In a fresh escalation, the European Union (EU) has informed Beijing about implementing tariffs of up to 38% on imported Chinese electric vehicles (EVs) on the continent. This would result in duties of over €2 billion annually, thereby sparking a trade war-like situation with the world’s second-largest economy.
These tariffs will take effect in July 2024 in line with World Trade Organisation (WTO) regulations. The EU will offer China a four-week period to challenge any evidence supporting the imposition of tariffs on imported EVs.
In addition to the existing 10% tariff on vehicles imported into the EU, Chinese electric cars will now face total tariffs of up to 48%. The move follows a nine-month investigation into alleged unfair state subsidies into Chinese battery electric vehicles (BEVs), including top brands such as BYD, Geely, part owner of the Swedish brand Polestar, and Shanghai’s SAIC, which owns the British brand MG and has a joint venture with Volkswagen in China.
Giving out the details
Brussels will implement five tiers of tariffs. EV manufacturers, upon their cooperation with EU investigators, will face a 21% tariff. Those not following the line will face the highest tier of 38.1%. SAIC, the owner of MG, will be hit with the top tariff, while Geely, a stakeholder in Volvo, will face a 20% tariff. BYD brands will be subject to a 17.4% duty. These tariffs could be enforced as early as July 5th, potentially adding €5,250 to the price of a €30,000 entry-level BYD car.
Officials have indicated that in some cases, a Volkswagen car made in China but sold in Europe could be more expensive than a BYD vehicle. Car plants owned by Chinese companies in the EU, such as the upcoming BYD factory in Hungary, were not part of the current investigation, highlighting the EU’s focus on creating job opportunities within the bloc.
The EU Vice-President, Margaritis Schinas, expressed concerns that car manufacturing in China was unfairly subsidised, posing a risk to the EU’s battery electric vehicle producers. The EU’s investigation presented to China highlighted data indicating potential harm and a threat to the European car industry.
The EU claims that the shift from combustion engines to EVs has been hindered by competition from China, which could result in a loss of investment and jobs in a sector that employs nearly 13 million people in Europe. Schinas stated that the EU has contacted Chinese authorities to address these concerns and find solutions.
European manufacturers are preparing for possible retaliatory actions. In 2023, the value of all EU vehicle exports to China is estimated to be close to €200 billion, making it the third most important market for the EU after the United States and the United Kingdom. The EU anticipates that China may impose additional counter-duties on exports from other sectors, such as French cognac and dairy products.
The action increased tensions in Germany, as the country seeks to safeguard its exports to the large Chinese market. Talking about Germany, the country has reportedly launched its bid to avert a full-scale trade war between Europe and China.
The EU aims to convince other leaders that a focused approach is needed to address China’s overcapacity in cars, steel, and other products like solar panels and electric vehicle batteries in order to protect non-Chinese G7 member states. Reports indicate that American and Turkey administrations have recently imposed tariffs of 100% and 40% respectively on Chinese EV imports.
Concerns also exist among G7 members that Chinese production overcapacity could negatively impact emerging economies such as Brazil, Mexico, and India. According to the EU Chamber of Commerce in China, which advocates for European companies in the country, any imposed tariffs should adhere to WTO regulations and be disclosed transparently.
When will tariffs kick in?
The deadline for Chinese companies to provide evidence to challenge the EU’s findings is 4 July. If resolved through talks before this date, the tariffs may be adjusted. Consumers who have already ordered a car before this date with a locked-in price should be cautious of potential price hikes and review their contracts. The EU thinks companies like BYD can absorb the subsidy level and remain competitive with European competitors without fully passing on the tariffs to consumers.
The EU argues that China provides subsidies at every step of the electric vehicle manufacturing process, including mining lithium for batteries, shipping cars to Rotterdam and Zeebrugge. The investigation revealed that car factories receive cheap or free land from the government, as well as specific subsidies for lithium and batteries below market price. Additionally, battery suppliers are said to act as public bodies implementing national industrial policy, and the battery sector benefits from tax exemptions.
The investigation uncovered several financial benefits, such as green bonds being issued at a lower rate than those available in international markets and preferential refinancing rates for funds supporting the sector. Xi Jinping aims to establish global leadership in the green technology industry, encompassing solar panels, heat pumps, and wind turbines.
Judging the impact
The EU is accusing Chinese car suppliers of receiving state support that is allowing them to undercut European rivals and hinder the EU’s transition from internal combustion engines to battery electric vehicles. The EU plans to ban the sale of new ICE cars by 2035.
China-made cars made up 25% of the EU market in 2023, a significant increase from 3.9%. The EU claims that the aggressive trade tactics used by Chinese manufacturers to lower prices in their domestic market are now being applied in Europe, putting pressure on EU manufacturers to lower prices and impacting their profitability and ability to invest in the future.
And yes, chances are higher that China will strike back. As per the politico, Beijing sees France as the instigator behind the EV probe and has hit back with a dumping probe of its own into “wine-distilled brandies from the EU,” aka French cognac. President Emmanuel Macron, hosting President Xi Jinping in May 2024, claimed a win after their talks, saying his Chinese counterpart didn’t want to impose pre-emptive tariffs.
As per the reports, China is setting its sights on German luxury cars. In an interview with state media, Liu Bin, a top automotive adviser, recommended raising temporary tariffs on large-engine vehicles imported from Europe to 25%, a move that would hurt the likes of sports car and SUV maker Porsche.
While German auto brands are exposed to China, their premium models would be able to take such a hit, according to Matthias Schmidt, a European automotive analyst, who stated, “The models impacted are all high-end premium models that can either soak that up in higher pricing or lower margins but remain profitable.”
Similarly, analysts expect Chinese exporters to be able to swallow whatever the EU decides in its subsidy investigation.
Jurgen Matthes of the German Institute for Economic Research, said, “No major economic damage is to be expected.”
Auto exports as a share of GDP are declining, now accounting for only about 0.3%. Moreover, Beijing’s threatened tariffs on luxury cars are expected to have a limited impact on exports.
Battery maker CATL and EV giant BYD are investing in Hungarian factories and upon the completion of these projects, the ventures will be able to avoid the EU’s duties in the coming years. They are following a similar strategy in Mexico to avoid US tariffs.
Judging Chinese reaction
Lin Jian, a spokesperson for the Chinese foreign ministry, criticised the EU’s investigation as an example of protectionism. He warned that imposing tariffs would harm China-EU economic cooperation and disrupt the production and supply chains of vehicles worldwide. Jian stated that Beijing would do everything necessary to protect its rights and interests.
Beijing is reportedly annoyed with the increased pace of the EU’s trade investigations and calls for a truce to avoid further escalation. China is not simply calling for a cessation of hostilities but is also signalling potential retaliation.
Beijing is calling for a broad negotiated solution and fresh ideas on solving the ongoing disputes, affecting trade in everything from airport security scanners to medical devices. The Xi Jinping government can target the EU’s agricultural stakes since China has emerged as the third destination for the regional bloc’s agri-food exports and represents 6.4% of the EU’s total agri-food trade.
Aviation will be the other arena. European giant Airbus is the largest supplier to the Chinese market. Beijing had threatened to target Airbus in the past. On one occasion, it said that it would not buy the planemaker’s products if China’s airlines were to fall under EU carbon emission trading rules.
In response to the investigation into subsidies for Chinese electric vehicles, Beijing in January 2024 launched an anti-dumping probe against European producers of liquor, hitting France specifically. French cognac producers fear that they will be the target of Beijing’s ire once the EU executive officially announces the electric vehicle tariffs.
Xi met European Commission President Ursula von der Leyen and French President Emmanuel Macron for three-way talks in Paris recently, but the tone of talks was reportedly chilly and only yielded a promise by the Chinese leader not to slap temporary duties on French cognac producers. Expect the promise to remain just words.
Analysts are warning about an escalating trade war, raising prices for consumers and hurting exporters and their workers on both sides. Both are major markets for each other, China, a rising economy of over one billion people, and Europe with its relatively well-off population of more than 400 million.
“It’s a little bit like seeing a slow-motion traffic accident unfolding. The accident has not happened yet and it is still possible to find an off-ramp. It is getting urgent,” Jens Eskelund, the president of the European Chamber of Commerce in China said a few months back.
Beijing has been reiterating about taking “all necessary measures” to protect the rights and interests of Chinese companies.
As per He Yadong, a Commerce Ministry spokesperson, the Xi administration “reserves the right to file complaints to the World Trade Organisation.”
The EU is also investigating subsidies given to Chinese wind and solar companies and whether China is unfairly restricting access to the market for medical devices, a long-running complaint of European manufacturers.
China’s state-owned Global Times newspaper has reported that businesses may ask the Xi government to launch an anti-dumping investigation into certain EU pork products and an investigation into subsidies for some dairy products. Confirming the report, he said that the authorities would review any applications for investigations and initiate a case if the requirements for one were met.
The Global Times also quoted a leading Chinese auto industry expert calling for raising the tariff on imported vehicles with larger engines to reduce carbon emissions, a move that would hit high-end German exports from Mercedes and BMW.
Volkswagen expressed concern that the EU tariffs on Chinese EVs could escalate trade conflicts and said the EU is promoting an ongoing trend toward protectionism, nationalism and isolationism.
“The negative effects of this decision outweigh any potential benefits for the European and especially the German automotive industry,” the automaker noted.
China may also impose retaliatory tariffs on French and Italian luxury goods, cosmetics, wine, chocolate or furniture, said Gabriel Wildau, a China analyst at the Teneo consultancy.
How badly will tariff warfare affect the Chinese companies? As per the analysts, some of these ventures might still be able to make a profit, even with duties as high as 30%. The provisional tariffs range from 17.4% to 38.1%, depending on the carmaker, and come on top of an existing 10% tariff on vehicles. The new rates would pose a serious market barrier to Chinese EV exports, the China Chamber of Commerce to the EU said.
Calculations by the research and policy think tank Rhodium Group found that five of six models from BYD, China’s largest EV maker, would earn a profit with a 30% tariff, while a made-in-China Tesla Model 3 would sell at a loss.
Europe preparing for the worst outcome
A few years ago, China banned seafood imports from Japan due to a dispute over maritime waters and Japan’s disposal of treated nuclear wastewater into the sea. According to Euro News, EU food companies, such as dairy producers, are currently concerned about reports of Chinese domestic food companies requesting investigations into some EU food imports.
These allegations could lead to either anti-dumping or anti-subsidy investigations. Even if these allegations are later disproved, trade could still be halted for a significant amount of time during the investigation.
“However, this could also end up harming China itself, as the EU was the country’s second-biggest import partner in 2023, with China importing about 36% of its dairy imports from the bloc last year. Some of the most frequently imported products were cream, whey powder and fresh milk,” Euro News stated.
“If a trade war does escalate, New Zealand, which is currently China’s biggest dairy products supplier could potentially be poised to step into the gap. Australia, another significant import partner, could also stand to benefit,” it added.
The EU’s luxury products sector is another arena that may face the heat, with China being a major market for products such as handbags, perfumes, shoes, clothes and other accessories. European watches and jewellery also have strong demand in China.
With several luxury goods companies already facing falling demand post-pandemic, due to the cost of living and higher interest rates, any punitive action from Beijing could potentially derail things further.
“Similarly, China is a key component in the critical minerals supply chain globally, and has already shown that it is more than willing to use this sector as a tool in trade wars. This was seen when China stopped the export of rare earth minerals to Japan, due to the two countries disagreeing over the Senkaku Islands. If things with the EU heat up, China could also do the same to the EU, which could prove to be disastrous to the continent’s green transition goals. The EU has also recently launched an anti-dumping investigation on Chinese biofuels being imported into the bloc,” Euro News concluded.