Why Tesla No Longer Needs to Worry About the US-China Trade War

Tesla's new China factory will benefit from the expansion of the Shanghai Free Trade Zone.

Tesla’s new China factory will benefit from the expansion of the Shanghai free trade zone. Xinhua/ via Getty Images

Over the past 12 months, Tesla has revised the price tags for its made-in-the-USA electric cars in the Chinese market several times to tackle the impact of Beijing’s tariffs on American goods amid a bruising U.S.-China trade war.

As the trade war continues to get worse, though, Tesla may be able to catch a breath from calculating the tariff impacts thanks to a new development in China’s domestic economy policy.

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As reported by Chinese news site Xinhuanet on Tuesday, the Chinese government is set to dramatically expand the size of its experimental free trade zone (FTZ) in Shanghai to to cover Tesla’s new “Gigafactory” in Lingang, an industrial area on the outskirts of Shanghai.

If implemented, it means Tesla’s China factory will be exempt from any tariffs when buying supplies from the U.S.

The Shanghai Gigafactory, which is currently under construction, was designed to manufacture Model 3 cars, Tesla’s first mass production model, for the Chinese market. Lower production costs and avoiding tariff-related risks were also part of the consideration to build a facility in China. But some Model 3 supplies, in addition to the higher-end Model X and Model S, still need to come from the U.S.

In addition, Tesla is also expected to benefit from corporate tax cuts coming with the FTZ expansion plan.

China is currently experimenting with a dozen free trade zones along its coast. If successful, these special economic districts will likely replace Hong Kong, which used to be the only free trade port in the country, serving as a point of contact between mainland China and the rest of the world but is now embattled by escalating local political activism.

At the end of August, Tesla CEO Elon Musk is scheduled to visit China to speak at an international artificial intelligence conference in Shanghai. He said earlier this month that he would also launch a local branch of his infrastructure company, the Boring Company, during the trip.

Why Tesla No Longer Needs to Worry About the US-China Trade War