Friday, March 30, 2018

On Tesla and Tariffs

Much to the chagrin of Econists the White House has imposed tariffs on steel and aluminum imports into the US. The tariffs are set at 25% and 10% on the two metals respectively. The relationship between trade and environment is fascinating and complex and above all hard to generalize. But here I just want to explore what it means for pollution from transportation. It is not obvious the these are connected right? But they are.

I will dispense with the environmental implications one can draw from Econ101 as to how this raises domestic price of these commodities and lowers the world price (as we are a large consumer) and it's attendant effects for consumption and pollution. Since steel and aluminum are very energy intensive, if this action does lead to a net reduction in global consumption and if it shifts production to countries with cleaner electricity mix, it could be an "unintended" benefit for the environment. But those are BIG IFS. For if you relax Econ101 assumptions and bring in exemptions to imports from specific countries which could mean we are just shuffling things around, game theory and  general equilibrium effects, it gets complicated very quickly. Economics of trade and the environment is, however, not my trade.

But what I do know is steel and aluminum have an important role in automakers achieving the stringent fuel economy standards put forth by Pres. Obama. Needless to mention, this is a regulation that the current administration is proposing abandoning. In any case, according to the US Department of Energy,  "A 10% reduction in vehicle weight can result in a 6%-8% fuel economy improvement. Replacing cast iron and traditional steel components with lightweight materials such as high-strength steel, magnesium (Mg) alloys, aluminum (Al) alloys, carbon fiber, and polymer composites can directly reduce the weight of a vehicle's body and chassis by up to 50 percent and therefore reduce a vehicle's fuel consumption."

At the same, it appears that aluminum-based materials are two to three times costlier per kilogram relative to steel. So whereas the pricey Tesla S relied more heavily on aluminum, the Tesla 3 which is a intended as a mass market car has a greater proportion of Steel. This means the Tesla 3 will be heavier for a given range  and will have to pay a greater fuel economy penalty.

In fact, the tariffs might be giving ammunition to auto makers to lobby harder for weaken the fuel economy targets. After this yet another depressing assessment, let me try to cheer you up with a couple of sunnier possibilities. One, steel makers have not been sitting idle hoping for political developments to regain market share in the auto industry. They have developed  advanced high-strength steel (AHSS), which according to the steel industry is cheaper and has lower life cycle emissions relative to aluminum. This coupled with improvements in power train technology and lighter batteries there might not be much penalty from reverting to steel. Last but not least, the tariffs on aluminum are set lower relative to steel.

If you accept that intentional harm is a given, then the fact there isn't additional unintentional harm is good news.

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