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

Tesla ShanghaiA Tesla logo is seen at a groundbreaking ceremony of Tesla Shanghai Gigafactory in ShanghaiReuters

  • Elon Musk kicked off the construction of Tesla's new $2 billion "Gigafactory" in China on Monday, which he says will be ready this summer.
  • A factory on Chinese soil may help Musk dodge tariffs imposed by China as part of Donald Trump's trade war.
  • Tesla said in October 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.
  • The factory will only make the Model 3, while the Model S and X will be built in Tesla's two US factories.

Elon Musk kicked off construction of his new Tesla Gigafactory in Shanghai, a project which could help him get around tariffs on cars which have recently been inflamed by 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 around 3:00 p.m. local time (2:00 a.m. ET) on Monday.

The new factory, first announced in July 2018, could be a remedy to problems operating in China, which Tesla said were partly down to Donald Trump's trade war. Musk said the factory will be finished by the end of 2019.

tesla shanghaiThe site of the new Tesla factory.Reuters

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."

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 dialled back the 40% tariff rate to 15% as part of the 90-day truce agreed by President Donald Trump and Chinese President Xi Jinping.

It will revert to 40% on March 1, 2019, unless the two nations agree something else.

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

Exactly how much this could save 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, then shipped to the Shanghai factory for assembly, would still likely face some kind of tariff.)

Nonetheless, Tesla has previously said that the factory would help 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 notorious workaholic and father of 5 makes and spends his fortune

In November, Tesla cut the price of their 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 China BeijingNg Han Guan, File/AP Images

The other two Gigafactories are in Storey County, Nevada, and Buffalo, New York.

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

Tesla have 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 runing.

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 on $34 billion worth of goods imported from China.

The trade war cooled off slightly over the holiday period, with Trump and Chinese leader Xi Jinping agreeing a suspension of car and car-part tariffs from January 1 for three months.

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

Get the latest Tesla stock price here.

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