On July 4, 2024, the European Union approved a new package of temporary tariffs on Chinese electric vehicles, ranging from 17% to 38%, aimed at promoting protectionism for the European domestic automotive industry. The European Commission had announced these tariffs in June, which were approved and implemented temporarily until the negotiation period with China ends, with a view to finalizing them for a sustained five-year term in November 2024.
Interconnected Contexts:
This European move comes amidst several developments in relations with China and the electric vehicle market, which can be summarized as follows:
Chinese Manufacturing Dominance: The success of Chinese electric vehicle manufacturing is largely attributed to government support and incentives that have enhanced the competitiveness of this industry. Investments in research and development have been integrated into China’s 10th and 11th Five-Year Plans, and the industry is classified as one of the seven emerging strategic sectors that China aims to lead globally by 2049. By 2025, 80% of battery-powered electric vehicles are expected to be manufactured in China. For instance, BYD received 2.1 billion euros in direct government subsidies in 2022. Due to weak domestic demand and high manufacturing capacity, this led to a surplus of stock being directed to foreign markets, particularly Europe. This rapid growth in the Chinese market share in Europe has raised concerns among the European bloc, as seen with BYD, which aims to capture 5% of the European electric vehicle market. In contrast, European companies are advancing their contributions to the electric vehicle market. Volkswagen, for example, is offering over 30 new products this year and plans to develop and produce an electric vehicle priced at 20,000 euros in Europe by 2027. French company Renault announced in May that it is collaborating with China to produce electric cars, which will be assembled in France and sold at 25,000 euros. Stellantis, the owner of the Fiat and Peugeot brands, introduced the Citroën ë-C3 electric car this year priced at 23,300 euros and will start sales of this model in September in the European market, developed in collaboration with Chinese company Zhejiang Leapmotor Technologies Ltd.
European Investigations into Chinese Car Imports: On October 4, 2023, the European Commission launched an investigation into the Chinese automotive industry to address unfair competition practices and market flooding due to unfair Chinese government support for electric vehicle suppliers. This led the Commission to investigate the potential for countervailing duties within 13 months (by November 2024). As a result of these investigations, the current decision on temporary tariffs was made in July 2024, pending completion of the investigations. The European Commission has also started registering imports of Chinese electric vehicles in preparation for the possible imposition of retroactive tariffs if the final decision on tariffs is approved after the investigation. Meanwhile, China already imposes a 15% tariff on European electric vehicles.
American Restrictions on Chinese Car Imports: In May 2024, the U.S. administration also decided to increase tariffs on various Chinese imports, including electric vehicles, by over 100%. However, the impact of this move on the car market is more political than economic, given the limited U.S. imports of these vehicles, unlike the European situation.
Reactions:
Reactions from various stakeholders have been varied, even within Europe itself, as outlined below:
Divergent European Stances: Germany, a major economic ally of China within the European bloc, has opposed the move. German Chancellor spokesperson Steffen Hebestreit welcomed the Commission’s indication of potential negotiations with Beijing when the tariffs were announced in June. German Minister of Digital and Transport Volker Wissing described the increase in tariffs as a destructive step. The German Automotive Industry Association opposed the tariffs, stating that they would isolate the European and specifically German markets from global markets. Sweden and Norway have also indicated they will not support the European decision, as has Hungary, which opposes what it describes as European punitive measures that do not support the European industry but rather penalize the Chinese industry. Hungary has proposed a package of 11 recommendations to accelerate the transition to electric vehicles for the EU, calling for coordinated European positions on the industry. Chinese experts have described this stance as divisive and have urged the European bloc to move past it by returning to cooperation rather than initiating trade wars with China. Several European companies have expressed opposition to countervailing duties on Chinese electric vehicles, arguing that such protectionist measures would only harm the European automotive industry. Volkswagen Group, for example, rejected the tariffs, noting that they do not enhance the long-term competitiveness of the European car industry and could have negative effects, particularly on the German industry. Similarly, Stellantis in the Netherlands has opposed measures that conflict with globalization, competition, and free trade. Conversely, French companies have welcomed the decision, viewing it as contributing to fair competition for the European industry, a stance echoed by the Spanish and French governments.
Chinese Discontent: The Chinese Ministry of Commerce has expressed concern and dissatisfaction with the European decision, labeling it as illegal and poorly considered. The ministry warned that it would take necessary measures to protect Chinese companies’ rights, describing the Commission’s decision as politically motivated and economically harmful to Chinese interests. China has urged the EU to correct its mistakes and return to a rational path of handling disputes through dialogue and consultation, emphasizing that China retains the right to file a dispute against the EU at the World Trade Organization (WTO) over the electric vehicle tariffs, considering the decision a violation of WTO rules. China has sought to persuade its European allies, such as Germany, Sweden, and Hungary, to oppose the decision.
Potential Chinese Response: Despite ongoing talks, China has shown readiness to respond to what it views as a trade war by launching its own investigation into European market practices, targeting sectors such as wine and pork. Beijing has indicated its willingness to impose retaliatory tariffs of up to 25% on EU-made cars with large engines and is considering reciprocal tariffs on European aviation, agricultural goods, dairy products, and wine. It may also restrict exports of critical raw materials needed for electric vehicle production, such as lithium. China’s Ministry of Commerce announced it is conducting an anti-subsidy investigation into European government support which it views as a trade and investment barrier against Chinese companies, deeming such practices as discriminatory and detrimental to fair competition. This investigation, prompted by a complaint from the Chinese Chamber of Commerce, will focus on products like locomotives, photovoltaic energy, and wind energy. Additionally, Chinese agricultural producers have requested an anti-dumping investigation into pork products, expected to conclude by early next year.
Potential Implications:
This decision could have numerous implications with potential future effects, which can be outlined as follows:
Losses for European Manufacturers: Many European companies fear that China might retaliate or prevent them from entering the Chinese market. European exports to China are already declining, as seen in the 15% drop in German electric vehicle exports in 2023 compared to the previous year. European companies worry that an escalation in the trade war could harm their interests in the Chinese market, leading many to express opposition to the European Commission’s move. European car manufacturers have significant investments in China due to reliance on Chinese supply chains for production, especially for parts like batteries, where European production faces stagnation due to various obstacles compared to Chinese dominance. This makes tariffs a threat to the long-term competitiveness of European electric vehicles. Currently, Chinese cars are sold in Europe at higher prices than in China, meaning they could still maintain profitability even with the tariffs, potentially even more so than in the Chinese market. For example, BYD products are expected to be profitable in the European market even with a 30% tariff, suggesting that the biggest losers might be European producers and consumers rather than the Chinese.
China Seeking Alternative Markets: Some countries are benefiting from the intensifying trade war between China and the EU by attracting Chinese companies to their markets, such as Turkey, Thailand, and Hungary. BYD has opened an electric vehicle factory in Thailand, its first in Southeast Asia, with an annual production capacity of 150,000 vehicles, including plug-in hybrids. In addition to its factory in Hungary, which is set to start operations in three years, BYD has announced plans to establish a factory in Turkey to produce electric vehicles with a capacity of 150,000 cars per year, under an agreement signed with Turkish Minister of Industry and Technology Fatih Kacır, in the presence of Turkish President Recep Tayyip Erdoğan. The investment is estimated at around one billion dollars. Chinese companies are also targeting non-European markets in anticipation of intensified trade disputes. China has become the largest exporter of cars to Israel this year, capturing about 68% of the Israeli market from the beginning of the year until May. Chinese exports to Russia and Brazil have also increased, with Chinese electric vehicles now representing about 74% of Southeast Asia’s markets. Chinese companies might avoid tariffs by setting up manufacturing plants in Europe, as seen with BYD in Hungary and Chery in Catalonia, Spain.
Disruption of European Carbon Neutrality Goals: The EU’s efforts to achieve carbon neutrality by expanding the use of electric vehicles by 2030 might be hindered by the tariffs, which could lead to higher prices and reduced demand for these vehicles. The main obstacle to achieving this goal has been the high cost of electric vehicles, with some companies like Tesla already announcing price increases. Given the reliance on Chinese supply chains for the European green transition, these tariffs could harm the European electric vehicle industry and the shift towards clean energy, particularly as China dominates the supply chains for critical minerals needed for these sectors. This threat has already been seen with Japan due to disputes over the Senkaku/Diaoyu Islands. Conversely, some believe that these tariffs could be beneficial in the long run by promoting the localization of green industries and jobs within Europe, reducing dependency on Chinese imports.
Future of the Decision: Several potential scenarios could emerge, including the possibility of finalizing the tariffs if an agreement between the parties is not reached. It is possible—though unlikely—that the tariffs might not remain permanent if at least 15 European countries (65% of the EU population) vote against them in November, supported by opposition from Germany, Sweden, Norway, and Hungary. This could create a majority opposition within the Commission and its Trade Defense Instruments Committee, especially if China succeeds in leveraging economic coercion and threatens retaliatory measures that might lead European countries to avoid antagonizing Chinese interests.
Maintaining Communication Channels: EU Ambassador to China Jorge Toledo noted at a conference in Beijing in July 2024 that consultations with the Chinese government on this issue have been ongoing for months. However, European Commission Vice President Valdis Dombrovskis recently received contact from Chinese Commerce Minister Wang Wentao to initiate discussions, influenced by German pressure. The European Commission has indicated ongoing dialogue with Chinese partners to address unresolved issues and achieve positive results before the final approval of the tariffs in November 2024. There is room for negotiation and adjustment, suggesting that the parties may resolve their differences through diplomatic channels and dialogue. Given the mutual need and dependence between the two sides, EU-China relations are distinct from the U.S. situation. It is unlikely that China will engage in a trade war with the EU akin to the one with the U.S. during the Trump administration, given China’s economic downturn and the importance of the European market for Chinese exports and investments. This reduces the likelihood of severe retaliatory measures or a large-scale trade war, enhancing the prospects for dialogue and negotiation while maintaining long-term economic competition.
