From Trade War to Green Transition: Optimal Electric Vehicle Tariffs with Revenue-Funded Subsidies

Panle Barwick, Jack Collison, Pinelopi Koujianou Goldberg, Shanjun Li and Yucheng Wang

No 21627, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study the optimal design of trade and industrial policy when governments pursue environmental objectives alongside traditional national welfare. Motivated by the global transition to electric vehicles (EVs) and growing concerns about competitiveness, resilience, and the environment, we develop a framework in which policymakers choose tariffs and domestic production subsidies to maximize national welfare, defined as the sum of consumer surplus, domestic profits, environmental benefits, and tariff revenue net of subsidies. We combine a theoretical model of differentiated-product oligopoly with a structural demand model estimated using vehicle-level data from 13 countries during 2004-2023 that together account for the vast majority of global EV sales. Our central finding is that the optimal policy combines a moderate tariff on imported EVs with a subsidy to domestic EV production financed through tariff revenue. This policy substantially outperforms both outright protectionism and laissez-faire. Relative to current policies, it preserves consumer access to affordable EVs, accelerates fleet electrification, supports domestic producers, and remains budget-neutral. For the United States, the optimal policy more than doubles EV market share, generates over \$45 billion in annual welfare gains, and avoids approximately 95 million tons of lifetime CO$_2$ emissions. A key mechanism underlying these results is the pass-through of tariffs and subsidies to prices, which depends critically on demand curvature, product substitution, and market structure. More broadly, our results suggest that effective industrial policy requires careful attention to market structure and country-specific conditions, balancing consumer, producer, fiscal, and environmental objectives rather than adhering to ideological prescriptions.

Keywords: Industrial policy; electric vehicles (search for similar items in EconPapers)
JEL-codes: F13 F14 H23 L52 Q58 (search for similar items in EconPapers)
Date: 2026-06
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