Elon not so keen on tariffs after all? Tesla boss backflips on his support for EV tariffs as they may make the entry-level Model 3 significantly more expensive

Elon Musk, controversial boss of Tesla, has reversed his stance on harsh protectionist trade policies put in place by the Biden administration in the US.

According to Reuters, Musk told the Viva Technology conference in Paris that “neither Tesla nor I asked for these tariffs, in fact I was surprised when they were announced. Things that inhibit freedom of exchange or distort the market are not good.”

“Tesla competes quite well in the market in China with no tariffs and no deferential support. I’m in favour of no tariffs," he added.

This flies in the face of his previous comments in January that if Chinese manufacturers would “pretty much demolish most other car companies in the world" unless protectionist policies were put into place.

The brutal new tariffs cover a wide range of goods from China in order to protect US jobs from cheap imports. Specifically, electric vehicles imported from China will now attract a 100 per cent tariff, while duties on semiconductors have been doubled to 50 per cent.

Importantly, the US will increase tariffs on batteries built in China from 7.5 per cent to a massive 25 per cent this year.

This may be the source of Elon’s backflip on the new tariff regime. The issue is the base model rear-wheel drive Model 3 (the most popular grade) uses a more affordable lithium iron phosphate (LFP) battery sourced from what is now the world’s largest battery manufacturer CATL in – you guessed it – China.

Even if these Teslas are still built in the US, the batteries attracting a 25 per cent tax will cause issues for the EV giant, particularly as it has been slashing prices to try to stay competitive against a backdrop of slowing EV sales in the US.

Recently, Tesla dropped the standard range Model Y from its website in the United States meaning the popular medium SUV is now available exclusively with Nevada-built battery packs.

Batteries made for the Long-Range and Performance Model 3 and Model Y variants are made by either LG Chem or Panasonic, with the latter cells being assembled in a joint-venture plant with Tesla in Nevada, which will not only be immune to the tariffs, but may even benefit from increased clean energy tax subsidies for US ventures.

This could lead to Tesla having to source different, locally-built batteries for its entry-level models in the US. The same could be said for many manufacturers who have switched to LFP battery chemistries in their base model vehicles in order to bring the price down for consumers.

Most of the comparatively affordable LFP cells are sourced from one of China’s battery manufacturers, whether it’s CATL or BYD. Many batteries built by the other large players, like Korea’s LG Chem, are also built in China where they attract generous government subsidies designed to decarbonise the transport sector. It is these subsidies which the US government claims are unfair to its domestic manufacturing sector.

While the news is bad for Tesla, it is decidedly worse for Volvo and Polestar. Both manufacturers have Chinese-built vehicles in the US which will essentially be made uncompetitive by this new tariff regime.

The move has been seen as controversial as the existing 25 per cent tariff on Chinese-made EVs already locked out players which have already made an impact in Australia, like BYD and SAIC Motor (which owns the MG and LDV marques).

This seemingly has had Chinese automakers, already active in the Mexican domestic market, try to broaden their footprint in order to get around the tariffs with ‘built-in-Mexico’ versions of Changans, BYDs and others. In recent years, the Mexican auto sector has been booming as more US and European manufacturers invest heavily there in order to get a price advantage in the lucrative American market. 

As a result the US government, aware of this move, has reportedly been pressuring the Mexican government to not extend the same level of support as it already does to those American and European automakers. Time will tell if it works.

The outcome for Australia? More supply of Chinese-made batteries and Chinese-made vehicles should continue to bring the price of entry down for those wanting to make the switch to an EV.