China is officially making good on its pledge to reduce tariffs on car imports - and Tesla Inc.'s (TSLA) sales in the People's Republic stand to win big from the news.

China's Ministry of Finance announced that import tariffs for most vehicles will be slashed from 25% to 15%. The tariff cuts become official on July 1.

That huge import tariff cut gives Tesla the ability to compete on a more even keel with Chinese electric car manufacturers, who have benefitted from the ability to sell their cars at lower prices in the domestic market. Tesla has already announced that it will lower its prices because of the change, cutting the selling prices of Model X and Model S vehicles by more than 6%.

That amounts to as much as a $14,000 discount on the company's priciest cars.

Tesla will begin implementing the price cut now.

The tariff announcement comes at a critical time for Tesla in China. China is already Tesla's fastest-growing market, thanks in large part to an aggressive policy of government mandates for electric vehicle adoption.

While Tesla's sales in China still make up a relatively small part of overall revenues, adding up to around 17% of sales in 2017, China's EV mandates and burgeoning population of wealthy consumers has the potential to quickly become Tesla's most important overall market.

As the world's largest luxury car market, China has in recent years had an increasing appetite for Tesla's pricey electric vehicles, which sell for a substantial markup over U.S. selling prices due to the increased costs of shipping and importing them into the country. But Tesla is moving fast to change that.

Tesla's charging network and store footprint in China.
Tesla's charging network and store footprint in China.

The company has already reportedly started hiring for a new Gigafactory in mainland China, an expansion made possible by China's other pledge that it will allow companies to have 100%-foreign owned factories for the first time ever.

Having a "Made in China" stamp on new cars meant for sale in China could also have the added effect of opening Tesla models to additional government subsidies meant for domestic manufacturers.

Between lower costs achieved by tariff reduction and eventually domestic production, and the planned introduction of Tesla's more mass-market-priced Model 3 to China next year, Tesla could reach significantly more Chinese consumers.

Simply put, Tesla's sales in China could explode in the next several years.

Both short-term and long-term, Tesla's technical price trajectory looks like it could finally be ready to make a move to the upside, after a sluggish start to 2018. Success in China plays into that long-term upside potential in a big way.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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