The economic and environmental consequences of tariffs on electrical vehicles: A CGE analysis for US, EU and China

Abstract

The global trade landscape is undergoing profound changes, driven by the re-emergence of tariffs with Trump’s first administration in 2018 and the acceleration of the green transition. Among the industries affected is the electric vehicle (EV) sector, where traditional market leaders such as the US and EU face increasing competition from China. While economic blocs are resorting to tariffs in an attempt to reduce their dependency on China and strengthen their domestic industries, their broader economic and environmental consequences are unknown. This study investigates the economic and climate change consequences of increased tariffs imposed on EVs and their associated supply chains in the year 2022, using a Computable General Equilibrium (CGE) model to simulate trade scenarios involving the EU, US, and China.

The findings reveal while tariffs can reduce dependence on Chinese EVs and support domestic industries of countries imposing tariffs, they also slow EV adoption and undermine climate goals. In scenarios where all three regions impose 20% tariffs on EV imports, global EV adoption drops by 0.87%. This slowdown of shift to EVs from internal combustion engine (ICE) vehicles leads to over 1.85 Mt CO2-eq. of additional emissions over the lifetime of vehicles. Over half of these additional emissions are due to the 2.5% drop in EV adoption in EU. The trade diversion away from China leads to China’s market share in EU and US declining by over 70% and 18%, respectively. When tariffs are expanded to cover other inputs to the EV industry like batteries, critical minerals, and electronics, the EV sector is more adversely affected, resulting in a 1.2% decline in global EV adoption and a rise in associated emissions to 2.5 Mt CO₂-eq.

A complementary game-theoretic analysis of these scenarios helps explain the real-world tendencies of major economic blocs to impose tariffs. The results suggest that the United States is incentivized to impose tariffs as a means of strengthening its domestic EV industry while mitigating losses in EV sales. China, in turn, is motivated to retaliate in order to reduce the negative repercussions for its EV industry and to preserve its market share. By contrast, the European Union faces a more complex dilemma: although tariffs would support its domestic EV industry, they would also exacerbate the decline in EV adoption, making non-retaliation the more favourable strategy from a climate perspective.

This study offers policymakers critical insights into the economic and climate change impacts of tariffs on the EV industry and its supply chains. By quantitatively evaluating trade scenarios, it brings out the trade-offs between strengthening domestic industries and climate goals and helps anticipate its impact on other regions. The findings support more holistic decision-making by emphasizing the importance of integrating climate considerations into trade policy to ensure a balanced and effective EV transition.