Beyond The Gated Community

What the Biden Tariffs on Lithium Batteries Could Mean to the Industry and the Golf Car Customer

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.

Winners, losers, and maybes

Allied Lithium Battery.

One thing is clear, lithium battery packs will be affected, such that 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 $2,00 and for 210 Ah battery by half again as much, that, 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 with be subject to the new tariff.  Unofficial guidance from a contact in the Census Burau 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, that followed the strategy of exporting to Mexico, where the final product 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 a 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 as domestic capacity builds up.

Impact on the GCTV market

Econ 101, courtesy of Invetopedia—the impact of tariffs.

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 is probably sourced from Mexico’s own lithium deposits.  Not only would Mexico protest were the batteries from its plants be subject to the new tariff policy, but could also contend that U.S. subsidies to battery manufacturers within its borders would be a violation of the USMC pact.

“O what a tangled web weave…” when protectionist policies we first conceive.

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Contact the Author: Steve Metzger at smetzger@smallvehicleresource.com.  Or check out our website at www.smallvehicleresource.com, where you will find an extensive database of vehicle models and can make side-by-side comparisons of vehicles based on a full set of specifications.