The Right Response to China's EV Subsidies

According to Gernot Wagner and Shang-Jin Wei, Economists at the Columbia Business School: 

Some of the Chinese government’s EV subsidies are justified, both on the supply and the demand sides. They can represent the best option for internalizing positive learning-by-doing and scale externalities, and for helping producers climb the learning curve and slide down the cost curve beyond what the market would deliver on its own. That is especially true for batteries, a key input in the EV supply chain. The patent system provides crucial incentives for private innovation, but it does so highly imperfectly. Research and development has positive social spillovers, making it deserving of taxpayers’ support. Targeted demand subsidies are similarly justified, because they speed up EV adoption, helped by positive learning-by-doing and network externalities. The latter calls for direct support for an increase in the number of charging stations, itself deserving of direct subsidies (though over time, policymakers should phase down subsidies and instead increase gasoline taxes). While the success of Chinese EVs has spooked Western car manufacturers, some of the pain is self-inflicted. Having bet on massive gas-guzzlers for too long, they delayed the all-but-inevitable switch to EVs. But that’s not all: Chinese EVs are cheaper for the same reason that most everything manufactured in China tends to be cheaper than American or European products. Introducing EV tariffs in response to intense lobbying by Western car manufacturers might make for good election-year politics. After all, taxing one’s own citizens – including via carbon taxes – is politically difficult, while “taxing” others is sometimes viewed more favorably, especially by those with lower trust in government. But while some tariffs, like Europe’s Carbon Border Adjustment Mechanism (CBAM), are eminently justifiable, because they specifically address the negative carbon externality, those aimed at Chinese EVs or other products such as solar panels, which are crucial for the global green transition, are not. A much better idea is to subsidize domestic manufacturing, an approach reflected in the US Inflation Reduction Act and Bipartisan Infrastructure Law, and in targeted EU subsidies. Some of these subsidies can be justified simply as a politically feasible, second-best alternative to carbon pricing, including as a stepping stone toward pricing policies.

The Right Response to China's EV Subsidies, Project Syndicate