China and the US Double Down in Electric Vehicle Race

China actually had cut subsidies to EV makers in January, and said it would end tax breaks for consumers buying EVs by the end of 2023. The policy pivot this week is part of the government’s wider campaign to boost the economy. China’s widespread covid lockdowns wreaked havoc on economic growth last year, and the recovery has been more tepid than expected. Auto sales were up 4% year-over-year in the first five months of 2023, but policymakers had been hoping for stronger growth. The government views electric cars as key to China’s environmental and economic future, making it a logical choice for further stimulus.   

Under the new policy, Chinese consumers who buy electric vehicles will be eligible for up to 30,000 yuan (around $4,200) in tax breaks in 2024 and 2025, and half that amount for the following two years. For most people, this means that buying an EV will be tax-free, because the sales tax is 10% and the vast majority of electric cars in China sell for less than 300,000 yuan ($42,000). Overall, the government said the policy, which provides tax breaks for all "new energy vehicles,” including electric cars, plug-in hybrids, and hydrogen fuel cell cars, will amount to $72 billion.

In a press conference Wednesday, Vice Minister of Finance Xu Hongcai said the tax breaks are designed primarily to support consumers who buy cheaper cars. That’s another benefit to Chinese companies -- because they dominate the global market for less expensive EVs.  

The U.S. is racing to catch up

The U.S. has been relatively slow to join the global EV competition. The U.S. began providing tax credits for electric cars during the Obama administration, but those subsidies dried up during the Trump era. 

Since President Biden took office, the administration has made it a priority to boost the American EV industry, with climate and economic goals in mind. Under last year’s Inflation Reduction Act, the U.S. passed significant subsidies aimed at catalyzing the manufacture and sale of domestically manufactured EVs. As of this year, consumers can receive up to $7,500 in tax credits for EVs that meet certain made-in-America requirements: at least 50% of the battery components must be made domestically, and at least 40% of the battery minerals have to be sourced from the U.S. or a free trade partner. Consumers can receive partial tax credits if the cars don’t meet all the criteria.

The Biden administration has also poured government dollars into the industry through other channels. On Thursday, the Department of Energy announced that it is providing Ford with a $9.2 billion dollar loan to build battery factories in Tennessee and Kentucky in conjunction with SK On Co., a South Korean battery maker. That’s the biggest government loan to the auto industry since the bailouts that followed the 2008 financial crisis.

The recent outlays are expected to catapult the U.S. electric car industry forward in the coming years, but China has had a huge head start – and all those billions of dollars in investment have paid dividends. China sold nearly six million EVs last year – more than six times the U.S. figure. New energy vehicles made up one-third of total car sales in China as of May; in the U.S., EV sales were only 7.7% of the total in 2022.

China’s new tax credits will continue to support the growth of its EV sector. The China Automotive Technology and Research Center estimates that the new policy will boost sales by more than seven million cars over the four years it is in effect, Caixin reported.  

Meanwhile, China’s strong domestic EV sales have been followed by breakthroughs in the global market. Chinese EV maker BYD has pulled ahead of Tesla in global sales by dominating in Thailand, Singapore, Israel and other markets. Now Chinese companies have begun rolling out their higher-end EV models in Europe, and another frontier looms: auto analysts recently told the Washington Post that it’s only a matter of time before Chinese companies break into the U.S. EV market as well.