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President Biden’s  to raise additional tariffs levied by the United States on some Chinese products from 25% (already in place since the Trump presidency) to up to 100% in the case of electric vehicles (EVs) has  of a return to the dark age that started in 1930. In that year, the US Congress adopted the Smoot-Hawley Act, raising US tariffs substantially, a move that triggered worldwide protectionism and deepened the Great Recession. 

But while the new Biden tariffs are certainly very worrisome for the rules-based liberal trading system, they are in fact more reminiscent of the managed-trade era of the 1960s, 1970s and 1980s than of the 1930 Smoot-Hawley tariffs. Like the new Biden measures, the former targeted certain sectors, whereas the latter were broad-based.

Managed trade affected a relatively small number of products – though important, such as autos and steel. The measures were used mainly by Europe and the United States to stop imports from newcomers including Japan and Korea. The instrument of choice to limit imports from these countries was ‘voluntary’ export restraints (VERs), a form of quotas formally managed by exporters to get around the ban on import quotas under the General Agreement on Tariffs and Trade (GATT). There were also extensive VERs in textiles and clothing.

In the 1970s and 1980s, VERs were used extensively first by European countries and then by the United States . Starting in 1976, Japanese exporters agreed to limit their share of the British market to 11%. The next year, the French president announced that France would not tolerate a Japanese market share of more than 3%. By 1981, the domino effect had spread to the United States, with a VER programme allowing only 1.68 million Japanese cars to enter the US market each year, a figure gradually raised to 2.3 million by 1985. All VER programmes, not just in the auto sector but in all sectors, were eventually terminated in 1994 as part of the Marrakesh Agreement that concluded the Uruguay Round of GATT negotiations and ushered in the World Trade Organisation.

Will history repeat itself? Will limitations on Chinese electric vehicles now cross the Atlantic in the other direction, from the US to the European Union?   

Chances are high that the answer is yes, but times have also changed in several respects.

First, VERs are no longer an option. Not only are they forbidden by WTO rules, but China is not Japan. China is unlikely to agree to curtail its exports of electric vehicles voluntarily, and nor would the US and the EU offer China to keep the rent generated by their import limitations disguised as VERs.

Second, the imposition of VERs by European countries and the US led Japanese producers to set up factories in the EU and the US in order to sidestep the trade limitations. This time, the US may not allow Chinese producers to set up factories on its territory, based on national security arguments, a consideration that was not there with Japanese producers. Japan was never a ‘strategic rival’.

The situation in the EU is quite different from the situation in the US with respect to these two factors. First, EU producers of automobiles are much more reliant on the Chinese market than US producers. Hence, China would be able to retaliate much more vigorously against the EU producers if, like the US, the EU imposed additional tariffs of 100% on imports of Chinese EVs. Second, EU countries that are not home to European EV producers are unlikely to accept EU measures intended to ban foreign direct investment by Chinese producers in the EU, as the 2023 decision by  clearly shows.

This does not mean that the EU will not seek to curtail imports of EVs from China, but simply that the EU measures will be different from those imposed by the US. The European Commission is likely to announce soon the imposition of countervailing duties on EU imports of Chinese EVs, following the  that it launched last October. But the anti-subsidy tariff is expected to be well below the 100% tariff imposed by President Biden, so the EU market will likely remain more open to Chinese EV imports than the US market, and also more open to Chinese FDI