The European Commission’s inquiry into Chinese electric vehicles has become entangled in geopolitical tensions, raising the stakes even further.
For decades, the People’s Republic of China has lavished domestic companies with public money to fulfill the long-term economic objectives established by the government.
Among the current priorities is the development of Battery Electric Vehicles (BEVs), a sector that is fast expanding as nations transition towards climate neutrality.
The European Union has historically enjoyed a strong position in the car-making industry, with member states like Belgium, Spain, France, Italy, the Czech Republic, Slovakia and Poland ranked among the top 20 largest exporters in the world.
In Germany, the automotive sector is seen as a key industry, a major employer and a driver of innovation and growth.
This set the stage for the European Commission to launch an anti-subsidy inquiry into Chinese electric vehicles, a step highly likely to lead to additional tariffs to offset the unfair advantage of state aid and close the price gap. On average, the executive believes Chinese BEVs are 20% cheaper than their European counterparts.
Notably, the probe was initiated by the Commission without first receiving a formal complaint from the bloc’s industry. Equally remarkable is the fact the investigation is based on a potential threat of disruption, which may arise in the future and lead to “heavy losses which could prove rapidly unsustainable.”
Euronews explains what’s at stake.
How did we get here?
Under the Green Deal, the EU is legally obliged to slash its greenhouse gas emissions by at least 55% by the end of this decade.
Transport, a big polluter, has a role to play. After fraught negotiations, member states and the European Parliament agreed to ban new sales of combustion-engine vehicles as of 2035, which would effectively make electric vehicles the new normal.
Last year, more than 1.5 million units of BEVs were sold across the bloc, a 37% increase from 2022. This amounted to a 14.6% market share, surpassing that of diesel (13.6%).
In parallel, the Chinese economy entered a slowdown prompting companies to turn to exports to compensate for the weak demand at home.
Electric cars from brands like BYD, Geely and SAIC proved easy to sell as they were sought after by environmentally-conscious drivers and, most importantly, came with a more enticing price tag than European brands.
The bloc’s 10% tariff on foreign-made cars, a tiny fraction of the barriers seen in the US and India, further boosted the attractiveness of the single market.
This led to a drastic surge in imports of China-made cars: from 57,000 new units sold in 2020 to more than 437,000 in 2023, according to Eurostat, including models from Western firms like BMW, Renault and Tesla. Over the same period, the value of these transactions rose from €631 million to €9.66 billion.
A recent study by Transport and Environment (T&E) indicates the market share of Chinese brands in the EU’s BEV market ballooned from 0.4% in 2019 to 7.9% in 2023 and could soar past 20% by 2027 if the trend continues unabated.
What will happen next?
Commission officials have spent the last months collecting data about the Chinese market and feedback from industry actors. BYD, SAIC and Geely have reportedly refused to provide enough information.
The executive has already determined Beijing is using a wide range of subsidy measures such as grants, cheap loans, and VAT rebates among others to turbocharge its car-making industry and churn out BEVs with artificially lower prices.
The investigation’s prime goal is to establish whether this assistance could cause “injury” to the EU industry, i.e. a loss of sales, market share and profit margins. The Commission argues global demand cannot keep up with the rising volumes of China-made BEVs and prices are being depressed. This risks depriving EU companies of the necessary investment to remain competitive in the race to net zero.
The Commission, which has exclusive competence to set the bloc’s commercial policy, will slap tariffs on imports of China-made BEVs if it concludes the threat of “injury” is high enough. At this stage, all signs point to this scenario.
The deadline for provisional measures ends in early July but Brussels plans to announce a decision shortly after the June elections to the European Parliament. By early November, the Commission will come up with a proposal for permanent measures.
How high will the tariffs be?
Any tariff will come on top of the 10% rate present now. Based on previous anti-subsidy probes, the Rhodium Group expects measures in the 15% to 30% range, with tailored rates for BYD, Geely and SAIC. But, the group warns, these companies can cushion the impact because they sell their products in Europe at a considerably higher price than in China.
“Duties in the 40-50% range (…) would probably be necessary to make the European market unattractive for Chinese EV exporters,” the experts say.
Transport and Environment believes a 25% tariff would make European BEVs more competitive against their Chinese rivals and raise between €3 and €6 billion in additional revenue, mostly for the EU budget. The NGO recommends the strategy be accompanied by industrial action to boost local battery production.
Meanwhile, the Kiel Institute estimates a 20% tariff would result in “noticeable trade shifts”: a 25% decline in imports of China-made BEVs worth $3.8 billion (€3.5 billion) and a consequent rise in sales of EU-made BEVs worth $3.3 billion (€3.05 billion).
This would “likely” entail higher prices for end consumers as production, energy and labour costs in the bloc are “significantly more expensive” than in China, the Kiel Institute notes. Moreover, Chinese brands could bypass the levies by opening plants in EU countries, as BYD has announced it would do in Hungary.
Will China retaliate?
That Beijing will impose tit-for-tat retaliatory measures is a foregone conclusion in Brussels.
Blasting the inquiry as “unjustifiable” and “protectionist,” the Chinese government has warned it would not “sit back and watch” as levies are introduced and would take steps to “firmly safeguard our lawful rights and interests.”
Vehicles and agricultural products are the most vulnerable to Chinese reprisals. Beijing may also target sales of French brandy, having opened an anti-dumping probe earlier this year.
Asked about possible contingency plans, a Commission spokesperson refused to go into speculation and said its actions were designed “only to restore a level playing field and ensure fair competition” according to the World Trade Organization (WTO) rules. (The WTO allows countervailing duties if countries conduct an in-depth investigation.)
Brussels is familiar with Beijing’s wrath: last year, the country limited exports of two raw materials – gallium and germanium – after the Netherlands, pressured by Washington, introduced restrictions on the sales of semiconductor technology to China.
Can someone stop the tariffs?
If the Commission comes up with permanent tariffs in November, the proposal will be put for a vote between member states.
France and Italy have backed the plan, urging Europe to boost its “strategic autonomy” in the case of the former, or to espouse an American-style “assertive industrial policy”, per the latter.
Traditional advocates of free markets, like Sweden and Ireland, have expressed reservations about additional duties, while Hungary has adamantly opposed them.
German Chancellor Olaz Scholz and his cabinet have publicly voiced their skepticism, saying extra duties could damage the national economy. The German Association of the Automotive Industry (VDA), backed by the likes of BMW, Mercedes-Benz and Volkswagen, has come strongly against the idea.
“Countervailing tariffs on electric cars imported from China are not suitable for strengthening the competitiveness of the European automotive industry. On the contrary: the risks of a major trade conflict are obvious – the possible consequences must be taken into account accordingly,” a VDA spokesperson told Euronews.
Derailing the duties, though, will need a qualified majority: 15 member states representing at least 65% of the bloc’s population voting against the proposal.
Alternatively, the Commission could close the case and remove the tariffs but only if the subsidies under scrutiny, which China has denied using, are withdrawn.
Is this probe political?
EU-China relations are at a very low point after a string of disagreements around the COVID-19 pandemic, Russia’s war on Ukraine, tensions in the Taiwan Strait, the repression of the Uyghur minority and election interference, to name a handful.
Unfair trade practices, including subsidies, barriers in public procurement, intellectual property theft and forced labour, are another source of friction.
The anti-subsidy inquiry into Chinese BEVs was announced during Ursula von der Leyen’s State of the Union speech, a reflection of how intertwined trade and politics have become.
“Europe is open for competition. Not for a race to the bottom,” the Commission chief said. “We must defend ourselves against unfair practices.”
