Tesla gets a free-trade pass on China tensions with the US, or does it?

It’s hard to miss all the headlines about the United States’ trade war with China, the stock market’s reaction to it, and the various industry struggles in response to it if you spend any decent amount of time online. Honestly, I’m not much of a finance person, i.e., I only learned what a ‘short seller’ was by following Tesla. But being a reporter on all things Elon Musk, I couldn’t help but wonder how the discord was going to affect the all-electric carmaker in both China sales and its Gigafactory 3 project in Shanghai.

Then, my wondering seemed to stumble upon an answer thanks to a fellow Teslarati writer’s coverage of the expansion of China’s Shanghai Free Trade Zone (FTZ) to Lingang, the area where Tesla’s newest facility is located. (Thanks, Simon!) As part of a continuing effort to open the country’s markets to economic globalization, Shanghai and Lingang are intended to form a free market region similar to Hong Kong. Goods entering the FTZ will be tax-exempt for the most part.

On its face, it appears Tesla will get to avoid most of the arguments between Presidents Trump and Xi Jinping.

The company was already moving towards Chinese tax reductions by being a local manufacturer, but some supplies will still need to come from its facilities in the US, not to mention the high-end variants of the Model 3 as well as the Model S and Model X, risking import games and the like – something an FTZ would eliminate. The FTZ will also come with promised cuts to corporate tax rates for preferred industries. I mean, it certainly sounds like a great deal for a company like Tesla.

Tesla CEO Elon Musk⁩ in Shanghai signs preliminary agreement to build Tesla Gigafactory in China [Photo credit: Phil LeBeau]

“Customs authorities are supposed to ensure all the goods inside the zone are duty-free to boost commercial activities in the area,” Huang Yejing, a research professor at the Institute of World Economy at the Shanghai Academy of Social Sciences, was quoted as saying in the South China Morning Post. So, anything Tesla imports to Giga 3 will be free from fee baggage on China’s side. However, Huang also said this:

“But they also need to make sure that those duty-free goods do not flow out of the zone and are sold on the domestic market. It is still an unanswered question facing regulators.”

Does that mean the benefits of the FTZ are eliminated once Tesla’s cars leave the area to be sold at stores? It sounds like it. Well, maybe not all the benefits. Their cars can be built under the best free-trade policies China has to offer (for now), and residents within the Shanghai area will probably have the best prices on their Tesla cars. Does this deal kind of operate like when city residents purchase their cars outside their cities to avoid higher taxes? Since Tesla sells its cars online, will that create a loophole to sell anywhere in the country under FTZ deals?

China has been very generous to Tesla and Musk in their Shanghai endeavors thus far, and with that under consideration, it seems the goodwill may last at least for the immediate future. Musk is also bringing The Boring Company to China at the end of August, so China’s leadership obviously sees good things for China coming from his ventures.

Tesla gets a free-trade pass on China tensions with the US, or does it?

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