The EU’s answer to this has been baffling, to say the least. In a bid to save its inefficient (and expensive) car making industry, the bloc is actively going against consumers (the people who theoretically vote in all those bureaucrats) by doing its best to make Chinese EVs more expensive, thus forcing people who want EVs to pay more than they otherwise would have in a free market.

I mean, vehicle production is a strategic industry. There are reasons – aside from domestic politics – why you’d want to have the ability to produce vehicles. It’s cheaper for Europe to buy vehicles from China than to build them domestically (though I suppose it’s probably possible for European manufacturers to improve on cost competitiveness relative to where they are now).

In World War II, American vehicle production capacity was fairly important. It wasn’t just the fighting vehicles, but also a lot of unarmored vehicles, trucks and such. When Nazi Germany – which was mostly using horses for logistics still – had logistics problems reaching into the Soviet Union, the US had provided a lot of trucks to the Soviet Union, not to mention also providing some to the British and motorizing and mechanizing American forces.

https://www.historynet.com/studebaker-us6-the-lend-lease-deuce-and-a-half/

An ideal free market will optimize using price to guide it. But in order for that to produce the outcome you want, the price information needs to reflect everything that you care about.

When you have externalities, there are factors that the market will not take into account.

https://en.wikipedia.org/wiki/Externality

In economics, an externality or external cost is an indirect cost or benefit to an uninvolved third party that arises as an effect of another party’s (or parties’) activity. Externalities can be considered as unpriced components that are involved in either consumer or producer market transactions.

Externalities often occur when the production or consumption of a product or service’s private price equilibrium cannot reflect the true costs or benefits of that product or service for society as a whole.[9][10] This causes the externality competitive equilibrium to not adhere to the condition of Pareto optimality. Thus, since resources can be better allocated, externalities are an example of market failure.[11]

National security is a public good.

https://en.wikipedia.org/wiki/Public_good_(economics)

In economics, a public good (also referred to as a social good or collective good)[1] is a good that is both non-excludable and non-rivalrous. Use by one person neither prevents access by other people, nor does it reduce availability to others.[1] Therefore, the good can be used simultaneously by more than one person.[2]

Public goods include knowledge,[4] official statistics, national security, common languages,[5] law enforcement, public parks, free roads, and many television and radio broadcasts.[6]

The value of a public goods is normally going to be an externality.

So you’ll want to internalize it:

https://en.wikipedia.org/wiki/Externality

Governments and institutions often take actions to internalize externalities, thus market-priced transactions can incorporate all the benefits and costs associated with transactions between economic agents.[12][13] The most common way this is done is by imposing taxes on the producers of this externality. This is usually done similar to a quote where there is no tax imposed and then once the externality reaches a certain point there is a very high tax imposed. However, since regulators do not always have all the information on the externality it can be difficult to impose the right tax. Once the externality is internalized through imposing a tax the competitive equilibrium is now Pareto optimal.

Now, is this tariff the right way to do that? Is the value the EU places on it correct? I don’t know. National security is a positive externality, which I suppose might be an argument that EU vehicle production should be subsidized, rather than external producers subjected to a tariff. And it’s hard for me to say “this is the right number to price in national security”. There’s also a question here of the impact on EVs – which I think are the future of a lot of vehicular transport – versus other types of vehicles; placing a tariff just on EVs will tend to also encourage use of other types of vehicles. So, you could argue the details. But I will say that there is very probably some value associated with having the ability to having a “safe” source of vehicles, that it is non-zero, and internalizing an externality like that is not unreasonable.

All that being said, it is also important to recognize that there is a cost to doing this. There are a lot of risks out there that one might hedge against, and vehicle production may or may not be the main one to be concerned about. There are a lot of vehicle manufacturers out there around the world. Japan makes vehicles, Korea makes vehicles, the US makes (kinda expensive) vehicles. Unless the EU believes that they will be cut off from those, they could choose to not maintain a domestic source, but they would probably want to make sure that they had high confidence that those sources weren’t cut off.

Another factor is that automobile manufacture has high capital costs.

For a market to be efficient, it needs to be competitive. That is, if you have monopoly providers of something, the market may head away from being efficient. One way you can get monopolies is if the environment is such that it tends towards a natural monopoly.

https://en.wikipedia.org/wiki/Natural_monopoly

A natural monopoly is a monopoly in an industry in which high infrastructural costs and other barriers to entry relative to the size of the market give the largest supplier in an industry, often the first supplier in a market, an overwhelming advantage over potential competitors. Specifically, an industry is a natural monopoly if the total cost of one firm, producing the total output, is lower than the total cost of two or more firms producing the entire production. In that case, it is very probable that a company (monopoly) or minimal number of companies (oligopoly) will form, providing all or most relevant products and/or services. This frequently occurs in industries where capital costs predominate, creating large economies of scale about the size of the market; examples include public utilities such as water services, electricity, telecommunications, mail, etc.[1]

High capital costs can act as a barrier to entry and cause an industry to head towards being a natural monopoly. So, from this standpoint, it might make sense for the EU to ensure that it has access to a competing automobile industry if the potential alternative is a world where they can only otherwise obtain automobiles from China. Here, you’re basically paying something to make sure that you retain a market that is – at least somewhat, even if the tariffs decrease that competitiveness – competitive for the long haul.

Is that justified here? I don’t know. But it’s at least something to consider. The author is just saying that any restraint on trade makes a market less-efficient, and that’s true in the general sense. But…there are also exceptions, like the above factors. It’s not prima facie a bad idea for the EU to take those exceptions into account, which I think is what the author is saying.

Remember Nord Stream 2? That was fairly inexpensive as a source of energy. But…there were some externalities, some costs that were not incorporated into the price there – like the fact that the Russian government might use that dependence to cut off gas supply as a source of political leverage, even if it didn’t make sense for Gazprom as a company. The EU probably did Nord Stream 2 because its market regulators didn’t internalize national security costs.

Does the same thing apply here? shrugs I don’t know. But the idea that it might ain’t crazy.

I’d also add that the US has been doing something similar.

Weirdly editorialized article with AI images when you could just link their Reuters source.

1. EV cars pollute more than public transportation and therefore should not be cheaper than public transportation
2. China engages in unfair state subsidies for their EV market, while the EU does not. (See Northvolt)