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IF Insights: EU talks tough at China on trade front, but at what cost?

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China has already built a solid domestic manufacturing ecosystem for its EV industry, and companies are simply reaping the benefits of it

The European Union (EU) has now hit China-made electric vehicles (EVs), being imported into the continent, with tariffs as high as 38.1%. The move from the EU follows a similar pattern in which the Joe Biden administration in the United States has started increasing import duty on various Chinese products, including EVs. The tariff imposed varies from company to company. The duty on BYD electric cars will be 17.4%, 20% on Geely and 38.1% on SAIC models.

The European Union conducted investigations into subsidies enjoyed by Chinese EV companies from their government. The probe found out that due to the aides, these brands kept costs in check and then offered their products in Europe at prices that were far more competitive than price stickers on comparable electric models from local European brands.

Analysts are seeing the latest EU move as a “protectionist” one in nature, with the aim of saving the local automotive industries against a rush of Chinese brands that are offering products at compelling prices, while being relatively robust and loaded with features.

The Move Was Coming

In May 2024, Biden ramped up tariffs on Chinese-made electric cars, solar panels, steel and other goods. Canada, US’ neighbour, is also considering tariff revisions on Chinese EVs. Flavio Volpe, president of the Automotive Parts Manufacturers’ Association, told CBC News that Canada had to implement similar trade levies.

His views found support from Brian Kingston, president of the Canadian Vehicle Manufacturers Association, who commented, “Canada cannot be out of step with the US on China. We need aligned policies that strengthen the North American auto supply chain.”

The Justin Trudeau government has already partnered with Canadian provinces to attract investments to spur EV production in the nation. Asahi Kasei Corporation, in partnership with Honda, recently announced the construction of a USD 1.6-billion EV battery plant in Port Colborne, Ontario.

Volpe believed that domestic EV production could be held back if China flooded the Canadian market with cheaper products. However, he feared China’s retaliation with moves like implementing export controls on its critical minerals that are used in EV battery manufacturing. Ottawa and Washington have already announced co-investing in critical mineral producers for the first time as they work to boost regional supplies.

With two prominent Atlantic neighbours taking a firm stand against the Chinese EV players’ global dreams, it was about time that Europe followed suit and they have done that.

Is The Move Problematic?

West has ambitious climate goals, including reaching 100% zero-emission vehicle sales through domestic manufacturing. However, they don’t have the required resources to meet the targets. Chinese EV companies are using these opportunities to infiltrate the European and American markets, and they have the edge in this scenario, due to their products’ compelling prices, while being relatively robust and loaded with features.

“In the last five years or so, China emerged as an absolute leader in [the EV] space,” said Alla Kolesnikova, head of data and analytics at Adamas Intelligence, a research and consulting firm specialising in strategic metals and minerals based in Toronto.

Take Canada for example. Its EV sales regulations include a target of 100% zero-emission vehicle sales in the country by 2035. The United States, on the other hand, is aiming to have between 35% and 56% of all vehicle sales between 2030 and 2032 be EVs. For analysts, both countries have a long way to go before their EV industries become self-sustaining. Until then, import will be the only option.

According to Statistics Canada, zero-emission vehicles accounted for just over 10% of all new motor vehicle registrations in 2023, an increase of 49.4% from 2022. According to Niel Hiscox, president of Clarify Group, a Canadian-based automotive research and advisory firm, higher upfront costs provided by EVs in general will make consumers think twice before buying the vehicles.

Volpe compared the situation with that of “chicken and egg,” as Canada, presently, does not have the domestic industrial capacity to meet consumer demands. Once this situation gets taken care of, prices should come down. As prices come down, more people will buy EVs and as they do, more charging stations will be built.

In this background, Chinese EV makers are currently enjoying the market edge. As per Alla Kolesnikova, head of data and analytics with Adamas Intelligence, Chinese EVs in Canada, apart from the cost advantage, also provide varieties to choose from, be it cheaper, smaller, basic cars, or larger SUVs and luxury sedans.

Also, China mines an abundance of the metals and minerals needed for EV batteries, including lithium and cobalt, which means they have the supply chain locked down, as per Kolesnikova, while pointing out that Beijing is also being the major exporter of EV batteries. China has already built a solid domestic manufacturing ecosystem for its EV industry, and companies are simply reaping the benefits of it.

Canada, on the other hand, is facing a huge challenge of having its own battery manufacturing infrastructure, and as per Sean De Vries, executive director of the non-profit Battery Metals Association of Canada, although the country possesses the critical minerals, the administration needs to pump more money on the mining front.

Discussing the European Scenario

Europe has emerged as the biggest export market for Chinese EV manufacturers. Washington does not import many EVs, but its “protectionist” policy measures put pressure on the European Union to follow similar lines. The problem is, even if Chinese EVs don’t infiltrate much in the United States due to the tariff pressures, they will compensate things further by ramping up the competition in Europe.

Agatha Kratz, a director at research provider Rhodium Group, told CNN that the hike in US tariffs on Chinese EVs makes it “easier” for the EU to take its tariffs “all the way to 30%,” triple their current level.

However, it would be “very hard” for Brussels to match the American tariffs, as Kratz noted, “The EU can’t justify going much higher (than 30%) as the duties need to be aligned with the findings of the investigation on the scale of subsidisation in China.”

According to Citi, the EU accounted for 36% of Chinese EV exports in 2023, more than the next five largest markets combined. Chinese brands enjoy much lower production costs than their European rivals. This means that duties of 40% to 50% would probably be necessary to make the European market unattractive for Chinese EVs.

For BYD, China’s biggest EV maker, the tariffs would likely have to be even higher to be effective, Rhodium Group noted, while stating that such measures will be unlikely, as it will end up hurting the European automakers, many of which manufacture cars in China before selling in Europe.

BMW CEO Oliver Zipse recently warned Europe to proceed with caution, stating that operating on a global basis is an advantage for any company. The worst way to endanger that is by introducing import tariffs. If Beijing retaliates, it will only make things difficult for the European carmakers operating in China.

While the EU wants to protect its strategically important industries from being wiped out by cheap Chinese imports, it is also dependent on Beijing for European goods exports. However, the EU’s steps are not limited to the EV sector only. The other interest areas are the alleged dumping of industrial products by China and unfair state support for Chinese makers of wind turbines.

“The EU is using its whole toolbox at the moment to defend its economy and European jobs from what it perceives to be unfair trade practices from China. I’d say we are entering a very tense period in terms of trade interactions and trade defence,” Kratz said, while indicating the possibility of a trade war between the EU and China.

Industry Reaction

Chinese EV maker Nio said that while it opposed the decision, in Europe its “commitment to the EV market remains unwavering.” BYD and Chery have already announced plans to build cars on the continent, which would avoid the tariffs.

Talking about German automakers, China accounted for nearly 32% of sales at BMW in Q1 2024 and around 30% for rivals Volkswagen and Mercedes-Benz. Any Chinese retaliation will only bring pain for these ventures and most importantly for Germany’s manufacturing economy. Chancellor Olaf Scholz has warned against “isolationism and unlawful customs barriers that ultimately only make everything more expensive and everyone poorer.”

Talking about Tesla, the Elon Musk-led venture has asked the European Union to subject its cars to a lower tariff than other manufacturers shipping into the bloc from China.

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