Turkey surprised many when it announced an additional 40% import tariff on electric vehicles (EVs) produced in China in March. Beijing protested the measure, with its Ministry of Commerce reportedly expressing strong dissatisfaction and warning that they undermined the confidence of Chinese companies in investing in Turkey. 

However, a few weeks later, Chinese automotive powerhouse BYD signed an investment agreement for the construction of a $1bn production facility in Manisa, western Turkey. Speedy Working Motors, a subsidiary of China’s Brilliance Auto Group, also submitted a proposal to the Turkish government earlier in July to build a plant in the country. 

If the Turkish government was trying to force the hand of Chinese producers, these latest developments seem to validate its strategy. In this context, trade tariffs may well become another measure of investment promotion, or rather investment suasion. 

The narrative around trade tariffs has increasingly been framed in the context of the US–China trade war, whereby they naturally come to be perceived as a hostile act. That certainly applies to the case of the US, where the 100% import tariffs on EVs made in China are more ideological than economically motivated. 

It applies to a lesser extent when it comes to a country like Turkey, which is not using trade tariffs to sever its engagement with China. Rather, it is leveraging them to change the terms of engagement with Beijing and swap Chinese imports for Chinese investment. Other countries, such as Brazil, have taken similar steps in using trade tariffs as a tool of investment suasion. 

The head of the Investment Office of the Presidency of the Republic of Turkey, Burak Dağlıoğlu, highlights that BYD’s investment in Turkey has been in the works for months, with negotiations intensifying after Industry and Technology minister Mehmet Kacır visited the company’s headquarters in Shenzhen in December 2023. He also concedes that “our approach wants to make sure that companies are manufacturing new energy vehicles in Turkey”, and “tariffs are part of this effort”. 

The same official statement by the Ministry of Trade announcing import tariffs on EVs made in China mentioned that one of objectives of the policy was “to encourage domestic investment and production”. 

Tariff jumping is nothing new. Companies across sectors have typically been relocating production facilities to avoid paying import tariffs when the financials worked. The investment in new production facilities in the US by Japanese carmakers in the 1980s in the wake of the introduction of voluntary export restraints has become a case study for tariff jumping. But the way policy makers are being more strategic about tariff as a tool of investment suasion is more of a novelty. 

“How many countries are using tariffs — or the threat of tariffs — to actually just get more Chinese investment?” wonders Kyle Chan, a postdoctoral research associate and lecturer at Princeton University. 

“Turkey seems to be willing to negotiate and try to use the leverage they have to have something in return from China,” Mr Chan says.

To further encourage Chinese companies to invest in Turkey, the government pledged that those Chinese automakers such as BYD that commit to building production facilities in Turkey are eligible for incentives that would exempt them from the 40% additional tariff. 

Ankara’s gamble traces back to the profile of the country’s trade with China. 

Turkey’s imports from China were about $45bn in 2023, according to official figures. In contrast, Turkey’s exports to China were only $3.3bn. Its auto industry, which is the backbone of the country’s industrial production and Europe’s third-largest after Germany’s and Spain’s, and at par with France’s, saw imports grow by almost 80% in 2023, according to figures from the Automotive Industry Association. 

Against this backdrop, tariffs on EV made in China can help rebalance trade with Beijing and protect the competitiveness of local automotive productions. BYD’s new facility will contribute to the competitiveness of the whole ecosystem. 

Yet Turkey’s use of trade tariffs as a tool of investment suasion is a gamble that may pay off only when certain conditions are in place. Companies such as BYD ultimately need a strong business case to set up a facility to jump local tariffs. They need sizeable domestic markets with good prospects; good access to other markets in the region — both in terms of regulation and infrastructure — and an automotive cluster that allows production at convenient costs. 

When all these factors are in place, the cost of losing access due to trade barriers is higher than the cost of investing in a new facility — in this regard, Turkey is a case in point. Brazil, where BYD and other automakers doubled down their investment commitments after president Lula reintroduced import duties on EVs at the beginning of 2024, is another. 

But when the combination of these factors is not compelling, trade tariffs risk backfiring as producers opt for geographies with lower trade barriers that guarantee a similar level of domestic and international market access. 

Ultimately tariffs as a tool of investment suasion is a gamble that can pay off only under certain circumstances. But the way countries are becoming more strategic with the way they use trade tariffs adds nuances to a narrative that goes beyond the idea of trade barriers as an exclusive act of trade hostility. Accordingly, a wave of tariff jumping FDI is already mounting. 

Do you want more FDI stories delivered directly to your inbox? Subscribe to our newsletters.