Tariff War: Are China and Europe heading towards a new trade conflict?

In June 2024, the European Commission announced its intention to impose tariffs on imports of Chinese electric vehicle manufacturers by up to 38.1%, following an investigation launched in 2023. The Commission cited what it deemed unfair Chinese support for companies undermining European car manufacturers, raising the specter of a fierce trade war between Europe and China. The European move is expected to prompt retaliatory action from China soon. However, the European bloc clarified it would continue discussions with Beijing on the investigation results, stating that the tariffs would be implemented on July 4, 2024, if unresolved trade issues persist.

The European decision also specifies temporary tariffs ranging from 17.4% to 38.1% on three leading Chinese companies: BYD, Geely, and SAIC. Other Chinese automakers face tariffs between 21% and 38.1%, depending on their cooperation with the EU in the investigation, in addition to existing EU tariffs of 10%, according to a statement from the European Commission.

Trade Escalation

Trade relations between China and the European Union are witnessing an unprecedented crisis due to European investigations into alleged unlimited Chinese government support for electric car manufacturers. This support has given Chinese products a competitive price and technological advantage over their European counterparts in global markets, particularly in Europe. This has escalated trade tensions between the two sides, summarized as follows:

European Investigations into Chinese Dumping: In September 2023, European Commission President Ursula von der Leyen announced an investigation into alleged Chinese government support for electric car manufacturers. This followed a doubling of European imports of Chinese electric cars between 2021 and 2023 to over 430,000 vehicles annually, valued at €10 billion, according to the Peterson Institute for International Economics. Conversely, European exports of electric cars to China were negligible. Brussels fears flooding the EU market, potentially eliminating its domestic industry.

The European Commission alleges that Chinese state subsidies have significantly contributed to creating excess industrial capacity, allowing Chinese companies to flood surplus production into global markets. This has prompted Brussels to urge Beijing to increase domestic consumption demand rather than disposing of surplus production globally.

Increasing European Protectionism for Local Industry: EU trade policy is increasingly turning protective amid concerns that China’s development model, focusing on economies of scale, could flood the bloc with cheap goods, including electric cars. German Chancellor Olaf Scholz emphasized during a visit to China that such measures “make everything more expensive and everyone poorer.” This German stance was reflected in the visit of Finance Minister Robert Habeck to China, the first such high-level European official visit since Brussels proposed new tariffs. Habeck aimed to explain the recent tariff announcement, mitigating risks of Chinese retaliation that could harm German companies benefiting from the Chinese market.

It is noteworthy that German car manufacturers strongly opposed EU tariffs, as nearly a third of their sales came from the Chinese economy. Germany also seeks to expand its companies’ access to the vast Chinese market while “mitigating risks” to its economy, reducing dependency on any single country, including China.

Alignment with G7 Major Industrial Nations’ Trends: The European Commission’s announcement followed the United States’ move to quadruple tariffs on Chinese electric cars in May 2024 to 100%, up from 25%. This has opened a new front in the trade war between China and Western countries. While Washington did not explicitly call on its G7 allies to take similar actions, Treasury Secretary Janet Yellen stated during a G7 finance ministers’ meeting in May 2024 that she wanted US allies in the G7 to show solidarity with Washington in this step.

European finance ministers from the G7 industrialized countries also called on the group to remain united against China’s unfair industrial policies. However, they also warned of the risks of a new trade war after Washington increased tariffs on Beijing. The difference between the EU and the US lies in the fact that Chinese manufacturing companies have barely established themselves in the US, whereas they are swiftly moving to penetrate the EU market, which accounted for nearly a third of Chinese electric car manufacturers’ total exports in 2023.

Beijing’s Rejection of Brussels’ Charges: During his visit to Spain in early June 2024, Chinese Minister of Commerce Wang Wentao hosted a roundtable with representatives of the Chinese Chamber of Commerce to the EU and Chinese companies. He rejected the idea of excess capacity in the electric vehicle sector in China as a “false narrative,” highlighting significant investments in research and development by local companies, which he believes have been crucial in reducing the high costs of new energy products globally.

European Division on Dealing with Beijing: Germany leads a group of countries opposing recent tariffs for fear of Chinese retaliation. German Chancellor Olaf Scholz indicated that such measures “make everything more expensive and everyone poorer.” This German approach was evident during Finance Minister Robert Habeck’s visit to China, the first such visit since Brussels proposed new tariffs. He aimed to explain the recent tariff announcement, easing the risk of Chinese retaliation that could harm German companies benefiting from the Chinese market.

It is noteworthy that German car manufacturers strongly opposed EU tariffs, as nearly a third of their sales came from the Chinese economy. Germany also seeks to expand its companies’ access to the vast Chinese market while “mitigating risks” to its economy, reducing dependency on any single country, including China.

Pushback from Some European Circles against Weak Electric Vehicle Tariffs: Before the new tariffs, the EU imposed a 10% tariff on all car imports, lower than China’s 15%. However, Germany realizes it cannot avoid the new tariffs and seeks to keep the rate as low as possible. Ideally, Berlin aims to keep this rate at the mutual level that China also imposes on the EU—15%. Berlin is working towards this before the final approval of new tariffs in November 2024, when EU countries are scheduled to vote to finalize tariffs for five years.

Escalation Consequences

The current escalation suggests that the European Union may soon slide into a trade war with China, potentially raising prices for consumers and harming exporters and their workers on both sides, as each market is crucial to the other. The main consequences of this trade escalation can be read as follows:

Chinese Toughening in Response to Europe: The European announcement triggered retaliatory measures from China, especially criticizing European trends. Beijing pledged to take all necessary measures to defend the legitimate rights and interests of Chinese companies, including threatening actions against European aviation and agricultural sectors, as voiced by the Chinese Ministry of Commerce spokesperson in June 2024. He stated that “the responsibility for the existence of a trade war between China and Europe lies entirely with Europe” due to its scare tactics and threats of punitive tariffs, demanding overly vague information.

Imposition of Similar Chinese Tariffs on European Products: China is preparing a series of retaliatory measures against the European bloc, but it may differ from the major trade war with the United States, which included comprehensive sanctions on both sides. In this case, Beijing’s targeted rules seem more similar to those used against Australia a few years ago, where the government and state media have already identified specific products that may soon face tariffs

Europe and China’s geopolitical implications: As the trade tensions escalate, geopolitical implications loom large for both Europe and China. The European Union’s move to impose hefty tariffs on Chinese electric vehicle imports signals a potential shift towards a more protectionist stance against what it perceives as unfair Chinese government support for its industries. This move not only risks escalating trade tensions but also underscores Europe’s intent to protect its domestic industries and jobs from what it views as market distortions caused by Chinese state subsidies.

Economic impact on global markets: The escalating trade conflict between Europe and China could have significant economic repercussions globally. As both sides implement tariffs and potentially counter-tariffs, prices for consumers may rise, impacting affordability and market dynamics. Moreover, global supply chains, particularly in industries like electric vehicles and renewable energy technologies, could face disruptions, affecting international trade flows and economic stability.

Broader implications for international trade rules: The intensifying trade dispute between Europe and China highlights broader challenges in international trade governance. It raises questions about the effectiveness of existing trade rules and mechanisms in addressing issues related to state subsidies, market distortions, and fair competition. The outcome of this dispute could influence future trade negotiations and agreements globally, shaping the landscape of international trade policies and regulations.

Strategic implications for global economic alliances: The conflict between Europe and China also has strategic implications for global economic alliances. It may influence the alignment of countries and regions in trade blocs and international organizations, as countries weigh economic interests against geopolitical considerations. This could lead to shifts in diplomatic and economic relations, as well as the formation of new alliances aimed at navigating and influencing the global trade landscape amidst escalating tensions.

Overall, the escalating trade conflict between Europe and China over electric vehicles underscores broader geopolitical and economic challenges facing the international community. It reflects a growing trend towards protectionism and economic nationalism, complicating efforts to maintain open and fair global trade practices. As both sides maneuver through negotiations and potential retaliatory measures, the implications for global markets, trade rules, and strategic alliances remain significant and warrant close international attention and engagement.

SAKHRI Mohamed
SAKHRI Mohamed

I hold a Bachelor's degree in Political Science and International Relations in addition to a Master's degree in International Security Studies. Alongside this, I have a passion for web development. During my studies, I acquired a strong understanding of fundamental political concepts and theories in international relations, security studies, and strategic studies.

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