Elon Musk has started building a Tesla Gigafactory in China, and it could let him dodge Trump's trade war

  • Elon Musk on Monday kicked off the construction of Tesla's new $2 billion factory in China, which he says will be ready as soon as this summer.
  • A factory on Chinese soil may help Musk avoid retaliatory tariffs imposed in the US-China trade war.
  • Tesla in October said it was accelerating construction because tariffs as high as 40% were making it uncompetitive in China.
  • Since then, a temporary truce has brought rates back to 15% — but that expires on March 1, and it is unclear where they will end up. A Chinese base would shelter Tesla against potential future tariff hikes.
  • Musk on Twitter on Monday said that the factory would make Tesla's Model 3 and that the Model S and the Model X would still be built in Tesla's two US factories.

Elon Musk has kicked off construction of his new Tesla Gigafactory in Shanghai, a project that could help him avoid tariffs on cars that have recently been inflamed by President Donald Trump's trade war with China.

Musk gave a speech at the site of the planned $2 billion factory in the Lingang district of Shanghai at about 3 p.m. local time (2 a.m. ET) on Monday.

The new factory, first announced in July, could be a remedy to problems operating in China, which Tesla attributed partly to President Donald Trump's trade war. Musk said the factory would be finished by the end of 2019 and might be ready in some capacity as soon as this summer. 

In October, Tesla said tariffs imposed by China to counter those made by Trump "resulted in an import tariff rate of 40% on Tesla vehicles versus 15% for other imported cars in China."  

RELATED: Take a look at all of the products that may be affected by the U.S.-China trade war: 

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Products directly hit by Trump's tariffs on Chinese goods
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Products directly hit by Trump's tariffs on Chinese goods
Meat: pork; beef intestine; rabbit meat; venison; frog legs
Fish and seafood:live fish including ornamental fish, trout, eels, tuna, and carp; chilled or frozen meat of various types of trout, salmon, halibut, plaice, sole, albacore, tuna, herring, mackerel, cobia, swordfish, pollack, whiting, catfish, rays, and more; various types of salted or smoked fish; other seafood including various types of lobsters, crabs, shrimps, prawns, oysters, scallops, mussels, clams, squid, octopus, conchs, abalone, sea cucumbers, and sea urchins.
Non-meat animal products such as eggs and dairy:Whey products; butter; various types of eggs including chicken; honey; hair of animals including human, hog, horse and badger; animal intestines, bladders; feathers; bones including shells, beaks, corals, hooves, antlers, and more.
Vegetables:onions; garlic; cauliflower and broccoli; cabbage; carrots; turnips; radishes; beats; cucumbers; peas of various types; beans; lentils; celery; mushrooms; peppers of various types; squash; okra; sweet corn; potatoes; sweet potatoes and yams; some types of tomatoes; spinach; Brussels sprouts.
Fruit and Nuts: Coconuts; cashews; almonds; hazelnuts; walnuts; chestnuts; pistachios; macadamia nuts; pecans; dates; figs; pineapples; guavas; oranges; mandarins; clementines; raisins; grapes; apples; pears; quinces; peaches; berries including strawberries, raspberries, cranberries, blueberries and others; bananas; a variety of dried fruits; peels of various fruits.
Cereals: wheat, including durum wheat; barley; oats; corn; various types of rice; grain sorghum; buckwheat; quinoa; and more.
Mill products: flours including those form wheat, corn, buckwheat, rice, rye, other cereals, potatoes, and bananas; groats and meal of various types including wheat, corn, oats, and rice; malt; starches of wheat, corn, potato, and more
Oil seeds: soybeans; seeds of sunflower, flax seed, sesame, mustard, poppy and more; planting seeds for certain crops; cocoas and mint leaves; and seaweeds.
Sugars and candies: cane sugar; candies with no cocoa
Breads and Pasta: uncooked pasta; various breads, pastries, cakes, and biscuits.
Prepared vegetables and fruits: various vegetables and fruits previously listen in their prepared or preserved forms; various fruit jams including strawberry, pineapple, apricot, and more; peanut butter; various fruit juices including orange, pineapple, lime, grape, apple, and more.
Other food items: soy sauce; condiments and seasonings; protein concentrates.
Beverages and vinegars: water, including mineral water; fruit or vegetable juices and juice mixes; beer from malt; wine, including rice wine; ethyl alcohol; vinegars
Food processing waste and animal feed: brans from processing; oil cakes; dog or cat food; animal feed
Tobacco products: various types and preparations of tobacco; tobacco refuse; cigars; cigarettes; smoking tobacco
Salts and minerals: salt/sodium chloride; sulfur; graphite; quartz; types of clays; chalk; slate; marble; granite; sandstone; dolomite; gypsum; some plasters; some types of cement; mica; Epsom salts
Ores, slag, and ash: ores of iron, copper, nickel, cobalt, aluminum, lead, zinc, tin, chromium, tungsten, uranium, titanium, silver, other precious metals, and others; slag, various types of ash.
Mineral fuels and oils: coal; lignite; peat; coke; tars; various types of light oil; various types of kerosene; petroleum oils; liquefied fuels including natural gas, propane, butane, ethylene, and petroleum; oil shale and tar sands
Inorganic Chemicals: chemicals such as chlorine, sulfur; carbon, nitrogen, oxygen, and silicon; acids including sulfuric, nitric, and more; various types of fluorides, chlorides, sulfates, nitrates, carbonates, and more.
Organic chemicals
Fertilizers: animal or vegetable fertilizers; urea; ammonium sulfate; sodium nitrate; and more.
Tanning and drying extracts, dyes, and paints
Essential oils, perfumes: perfume; lip or eye make up preparations; manicure or pedicure products; shampoo; hairspray; bath salts.
Soaps and cleaning products: various types of soap; leather and textile treatments; polishes for shoes and furniture.
Glues, adhesives, and enzymes
Cigarette lighter fluid
Photographic goods: various types of photo plates; instant film; various types of film in rolls; various types of motion picture film.
Various chemical products: pesticides; herbicides; fungicides
Plastics: vinyl flooring and other plastic floor and wall coverings; sausage casings; bags; gloves including baseball gloves; rain jackets; machinery belts.
Rubber: latex; rods, tubes, and other products; conveyor belts; various types of transmission belts; various types of pneumatic tires; gloves; gaskets; dock fenders.
Raw hides and leather: animal skins including cow, buffalo, sheep, goats, reptile; various types of leather made from cow, buffalo, sheep, goats, reptile; leather trunks and suitcases; leather handbags; CD cases; gloves including ski, ice hockey, and typical use; belts; fur clothing, incluidng artificial fur.
Wood: fuel wood; charcoal; various types of wood including oak, beech, maple, ash and cherry; moldings; rods; particleboard; various types of plywood; doors; corks and stoppers; wicker and bamboo baskets.
Wood pulp products
Paper: Newsprint; writing paper; vegetable parchment; carbon paper; self-adhesive paper; cigarette paper; envelopes; tablecloths; handkerchiefs; folders.
Silk
Wool or animal hair products: cashmere; yarns; tapestries and upholstery.
Cotton: fibers; thread; yarn; denim; satin.
Flax: yarn; fabrics
Man-made textiles: polypropylene; rayon; nylon; polyester
Other textile products, rope, twine: hammocks; fish nets; carpets;
Fabrics: corduroy; gauze; terry towel; lace; badges; embroidery
Headgear: caps; hairnets; wool hats; head bands
Stone, plaster, cement, asbestos: stone for art; marble slabs; roofing slate; millstones; sandpaper; floor or wall tiles; cement bricks.
Ceramics: fire bricks; pipes; tiles; porcelain and china.
Glass and glassware: balls; rods; drawn or blown glass; float glass; tempered safety glass; mirrors; carboys, bottles, jars, pots, flasks, and other containers; microscope slides; woven fiberglass
Precious stones and pearls: industrial diamonds; silver and products made of silver; gold and products made of gold; platinum; palladium.
Iron and steel and products derived from the metals:drums; tubes; pipes; doors; windows; screws; horseshoes;
Copper: plates; cables; tubes; pipes; springs
Nickel: bars; rods; wires
Aluminum:powder; cable; wire; screws.
Various metal products, tools, cutlery: industrial items made from lead, zinc, tin, and more; saw blades; bolt cutters; hammers; wrenches; crow bars.
Machinery, both industrial and retail: steam turbines; engines; fuel-injection pumps; air compressors; air conditioning machines; refrigerators; cream separators; hydraulic jacks; escalators; manure spreaders; copiers; automatic beverage-vending machines
Electronics: vacuum cleaners; hair clippers; spark plugs; generators; bicycle lights; electric amps; television cameras; various types of TVs; video projectors.
Vehicles and parts: axles; driving shafts; gear boxes; radiators.
Parachutes

Ships and boats: sailboats; motorboats; canoes; yachts.

Instruments for scientific or medical purposes: microscopes; cameras for non-art purposes; gauges for pressure, electrical currents, and more.
Clocks and watches
Furniture, bedding, mattresses: car seats; wood chairs; furniture designed for offices, kitchens, and more; mattresses; chandeliers; lamps.

Assorted items: buttons; stamps; paintings; collections of zoological, botanical, mineralogical, anatomical, historical, archaeological interest; antiques of an age exceeding one hundred years

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It additionally cited "headwinds we have been facing from the ongoing trade tensions between the US and China" as a problem.

Read more: US companies are using an ingenious method to game the system and avoid the worst of Trump's trade war

Last month China dialed back the 40% tariff rate to 15% as part of the 90-day truce reached by Trump and Chinese President Xi Jinping.

It will revert to 40% on March 1 unless the two nations reach a larger agreement on trade.

Tesla plans for the new Shanghai factory to produce 500,000 cars a year on Chinese soil. 

Any cost savings for Tesla will depend on what the tariff regime is when production begins.

It will also hinge on the precise details of the supply chain. For example, Tesla components made in the US and then shipped to the Shanghai factory for assembly would still most likely face some kind of tariff.

Nonetheless, Tesla has previously said the factory will help it deal with the tariff problem. In the October statement, Tesla said it would accelerate construction as a response to the trade problems.

Read more: Elon Musk is worth about $23 billion and has never taken a paycheck from Tesla — here's how the workaholic and father of 5 makes and spends his fortune

In November, Tesla cut the price of its cars in China to balance out the cost of new tariffs imposed by the Chinese government. 

Musk got permission from the Chinese government on July 10 to build the factory, Tesla's first outside the US. 

Tesla also has Gigafactories in Nevada's Storey County and in Buffalo, New York.

The Shanghai factory would double the size of the electric-car maker's global manufacturing, Reuters said.

Tesla has also registered a financial leasing company in China with $30 million registered in capital, Reuters reported. This will allow it to speed up "leasing and consultancy" contracts to get the factory up and running. 

On Monday before the ceremony, Musk sent off a string of tweets about the factory:

"Aiming to finish initial construction this summer, start Model 3 production end of year & reach high volume production next year.

"Shanghai Giga production of Model 3/Y will serve greater China region. Shanghai Giga will produce affordable versions of 3/Y for greater China.

"All Model S/X & higher cost versions of Model 3/Y will still be built in US for WW market, incl China."

China's retaliatory tariffs were imposed after Trump ordered tariffs on $34 billion worth of goods imported from China.

The trade war cooled off slightly over the holiday period, with Trump and Xi agreeing, among other things, to an easing of car and car-part tariffs for three months beginning January 1.

The factory will be China's first wholly foreign-owned car plant, Reuters said.

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