Are the EU and China driving towards another trade war over EV tariffs?

The EU and China's electric vehicle industry are on a collision course and drawing closer to a decisive conclusion this week, that will potentially impact a major sector of Asia's largest economy. The two sides have kicked off discussions on the EU's plan to impose tariffs on Chinese-made electric vehicles , aiming to seek common ground on an issue that could derail relations between the two regions. EU imports of EVs from China raced to $11.5 billion in 2023, from $1.6 billion in 2020 – a nearly 620 per cent surge that accounted for 37 per cent of all EV imports in the EU, data from New York-based research firm Rhodium Group shows. The "provisional countervailing duties" to be meted out by the EU are scheduled to be enforced from July 4 – unless both sides come up with a compromise to avert possible industrial, economic and political implications , according to analysts. The EU-China discussions were agreed upon by EU Commissioner Valdis Dombrovskis and Chinese Commerce Minister Wang Wentao on June 22. The EU and China have conflicting views on this: the bloc wants to protect its own industry, while the world's second-largest economy sees this as selfish and counter to global trade rules, which are meant to promote fair competition, encourage economic development and prevent any related conflicts. "Europe aims to counter harmful subsidies benefiting Chinese EV manufacturers, fearing China’s export model could flood the European market with cheap goods on the back of weak domestic demand," Joseph Dahrieh, managing principal at brokerage Tickmill, told The National . "China ... sees Europe’s action as protectionism and potentially WTO [World Trade Organisation] violations." The EU believes China benefits from unfair subsidies after it formally began a probe on Chinese EVs in October to determine if they breach anti-subsidy regulations. An anti-subsidy investigation is initiated when the commission receives a valid complaint from an EU industry, providing sufficient prima facie evidence that a country is subsidising companies exporting a particular product to the EU and that this is causing injury to its industry. On June 12, the commission announced it has provisionally concluded that the battery EV (BEV) value chain in China benefits from unfair subsidies. Chinese EV producers benefitted from favourable terms, including the provision of preferential export insurance, income tax reductions and exemptions, dividend tax exemption, import and export tax rebates, value-added tax exemptions and rebates, and government provision of goods and services for less than adequate remuneration, the probe found. "The investigation also examined the likely consequences and impact of measures on importers, users and consumers of BEVs in the EU," the commission said. "It is therefore foreseeable that the subsidised imports of the product concerned could continue to negatively affect the [EU] industry's economic situation." For the EU, these tariffs "provide a competitive edge to local car makers by narrowing the price gap with Chinese EVs", George Pavel, general manager of Capex.com Middle East, told The National . The proposed levies vary, depending on the brand and the way the Chinese EV companies negotiate with the EU. So far, the bloc has already identified tariffs for three sampled Chinese producers: 17.4 per cent for BYD, which in January overtook Elon Musk's Tesla Motors as the world's biggest EV maker , 20 per cent for Geely and 38.1 per cent for Saic. Chinese EV manufacturers, which co-operated in the investigation but have not been sampled, would be subject to a weighted average duty of 21 per cent, while those that did not co-operate face a residual duty of 38.1 per cent. The levies are to come into force on July 4 – "should discussions with Chinese authorities not lead to an effective solution", the commission said. The final tariff levels will be set by November. While China has opposed the decision, it has expressed willingness to smooth things over. "If the EU is sincere in sitting down at the negotiating table, China is also willing to accommodate each other’s reasonable concerns through dialogue and consultation," China's Ministry of Commerce said in a Facebook post. The country is keen to "avoid the expansion and escalation of trade frictions in a rational and professional manner", it said. However, Beijing has made clear its "strong dissatisfaction and firm opposition" to the EU's move, pointing out that the probe employed "inappropriate practices" that breached WTO rules, and that the "disproportionately high tariffs" are aimed at "suppressing the development of Chinese enterprises". So far, China has threatened only "necessary actions", which include filing a lawsuit with the WTO, but any retaliation would not be a surprise. "China may retaliate by increasing tariffs on European goods, such as luxury cars and other high-value items, potentially escalating trade tensions," Mr Pavel said. Any Chinese retaliation would bring back shades of its trade war with the US under the administration of former president Donald Trump . That's what Germany, through its Transport Minister Volker Wissing, has expressed. "Vehicles must become cheaper through more competition, open markets and significantly better location conditions in the EU, not through trade wars and market isolation," he said on a translated post on X. Hungary's Minister for National Economy, Marton Nagy, called the EU's tariffs "brutal", arguing that "excessive protectionism is not the solution". Even the European car industry has opposed the duties. Stellantis, Europe's second-largest car manufacturer and the owner of the Chrysler, Dodge, Jeep, Maserati and Peugeot brands, said it would not support actions that "contribute to the world fragmentation" of trade. Volkswagen Group , Europe's biggest car maker, which has a partnership with Shanghai-based Saic, said in a statement that “the timing of the EU Commission’s decision is detrimental to the current weak demand for BEV vehicles in Germany and Europe". “The Volkswagen Group confidently accepts the growing international competition, including from China, and sees this as an opportunity. This also benefits our customers." With the levies, prices of imported Chinese EVs in Europe are expected to rise, meaning consumers will bear the brunt of higher costs – in addition to limiting adoption rates and choices. Those who oppose the tariffs also "fear it could harm existing commercial ties with China", Mr Pavel said. However, the impact on Chinese EV makers could be only for the short term and limited in the long run, as they primarily serve the domestic market, Mr Pavel said. In terms of financial impact, the affected Chinese EV companies are unlikely to be too worried about the EU's tariffs, given their good performance so far, said Chris Weston, head of research at broker Pepperstone. "If the EU is about to impose tariffs of 38 per cent on Chinese EVs, then either it's in the price, or shareholders aren’t overly nervous about a sizeable hit to earnings," he told The National . He pointed out that while BYD has been off its recent highs, it still had good returns throughout June and most investors expect its profit margins to remain healthy, he said. Meanwhile, the situation could also present an opportunity for Chinese car makers to establish bases in other countries – those in Europe included – to soften the blow of any tariffs, Mr Dahrieh said. They are "likely to intensify efforts to diversify into other markets such as the Middle East and Latin America, accelerate plans to relocate production to the EU and establish partnerships with European firms to mitigate the effects of the tariffs in the long run", he said. Also, there is no substantial evidence to suggest that Chinese EVs are of lesser quality, said Mark Greeven, a professor of innovation and strategy at the International Institute for Management Development. "Generally, even according to auto executives from other countries, output from Chinese factories is far from low-quality," he wrote in a report last month on the IMD's website. "In reality, they are innovative; [China has] high-end vehicles that often outperform German, Japanese and US competitors, barring Tesla, at least from the consumer’s and technology’s point of view." The US in May announced that it would be imposing 100 per cent tariffs on imported Chinese EVs and 25 per cent on EV batteries, part of a series of measures aimed at protecting manufacturers in the world's biggest economy. Even Canada on June 24 said it was considering such measures. Exports of Chinese EVs, which typically sell for 20 per cent less than their European counterparts, have quadrupled since 2021, reaching $34 billion last year, data from Statista shows. While the US has been largely unaffected by this surge – it imported less than $400 million worth of EVs from China last year – the tariff increase can be seen as a "pre-emptive strike to protect US car makers from new, potentially unfair competition from abroad", said Felix Richter, a senior editor at the German data intelligence firm. There is also no evidence that the EU's decision is being influenced by the US: Washington's move is seen as more symbolic as there are currently hardly any EVs that are shipped into the US from China, analysts at Dutch financial group ING said. The EU's move is driven by a real economic threat rather than merely playing catch-up with the US, agreed Mr Pavel. "The EU's tariffs ... aim to level the playing field without triggering a full-scale trade war. Despite internal opposition within the EU, the tariffs reflect a strategic effort to protect its economic interests against the competitive threat posed by subsidised Chinese EVs," he said. If the EU decides against imposing the tariffs – or at least bringing it down to levels more acceptable to Beijing – it could diffuse tensions, prevent another trade war and, notably, avoid internal conflict within the bloc. Such a move could improve trade relations with China, maintain Chinese EV manufacturers' competitive advantage in Europe and stimulate broader adoption of EVs among European consumers, Mr Dahrieh said. Mr Pavel added: "Overall, removing the tariffs could lead to a more stable and co-operative trade environment, fostering economic integration between the EU and China, while also maintaining a more cohesive internal EU stance on trade policies."

Are the EU and China driving towards another trade war over EV tariffs?

The proposed tariffs vary in amount and, if the issue is not sorted, take effect on Thursday