China is hacking the tariff system by investing in U.S. firms — and American taxpayers foot the bill
The United States has spent six years ratcheting up tariffs, sanctions, and trade defenses to curb China’s industrial dominance. Those measures have grown even sharper in the last two years: Washington raised tariffs on electric vehicles to 100 percent, boosted duties on solar cells and certain batteries, and tightened rules around foreign entities of concern in clean-energy supply chains. Yet Chinese companies have not exited the American market. They’ve adapted. By investing in or partnering with U.S. firms and building plants on U.S. soil, they can bypass the bite of tariffs—while tapping generous federal and state subsidies created to onshore critical manufacturing. In effect, a portion of America’s industrial policy outlays is flowing to projects tied, directly or indirectly, to companies based in the very country those tariffs target.
What looks like a contradiction is really a collision of two policy goals: raising trade barriers to counter China’s state-backed overcapacity, and rapidly scaling domestic clean-energy production to meet climate and competitiveness targets. The clash creates loopholes. Chinese companies are adept at finding them.
How the workaround works
– Origin shift via local assembly: Tariffs apply based on country of origin. By performing “substantial transformation” in the United States—assembling battery modules or solar panels from imported components—Chinese-affiliated firms can claim U.S. origin for the final product, avoiding many China-specific duties.
– Partnering and licensing instead of ownership: Joint ventures, minority stakes, long-term supply contracts, or technology-licensing deals let Chinese firms monetize intellectual property, ensure demand for upstream materials, and shape production without triggering outright bans. Structuring ownership below formal control thresholds can help avoid “foreign entity of concern” restrictions tied to the EV consumer tax credit.
– Tapping U.S. subsidies: The Inflation Reduction Act (IRA) pays per-unit production credits for batteries and solar components and offers investment tax credits to retool factories. Many credits are refundable or transferable, meaning Treasury can cut checks even when firms have no tax liability. States add land, infrastructure, training money, and tax abatements on top. None of this is automatically off-limits to a U.S.-incorporated affiliate of a Chinese parent.
– Arbitraging fragmented rules: The strictest “foreign entity of concern” guardrails apply to the consumer EV credit (which blocks vehicles with Chinese-made battery components in 2024 and certain minerals in 2025). But production-side credits for making cells, cathodes, or solar modules have looser or no FEOC exclusions. Meanwhile, Buy America, CFIUS reviews, and antidumping rules operate on different definitions and thresholds. The gaps create room to maneuver.
Real-world examples
– Batteries: Chinese battery champions have explored or executed U.S. projects through licenses, JVs, or subsidiaries. A high-profile licensing arrangement to produce LFP batteries in Michigan drew scrutiny over whether a Chinese technology partner would make the EV consumer credit ineligible; the plan was scaled back but not abandoned. Gotion, the U.S. subsidiary of China’s Gotion High-Tech, is building battery-materials plants in the Midwest with state incentives. Such facilities can qualify for lucrative per-kilowatt-hour (kWh) and materials credits under the IRA’s production program, even if their ultimate parent is headquartered in China.
– Solar: After a decade of tariffs on Chinese solar panels, production migrated to Southeast Asia to sidestep duties. As the U.S. tightened those channels and layered on domestic incentives, Chinese-headquartered manufacturers began opening U.S. module plants—often with American partners—to qualify for IRA production credits and avoid new trade actions. Projects linked to firms like JA Solar, Trina, and LONGi illustrate the model: assemble in America, source much of the value chain abroad until local supply catches up, and collect per-watt credits along the way.
– Rail and transit (a pre-IRA preview): CRRC and BYD established U.S. assembly lines to win city contracts while counting as domestic producers under Buy America rules and receiving local support. Security concerns eventually led Congress to ban federal funds for purchases from certain Chinese state-owned rolling-stock makers. The pattern—local assembly to satisfy procurement rules, followed by ex-post guardrails—is echoing in clean technology.
Why taxpayers are on the hook
Industrial policy in the IRA made a deliberate pivot from demand-side consumer rebates to supply-side production credits—paying firms for each battery cell, module, or solar panel produced in the United States. Many credits are refundable or transferable for several years, so companies without profits can monetize them immediately. That makes them powerful, fast-acting tools—but also creates fiscal exposure if global incumbents, including Chinese-affiliated firms, capture a large slice of the pie.
A single 20 GWh battery-cell plant can generate hundreds of millions of dollars per year in per-kWh production credits at full capacity. Cathode and anode materials, battery modules, and refined minerals also earn credits. Multiply that across several facilities and the numbers add up quickly. State and local incentives pile on top. The logic behind this spending is to build domestic capacity fast. The tension arises when the capital, know-how, or control links back to China, meaning the United States may be subsidizing production that helps entrench Chinese-led supply chains, even if some jobs and factories sit on U.S. soil.
The policy contradiction
– Tariffs and national security: Washington aims to counter China’s industrial overcapacity, reduce dependence on Chinese inputs in critical sectors, and protect intellectual property. Higher tariffs on EVs, batteries, and solar components are part of that strategy.
– Speed and scale for the energy transition: Meeting climate goals and reducing energy costs require a rapid buildup of domestic manufacturing. U.S. firms alone cannot deliver that scale overnight. Foreign investment—capital, equipment, and expertise—accelerates timelines.
– The result: A system that discourages imports from China but welcomes certain forms of Chinese-affiliated production here, sometimes with limited guardrails. That can deliver near-term jobs and output, but it risks locking U.S. supply chains into Chinese technology stacks and upstream dependencies, while channeling taxpayer dollars to affiliates of Chinese firms.
What Washington has done—and what’s missing
– Actions taken:
– Raised Section 301 tariffs on EVs, certain batteries, and solar cells; stepped up enforcement against circumvention through third countries.
– Implemented “foreign entity of concern” rules that disqualify EVs with certain Chinese content from the consumer tax credit.
– Tightened scrutiny of sensitive investments and land purchases via CFIUS; restricted federal transit funds from going to certain Chinese state-owned rolling-stock firms.
– Gaps and grey zones:
– Key production-side credits (notably the IRA’s per-unit manufacturing credit) have weaker or no FEOC guardrails, allowing U.S. affiliates of Chinese parents to qualify if they produce domestically.
– “Substantial transformation” origin rules can label a product “Made in USA” even when most value is imported, sidestepping China-specific tariffs and qualifying for subsidies.
– Licensing, minority stakes, and contract manufacturing can replicate control or influence without triggering formal FEOC or CFIUS thresholds.
– State and local subsidies often lack national-security screens or ownership guardrails.
Policy options
– Align incentives with security goals: Extend FEOC-style restrictions—or tailored ownership, control, and IP-licensing tests—to production tax credits so taxpayer support builds capacity that is durable and domestically controlled.
– Tighten origin and content rules: Pair “Made in USA” eligibility with minimum domestic-content thresholds for subsidized products, phased in on realistic timelines, to prevent token assembly from unlocking full benefits.
– Close control-by-contract loopholes: Treat certain licensing, tolling, or management agreements as de facto control for purposes of subsidy eligibility when they grant operational vetoes or production-direction rights to a foreign entity of concern.
– Expand reviews to greenfield projects: Give CFIUS or a parallel body authority to review greenfield investments in critical sectors, with clear, predictable criteria, to address security concerns without chilling benign capital.
– Demand transparency: Require beneficial ownership disclosure and supply-chain mapping as a condition of receiving large federal and state subsidies; enforce penalties for misrepresentation or evasive restructurings.
– Build allied supply chains: Coordinate with allies to mutually recognize trusted suppliers and focus restrictions on genuinely high-risk links, reducing costs while maintaining resilience.
– Sunset and score: Time-limit large awards, require periodic security and domestic-content audits, and publish cost-per-job and cost-per-kWh metrics so the public can see what it is buying.
The bottom line
Tariffs changed the terms of trade with China; they did not end China’s reach. Capital is mobile, technology is licensable, and supply chains bend around rules that are not perfectly aligned. Chinese companies are leveraging those realities—investing in U.S. projects, shifting final assembly stateside, and capturing production subsidies designed to rebuild American industry. Some of this may be acceptable: plants get built, workers get hired, emissions fall, and supply risks diversify from imports alone. But without tighter guardrails, the United States risks paying handsomely to reinforce the very ecosystems it set out to counter.
Industrial policy and trade policy can work together, but only if the incentives point in the same direction. Otherwise, “made here” becomes a label of convenience, and taxpayers end up funding a strategy that tariffs were meant to stop.
