The week of September 30, 2024: The EU’s EV tariffs, the dock strike, the Fed, climate policy, and much, much more.
The week of September 30, 2024: The EU’s EV tariffs, the dock strike, the Fed, climate policy, and much, much more.
Bit by bit, the European Union (EU) is coming to terms with the threat posed by electric vehicles (EVs) to its economy, and, by extension, its social stability. The auto sector accounts for roughly 7 percent of EU GDP and some 13 million jobs. It generates a trade surplus of around €90 billion. The bloc is, as I noted in a recent Capital Letter, is having to face the reality that its attempt to “force” EVs onto consumers has run up against resistance unanticipated by Brussels’ central planners.
Car buyers have been put off by EV costs and the reality that, as things (including charging infrastructure) currently stand, EVs are an inferior product to the traditional cars they are meant to replace, at least to those buyers who will be relying on them as their sole car (which is more likely in the EU than the U.S.). Yes, inferior. If a car is only judged by its ability to take its passengers safely, rapidly, and worry-free to its destination, traditional cars are still the better product.
An admission of this comes from the way that regulators are bribing and bullying car buyers into EVs. No one had to ban the horse when the first automobiles came along. Consumers chose cars for themselves. EVs may well be the better option in time (they have seen remarkable improvements in recent years). But the recklessly rushed schedule of the transition has meant that they have been allocated a role for which they are not yet ready, and that China, a hostile hegemon wannabe, has been handed an extraordinary opportunity to dominate one of the West’s key industries.
But there is always a price, even for an inferior product. Thus, in a number of markets (such as Germany and France), the demand for EVs fell sharply after the removal of subsidies. For some, the subsidy put a product that they wanted within reach, but for other buyers it reduced the price to a level low enough to compensate for EV inadequacies. Either way, once the subsidies disappeared so did much of the demand, in Germany in July, EV sales accounted for 13 percent of new car registrations, a figure far below earlier expectations, and far below the percentage that will be required by EU rules in 2025.
As mentioned in that earlier Capital Letter, these rules operate like this:
Some years ago, officials in the EU, UK, California, and other dim-bulb jurisdictions came up with the idea of imposing a quota system on automakers. The idea was to encourage them to switch more rapidly to electric vehicle (EV) production. The authorities would stipulate that a certain (increasing) percentage of a carmaker’s sales must be made up of EVs by certain dates. If a carmaker did not satisfy its EV quota in any given year, then it would pay a “fine” for every conventional car it sold above the ceiling that was the flip side of the quota. To oversimplify, if sales of EVs were required to be 20 percent of sales, but only accounted for 18 percent of those actually sold, the car company would pay a fine on every traditional car it sold beyond the “ceiling” that would have kept EVs at 20 percent of the total.
In early August, it was forecast that these fines could mean a €2 billion hit to VW’s bottom line, a singularly counter-productive development at a time when carmakers are using their profits from selling conventional cars to fund much of their investment in EVs. And worries about the fines are, as discussed in that Capital Letter, not confined to VW.
European EV sales in August were again sharply down. In September, however, they finally rose in Germany, up by 8.7 percent, but that recovery was less than it seems. September 2023 had been an exceptionally weak month there, owing to a cut in earlier subsidies.
If EV sales flounder that’s bad news for the companies in the home-grown supply chain that the EU is trying to encourage. The EU’s battery makers face a tough challenge. They are having to elbow their way into a segment where China is estimated to have 80 percent of an oversupplied market, and is already establishing a presence in the EU. China’s CATL, the world’s leading battery company, is established in Thuringia, in eastern Germany’s, accidentally or otherwise a strategic location. In September, the populist-right AfD came top in elections there, another reminder that EV-induced difficulties in the EU’s auto market bring political risks in their wake. The AfD has no time for the EU’s EV mandate.
The AfD is being kept out of power in Thuringia (for now), thanks to the other parties maintaining a firewall to keep it out. This will involve the center-right CDU at least cooperating with the BSW, a party revolving around Sahra Wagenknecht, a former Stalin fangirl who, as a young woman joined East Germany’s governing party only months before the Berlin Wall came down.
Karl Pfefferkorn, writing for the Brussels Signal:
The acceptance of former Socialist Unity Party of Germany (SED) member Wagenknecht as an acceptable CDU coalition partner is telling in the sense that her party’s positions do not differ substantially from those of the AfD. Both espouse economic nationalism, hostility toward migrants, and a pronounced affinity for Russia. Yet Wagenknecht, married to former Social Democratic Party (SPD) warhorse and Bundeskanzler candidate, Oskar Lafontaine, is clearly a paid-up member of the Berlin elite, while AfD leader Bjorn Hocke is most definitely not. One suspects the big difference is one of style: while Wagenknecht is a smooth and attractive politico, Hocke is a genuine firebrand, willing to stir up his supporters and traffic in near-taboos such as Alles fur Deutschland — all for Germany — that echo the National Socialist era.
“Near-taboos” is too kind. Using that phrase (which was displayed on the SA’s daggers) in a public speech is banned in Germany.
And then there’s the Russian question. If Germany’s government makes a mess of the country’s auto sector, the political consequences are likely to be bad news for Ukraine. Wagenknecht, it should be added is (like the AfD) no supporter of the EU’s plans to phase out the internal combustion engine.
And how about the EU’s battery champions, above all been Sweden’s Northvolt?
Yusuf Khan and H. Claire Brown, writing for the Wall Street Journal on October 4:
Europe’s great hope for battery independence is fighting for survival after the company said it was cutting 1,600 jobs and curtailing expansion plans.
Northvolt was the darling of the European cleantech industry, attracting billions in funding from the world’s biggest automakers, banks and governments. Today, as at least one investor questions its relationship with the company, its future seems bleak.
Oh.
Khan & Brown:
Slowing demand, high costs and technical difficulties in the face of overwhelming Chinese manufacturing expansion in recent years has meant that producing batteries profitably and at scale has so far proven an insurmountable challenge for Western companies.
BMW, one of Northvolt’s shareholders, recently pulled $2 billion worth of orders from Northvolt after it failed to meet delivery deadlines,
But the EV supply chain is not just a matter of batteries.
The next step [after mining] — refining — is tougher to crack and China has spent years building its expertise. The country processes more than half the world’s lithium, two-thirds of its cobalt, more than 70% of its graphite and about one-third of its nickel, according to the International Energy Agency.
The process is typically highly polluting and creates toxic waste. Growing scrutiny around the environmental cost of digging up raw materials and making EVs complicates approval processes along this step of the supply chain.
This will pose a problem for the EU. EVs are (dishonestly) promoted as “clean cars,” when they are (typically) only cleaner cars. Locating processing in the EU (if it can even be made to pay) is going to force Brussels to come clean about how dirty EVs manufacturing is. That may not be an easy (or quick) conversation with European voters or, for that matter, regulators.
China also has established a key position in the manufacture of battery-cell components such as anodes and cathodes.
So far as mining the basic raw materials that will be needed in EV production, China’s position is strong, but not (quite) dominant. Some of the resources needed are in Europe. In 2023, the Swedish company LKAB found what may be Europe’s largest deposit of rare earths in Sweden’s far north, but how long will it take to get mining there underway? Under the circumstances, it was interesting to read about a major investment in copper mining within Europe, but in Serbia, which is not in the EU, and is unlikely to join the bloc any time soon. Still, it’s in Europe, copper will be a key metal in the electrification that accompanies decarbonization, so this was something. But who is pouring these billions into Serbian copper mining? It’s not too hard to guess. Yes, it’s a company from … China, Zijin, which is now the second largest copper miner in Europe.
Here’s how it’s going (via RFE/RL):
BOR, Serbia — For Suzana Jovanovic, a resident living near the edge of an old surface mine, life hasn’t improved since a Chinese company took over the massive copper mining and smelting complex in 2018.
That’s when the state-owned Zijin Mining Group became a key partner in the mining venture on a pledge to invest $1.26 billion and improve environmental measures in return for a 63 percent stake.
The mining operation has grappled with concerns about its environmental impact and the health of nearby residents since it was operated by a state-run enterprise in Yugoslavia, and the promises by Zijin offered hope that things could change.
But Jovanovic says the situation hasn’t improved and Zijin has opened new sites in the area on the back of an additional $3.8 billion investment announced in September 2023.
One way to speed up the take-up of EVs in the EU would be to lower the tariffs on Chinese imports, as the Chinese can (thanks to generous state help) make EVs at a price low enough to attract EV-skeptical Europeans. The EU’s leadership like to claim that climate change is an existential crisis (it’s not) and that a coerced rapid change to EVs will play a vital part in staving off catastrophe (it won’t). If they truly believed that, then they would let the Chinese EVs pour in. And if that happened to wreck the European auto market, well, too bad: there’s a planet to save.
Curiously, the EU has not flung open the doors to its auto market to all those planet-saving Chinese EVs. Instead it has done the opposite. Brussels is now moving to impose tariffs of up to 45 percent(that’s up from a provisional regime of tariffs of up to 37.6 percent) on EVs imported from China. Not all Chinese manufacturers will pay the same rate. BYD will pay 17 percent, Tesla 7 percent. SAIC will pay an extra 35.3 percent. Those extra tariffs would be levied on top of the 10 percent levy that has been in place for some time. The reason for the decision (officially, but not unfairly) was the immense state support that Beijing had given its EV sector, but a more important factor is clearly growing unease about the danger posed to the EU’s auto sector by Chinese competition.
The provisional tariffs had (together with the weakness in the EV sector) hit demand for Chinese EVs in Europe hard, with sales falling by 48 percent in August. But the potential threat to EU automakers can be seen by the fact that beforehand Chinese manufactured cars (including Tesla) were accounting for around a fifth of EVs sold in the EU, up from 3 percent around three years ago. An influx of Chinese EVs would also make it more difficult for European carmakers to hit their EV quotas in 2025. Every EV bought from a Chinese manufacturer is (in theory anyway) one that could have been sold by an EU counterpart.
But a Reuters report listing a selection of responses within the EU to the proposed tariff hike reveals that the union is not united on this. Predictably enough, Hungary was opposed, which is partly Hungary being Hungary, and partly Hungary wanting to keep onside with China, a major investor. Somewhat ironically Hungary hosts a number of Chinese battery plants, and BYD, China’s leading EV-maker will be starting up production there next year. If the EU’s tariff wall stands (and is effective), Hungary will be well placed to function as a launchpad for Chinese EVs into the rest of the EU, but perhaps it would be undiplomatic for Hungarian Prime Minister Viktor Orban to say so out loud. Instead, he is contenting himself with talking about the foolishness of fighting an “economic cold war.” He wants to pursue a policy of “economic neutrality” (or, to put it another way, trade with everyone).
Meanwhile, Germany’s finance minister has warned that the EU Commission “should not trigger a trade war despite the vote in favor of possible punitive tariffs against China. We need a negotiated solution.” Germany voted against the higher tariffs, which, given the size of its auto sector, might seem counter-intuitive, were it not for the fact that its major automakers have extensive production facilities in China (as do a good number of other major German companies). German automakers have long opposed higher tariffs. BMW’s CEO has described the vote (for increased tariffs) as a “fatal signal” for the European auto sector. He wants talks between the EU and China to sort the whole thing out, as does the CEO of VW. BMW, Mercedes-Benz and VW sell between 33-40 percent of their vehicles in China. Europe’s EV makers also rely on Chinese batteries and other resources. China is well-placed to play very rough should it so choose.
Germany finds itself, again, trapped. There were two big ideas running through its economic policy in the early 2000s. The first was reliance on “cheap” Russian gas as a bridge fuel as the Germany decarbonized. We know how that worked out. The second big idea was developing China as a key export market, a “win-win,” according to Angela Merkel. Germany succeeded in building that market in China, but what happens now? The Chinese market is proving increasingly tricky for German industry as its erstwhile customers transform themselves into competitors. But despite that, Germany appears to be dug in too deeply to contemplate a retreat, meaning that matters could get very ugly should China hit back hard.
The Brussels Signal’s Pfefferkorn argues the anti-tariff consensus in Germany may crumble:
If German jobs are to be protected, the CDU will need to embrace new EU tariffs and slow the transition to EVs. In a political competition for votes, the fate of German auto workers carries more weight than the revenues VW pulls from its sales in China, or the carbon reductions mandated by the EU.
Whether the CDU, which will probably be the leading party in the next German government, will be prepared to follow that logic by supporting higher tariffs remains to be seen (after all a disaster in China would inevitably hit German manufacturers’ payrolls), but, from what some in the party have been saying, they would have no objection to moving away from the EU’s current EV timetable.
Pfefferkorn continues:
[Germany] is just embarking on a long transition away from cheap Russian fuels and a once-booming Chinese market. If it is to maintain employment in its leading industrial sector, it will need to offer its automakers protection both from Chinese competition and from threats to its core competence in internal combustion engines. In a looming era of neo-mercantilism in both China and the United States, it is not hard to see German industrialists sizing up the EU’s Single Market as a profitable haven protected from foreign competition and disruptive innovations.
It is not an exaggeration to speak about a “looming era of neo-mercantilism.” Indeed, add it to the growing pile of bad consequences flowing from the green transition. China has always been mercantilist, and with the IRA, the U.S. has gone a long way down that route, at least in climate-related areas. The EU, which, as its creative use of antitrust against American companies has demonstrated, is hardly immune to the protectionist temptation. And if the Draghi report and countless obiter dicta from Brussels, Emmanuel Macron, and so on are any guide (they are), the EU appears to be limbering up to join the mercantilist game at scale (if it can find the money). And could that mean state aid to struggling auto companies? It could. For now, however, the higher tariffs are another good reason to scrap EV mandates. To force consumers to pay a premium, tariff-protected price for cars they don’t really want ought, in an even remotely sane system, to be an insult too far.
Other producers of goods in sectors (the Auto business apart) where China might retaliate, such as pork producers and makers of luxury goods, are sounding the alarm. PFA, the French automakers’ association has, however, welcomed the move, arguing that it is “in favor of free trade but within the framework of fair rules.”
Overall, the vote for the higher tariffs was hardly overwhelming. Five countries, voted against, twelve abstained, and ten voted in favor, including some of the countries (such as the Baltic trio) most suspicious of the Beijing regime and, crucially, France and Italu, car-making countries. The abstainers include Sweeden. Volvo cars is now a Chinese operation. The EU is willing to keep talking to Beijing. Expect twists and turns.
The best hope for the EU is that with demand in China depressed, Chinese exporters of all descriptions are so desperate for business abroad that that will limit the extent of Beijing’s reaction. Maybe. And it will be cold comfort if the imports come pouring into the EU on a scale too great to comfortably absorb. It could also be that the tariffs (even if they go as high as 45 percent) may be less of a hindrance to Chinese than some in Brussels may believe. If that is the case, what will Brussels do?
The EV mandate is emerging as one of central planning’s greatest fiascos — and that’s a very crowded field. If Brussel believes that tariffs will put a cap on the mayhem that is being unleashed on the EU’s auto sector, it is mistaken. The bad news is just getting going.
The Capital Record
We released the latest of our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, makes use of another medium to deliver Capital Matters’ defense of free markets. Financier and National Review Institute trustee, David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by the National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.
In the 190th episode, David is joined by Sam Raus of Young Voices to discuss all the hubbub around the proposed Nippon Steel acquisition of U.S. Steel. The opposition to a company domiciled overseas investing foreign capital in U.S. workers, enterprises, and activity has been a golden chance to highlight the most ignorant of economic outlooks. Sam brings economic cogency to the matter, and the discussion is lively, hard-hitting, and worthwhile.
The Capital Matters week that was . . .
The Fed
Jon Hartley, Jackson Mejia & Michael Toth:
The new groupthink, which insists on cutting rates as much and as soon as we can, carries a risk for those not buoyed by inflated asset prices. Even as inflation has declined, it remains a half percentage point higher for the bottom quartile of the income distribution, something we have documented in our research with the Foundation for Research on Equal Opportunity. If inflation spikes again, low-income households would be disproportionately hurt because the prices for the “basket” of goods that those families buy would rise faster than the goods typically purchased by higher-income households.
The Dock Strike
You have a packed day ahead of you, so you get up early to get breakfast. Around 6:15 a.m., you head to the elevator, which has a sign on it informing you that the elevator does not open until 7:00 a.m. What you found charming yesterday, today leaves you a little perturbed. “I’m fully capable of pushing the buttons without an operator,” you say to yourself. You don’t really want to go down and then back up 19 flights of stairs first thing in the morning, so you decide to just burn time until 7:00.
Most people are aware of the historical mafia connections of the International Longshoremen’s Association, the East Coast dockworkers’ union. On the Waterfront, starring Marlon Brando, came out in 1954. Many of the mafia connections to transportation were laid out by congressional committees in the 1950s and 1960s, then by prosecutors in the major mafia trials of the 1980s and 1990s.
But, just as a thought experiment, read this account and try to guess what year it’s from…
When a strike is in the public eye, anyone opposing the union can count on being denounced as “anti-worker.” Yet 94 percent of American private-sector workers are not union members, and the behavior of some of the unions that represent the dwindling 6 percent is a great illustration of why they don’t want what organized labor is selling…
Standing up to union bullies such as Harold Daggett of the International Longshoremen’s Association is a long-standing part of National Review‘s mission. The statement explaining NR’s purpose from the first issue of the magazine said NR “will explore and oppose the inroads upon the market economy caused by monopolies in general, and politically oriented unionism in particular.”…
The president and vice president are the only elected positions in our Constitution with a national constituency. Yet, looking at their statements after the suspension of the International Longshoremen’s Association (ILA) strike, one would think Joe Biden and Kamala Harris are working for organized labor…
ESG/Stakeholder Capitalism
What ING’s CEO is doing is (in essence) “borrowing” shareholder capital and the power that it gives him as the CEO of a large bank to use the bank’s financial power to advance not shareholder return, but an ideological agenda (he wants to be “moving in tandem with Paris”).
Regulation
It is a good time to review what the Biden administration promised to do about energy policy. Back in 2021, President Biden and VP Harris promised a “whole-of-government” approach to such policy. And they’ve delivered, to the detriment of the nation and with no meaningful impact on global energy production or climate change. The administration has mobilized a phalanx of federal regulatory agencies to pass new rules aimed at both destroying U.S. demand and constricting future domestic production of hydrocarbons…
Electric Vehicles
I wrote last week about growing concerns in Italy over the EU’s EV mandate. These have been around for a while, as EV demand in the EU continues to disappoint and as 2025 brings with it the EU’s demand that automakers’ sales must include (at least) a certain percentage of EVs…
Antitrust
Federal Trade Commission chairwoman Lina Khan is appearing at pre-election events with Democratic representatives Greg Casar (Texas), Raja Krishnamoorthi (Ill.), and Mark Pocan (Wis.), Democratic Senate nominee Ruben Gallego (Ariz.), and Senator Bernie Sanders (I., Vt.), Punchbowl News reports.
The progressive antitrust regulator has drawn criticism from free-market conservatives yet has been supported by some Republicans, most notably vice-presidential nominee J. D. Vance…
Honduras
Honduran president Xiomara Castro is caught in a web of corruption, scandals, and backroom deals. Rather than address those issues to rebuild public trust, she has decided to shift the blame, weaken the opposition, and hold onto power at all costs. This is evident in her recent move to declare Zones for Employment and Economic Development (ZEDEs) unconstitutional — a decision that puts political survival above the well-being of the people…
Climate Policy
Almost anytime federal bureaucrats across multiple agencies can agree on something, it is bad news. That is certainly the case for a recent proposed regulation from the Biden-Harris administration, which would require almost all federal contractors to make voluminous disclosures regarding greenhouse-gas emissions and “climate-related financial risk.”
Though ostensibly intended to improve the climate, the rule wouldn’t help anyone except lawyers, accountants, and climate consultants. It certainly wouldn’t help taxpayers, who would be asked to pay more as contractors attempt to recover costs…
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