," Zhu said. "Not only EVs, but also energy storage, among others."