Multiple countries have now adopted, or have made signs of adopting, retaliatory measures against Chinese-manufactured electric vehicles. These measures are justified as attempts to curb China’s supposedly disloyal competition against domestic manufacturers while also satisfying some national security concerns. 

A cynical person might point out that these tariffs are merely a political expedience. For example, Canada’s proposed tariff happens after provincial governments and the federal government pledged more than $50 billion in subsidies to encourage production of electric vehicles in Canada. The paltry number of jobs that would be created would cost in excess of $4 million per job. For the United States, the numbers are even crazier—between $2 and $7 million per job. These costly subsidies, announced with great fanfare by politicians seeking media attention and votes, were already a tax burden. Now, that burden is being further increased so politicians can avoid losing the political benefits of their lack of fiscal frugality. 

But let us leave this cynical take aside and focus on the absurdity of the proposed reason for a tariff: the subsidies that China gives to its car manufacturers. 

China’s subsidies to EV are indeed considerable. One study finds that, given the elasticity of demand, all of the subsidy is passed to consumers in the form of lower prices. Given the size of subsidies, the price reductions regular consumers see are easily in excess of $10,000 per vehicle. 

That, however, is not a problem for Americans, Canadians, or Europeans. It’s a Chinese problem. Consider what subsidies entail: subsidies increase the production of a good, which in turn reduces its price. As the prices of electric vehicles fall due to increased output, consumers benefit from these lower prices, but subsidies need to be financed, and that comes from higher taxes. Crucially, these taxes are not paid by consumers in Canada, the U.S., or Europe, where the vehicles are being exported. They are paid by Chinese taxpayers, who also happen to be consumers. In essence, the burden of the subsidy is entirely shouldered by the Chinese. In this sense, Chinese subsidies act as a transfer from Chinese taxpayers to consumers abroad.

At the same time, these subsidies harm China in several other ways. First, Chinese consumers are prevented—by the higher tax rates—from consuming other goods and services they desire, limiting their economic contribution. Second, the subsidies distort the allocation of labor and capital, diverting resources into the subsidized electric vehicle sector at the expense of more productive industries that could better drive long-term growth. These other sectors, which could have attracted labor and capital under normal market conditions, are stifled and unable to expand. China is thus forced on a slower growth path—something that national security hawks should normally deem desirable. Finally, the higher taxes required to fund these subsidies dampen domestic investment, making China a less attractive destination for foreign capital. In contrast, countries like Canada and the U.S. become more appealing to investors without any effort on their part, benefiting from China’s internal economic distortions.

Economists often say there’s no such thing as a free lunch, but for everyone outside of China, these subsidies come remarkably close. The correct answer, from the vantage point of Western countries, is to let the Chinese subsidize. It is entirely a them problem. Tariffs on our consumers make it an us problem.