China’s EV sector could offset looming EU tariffs with detours via ‘friendly’ tracks, but be prepared for countermeasures

Firms could mitigate the potential impact of the European Union finalising its investigation into China’s electric vehicle (EV) sector by building production facilities in the likes of Turkey, Serbia and Hungary, but analysts also warned Beijing to look out for stricter countermeasures from the bloc.

Following proposed tariff increases on a wide range of EVs, batteries, semiconductors, cranes, graphite and other critical minerals from China unveiled by the United States earlier this month, Brussels is expected to conclude its investigation into subsidies in China’s EV sector by June 6, with provisional tariffs to be applied in early July.

“Chinese EV makers are likely already working out plans to mitigate potential EU high import tariffs, replicating the Japanese model used in the US in the 1970s and 1980s,” said Sebastian Contin Trillo-Figueroa, a Hong Kong-based geopolitical analyst who specialises in EU-Asia relations.

Trillo-Figueroa noted that Honda, Nissan and Toyota established manufacturing facilities in the United States in the 1970s and 1980s, employing local workers and integrating into the supply chain.

But should similar moves by Chinese EV makers have the “sole intention” of bypassing EU import tariffs, the bloc “might interpret tariff circumvention via Turkey as an attempt to undermine its trade regulations”.

“[And it] could enforce more stringent rules of origin for vehicles [that] could complicate and increase the cost of compliance,” Trillo-Figueroa added.

Wang Yiwei, a professor of international relations at Renmin University in Beijing, also said that the EU may respond by combining old protectionism accusations – such as bundling up concerns over forced labour and the Xinjiang Uygur autonomous region – if investment decisions by Chinese firms are interpreted as attempts to sidestep import tariffs.

BYD, China’s largest EV manufacturer, announced in December that it planned to build its first passenger car facility in Europe in southern Hungary, which would form the centre of its European production operations. It already has a plant in the north of the country where it assembles electric trucks and buses.

Sanja Arezina, a senior counsellor with the Serbian government, said that “at the request of the Hungarian and Serbian leadership”, China helps make its partner countries “more visible on the global investment map”.

Chinese carmaker Chery Automobile confirmed in April it had also sealed a deal to build its first European factory in Spain in a joint venture with Ebro-EV Motors.

French Finance Minister Bruno Le Maire also said earlier this month that France would welcome BYD if the Chinese company decided to build a factory.

And as one of the “friendly” partners for China, a report by Automotive News Europe earlier this month said that Turkey was in advanced talks with BYD and Chery over factory investment as part of a move seen to help boost sales in Europe.

Wang believes Turkey’s close connection with the Middle East and its Customs Union with the bloc make it “a good option” for Chinese companies entering the EU market.

The EU Customs Union, formally known as the Community Customs Union, provides free movement of covered goods within the bloc which are either wholly produced within a member state, or have been imported from a third country.

Li Lifan, a Russia specialist with the Shanghai Academy of Social Sciences, said that China would not only rely on Turkey and also increase investment in Hungary and Serbia.

Arezina added that China’s investment in the production of EVs in Hungary and Serbia would help obtain “free access” into the EU market.

Sanja Arezina, senior counsellor with the Serbian government

Hungary is also an EU member state that belongs to the European single market, she added, while Serbia has signed the Stabilisation and Association Agreement with the EU that enables duty-free access on imports of Serbian products to the EU market as it is being considered for full membership of the bloc.

President Xi Jinping visited Serbia and Hungary after a stopover in France during his first tour of Europe in five years earlier this month.

China became the largest source of direct investment for Serbia in 2022, with bilateral trade soaring from US$596 million in 2016 to US$4.35 billion in 2023.

“Chinese companies, by expanding their production chains in Europe, in fact at the same time help … shift from internal combustion engines to electric engines in vehicles – in order to reach zero carbon dioxide emissions by 2035,” Arezina said, referring to EU rules that state all new cars entering the market as of 2035 should have zero carbon dioxide emissions.

European firms, she added, do not have sufficient capacity, knowledge and production chains to realise the EU green transition.

“China is actually operating on several different tracks in the European arena, while at the same time helping the development of a new model of Chinese market growth based on hi-tech manufacturing,” Arezina said.