Trade showdown: How EU tariffs on Chinese electric vehicles may impact the auto industry

The European Union (EU) has announced plans to impose significant tariffs on Chinese electric vehicles (EVs), potentially triggering a trade war with Beijing. This move aims to counter what the EU perceives as unfair state subsidies that allow Chinese manufacturers to sell EVs at lower prices than their global competitors.

Electric vehicles have become the latest focal point in a broader trade dispute concerning Chinese government subsidies and the rapid growth of the country’s green technology exports to the 27-nation EU.

What are the tariffs?

The EU’s decision follows a nine-month investigation into alleged state support for Chinese battery electric vehicles (BEVs). The tariffs, which vary depending on the brand, aim to counteract these subsidies.

SAIC, the owner of MG, faces the highest tariff at 38.1 per cent. Geely, which has a stake in Volvo, faces a 20 per cent tariff, while BYD brands, including the Dolphin and Seal models, will be subject to a 17.4 per cent duty. Companies that cooperated with EU investigators will face a 21 per cent tariff, and those that did not cooperate will face the top tier of 38.1 per cent.

A 17.1 per cent tariff will increase the cost of an entry-level €30,000 car by €5,250, while a 38.1 per cent tariff will result in an €11,450 price hike. These charges are in addition to the existing 10 per cent levy on imported cars, meaning Chinese-made EVs could face total tariffs of up to 48 per cent.

The tariffs are set to take effect on 4 July 4. However, Chinese companies have until then to provide evidence to challenge the EU’s findings, which could lead to adjustments in the rates. The European Commission has indicated that the dispute could be resolved through talks before the tariffs provisionally come into force.

Consumers who order cars before this date and have their prices locked in may avoid the price hikes, but they should verify their contracts.

What is the motivation behind EU’s move?

The EU contends that the Chinese government subsidises every stage of the EV manufacturing process, from lithium mining to shipping vehicles to Europe. The investigation found instances of cheap or free land provided for car factories, lithium and batteries supplied below market prices, and tax exemptions for the battery sector.

Also Read: Why has Biden quadrupled US tariffs on Chinese EVs?

The EU also identified financing advantages such as green bonds issued at lower rates than international markets and preferential refinancing rates for funds supporting the sector. This state support, the EU argues, allows Chinese manufacturers to undercut European rivals and hinders the EU’s transition to BEVs.

What could be the impact on the industry?

Chinese-made EVs accounted for 25 per cent of the EU market in 2023, a significant increase from 3.9 per cent previously. The EU argues that this influx has forced European manufacturers to lower their prices, impacting profits and future investments. The EU plans to phase out internal combustion engine (ICE) vehicles by 2035, and the state support for Chinese EVs is seen as a threat to this transition.

Andrew Kenningham, chief Europe economist at Capital Economics, noted that the EU’s decision marks a significant shift in its trade policy. “The EU has often used trade defenses against China but not for such a crucial industry,” he told Reuters. European policymakers are keen to avoid repeating the mistakes made with solar panels a decade ago when limited action against Chinese imports led to the collapse of many European manufacturers.

How has China reacted?

Chinese foreign ministry spokesperson Lin Jian condemned the EU’s investigation as a “typical case of protectionism.” He warned that tariffs would damage China-EU economic cooperation and the stability of global production and supply chains. Lin stated that Beijing would take “all necessary measures” to protect its interests.

Also Read: Elon Musk’s Tesla slashes prices for EVs, FSD, as sales tank

The Chinese Passenger Car Association (CPCA) seemed less concerned, with Secretary General Cui Dongshu telling Reuters, “The EU’s provisional tariffs come basically within our expectations, averaging around 20 per cent, which won’t have much of an impact on the majority of Chinese firms.” He added that Chinese EV makers like Tesla, Geely, and BYD still have significant potential for growth in Europe.

How have European automakers responded?

German officials and automakers have expressed strong opposition to the tariffs. German Transport Minister Volker Wissing said, “The European Commission’s punitive tariffs hit German companies and their top products.” Chancellor Olaf Scholz noted that half of the EVs imported from China were produced by Western manufacturers.

Volkswagen rejected the imposition of duties, stating, “The negative effects of this decision outweigh any potential benefits for the European and especially the German automotive industry.” Mercedes-Benz CEO Ola Källenius added, “What we do not need, as an exporting nation, is rising trade barriers.”

Other manufacturers, such as Volvo and Stellantis, expressed concerns over the tariffs. Volvo is “analysing” the developments, while Stellantis emphasised the importance of free and fair trade and opposed measures that contribute to global fragmentation.

Shares in some of Europe’s biggest carmakers, such as BMW and Volkswagen, fell on fears of Chinese retaliation. BMW CEO Oliver Zipse criticised the tariffs, stating, “Protectionism risks starting a spiral: Tariffs lead to new tariffs, to isolation rather than cooperation.” Mercedes-Benz also voiced concerns about rising trade barriers.

How will Beijing retaliate?

Beijing has passed a law to strengthen its ability to retaliate against tariffs imposed by the US or the EU. China has already launched an anti-dumping investigation into mostly French-made brandy imports, causing concern among French cognac producers. Global food companies, including dairy and pork exporters, are also on high alert for potential Chinese retaliation.

Will Roberts, head of automotive research at RHO Motion, told Reuters, “The true test from today’s announcement will be whether Beijing will retaliate in kind, or come to an amicable solution.”

Analysts believe that Chinese manufacturers might be able to absorb some of the tariff costs. Joe Mazur, senior analyst at Trivium China, told Reuters, “It’s by no means a death blow to the Chinese EV industry in Europe.”

However, Chinese EV makers will likely pass some cost increases onto consumers. Despite this, Chinese automakers like BYD charge significantly more for exports than for domestic sales, offering some protection against tariffs. Chinese EV maker Nio criticised the EU’s approach, stating that it hinders global environmental protection and sustainable development.

Have any European nations reacted?

The Hungarian Minister for National Economy, Marton Nagy, condemned the EU’s move as overly protectionist. “Protectionism is not the solution,” he said, emphasising the need for the EU to enhance its global competitiveness rather than impose punitive tariffs.

Sweden’s Minister for International Development Cooperation and Foreign Trade, Johan Forssell, echoed these sentiments, expressing skepticism about tariffs and their impact on consumers.

Norway, not an EU member state, announced it would not follow the EU in increasing tariffs on Chinese EVs. Norwegian Finance Minister Trygve Slagsvold Vedum stated, “Introducing tariffs on Chinese cars is neither relevant nor desirable for this government.”

Is there any room for negotiation?

There is still room for negotiation between the EU and China. Brussels has left the door open for continued consultations to find a solution and avoid the worst-case scenario. State news agency Xinhua commented, “It is hoped the EU will make some serious reconsideration and stop going further in the wrong direction.”

The EU’s provisional duties are set to apply by 4 July 4, with the investigation continuing until 2 November, when definitive duties could be imposed for five years. The Commission has yet to decide whether to apply tariffs retroactively for three months.

Also Read: European carmakers in China are moving away to India, Indonesia because of tariffs on China-made EVs

The outcome of these negotiations and the potential for Chinese retaliation will significantly impact the global EV market and the broader economic landscape. Both sides have reasons to negotiate a deal to avoid severe economic repercussions, but the path forward remains uncertain.

With inputs from agencies