What the EU’s tariffs on electric vehicles mean for China

The EU’s announcement of sharply increased tariffs on Chinese electric vehicle imports marks a major setback to President Xi Jinping’s efforts to persuade Brussels not to follow Washington’s increasingly hardline stance on trade.

The planned tariffs, which follow a months-long investigation into Chinese subsidies, were decided despite warnings from Beijing that imposing punitive measures would disrupt trade and economic co-operation.

The tariffs vary across companies but will be as high as 48 per cent for carmakers judged not to have co-operated with the EU probe. Though this is well below the 100 per cent imposed by the US last month, it poses a new barrier to a fast-growing market for Chinese vehicles.

Will the tariffs slow China’s EV push into Europe?

Bill Russo, the former head of Chrysler in China and founder of Shanghai consultancy Automobility, said the tariffs would promote localisation of EV manufacturing in Europe and could be positive for competition.

Chinese companies have already begun investing heavily in making cars and batteries in Europe, including multibillion-dollar factories in China-friendly Hungary.

However, Russo said the EU tariff rates would do little to stand in the way of sales growth by BYD, the Chinese group that competes with Tesla for the title of the world’s biggest EV manufacturer.

“Will it slow them down? No. If you put that kind of tariff on top of the Chinese cost structure, it is still going to be better on cost than anything the European carmakers are currently capable of doing,” he said.

Citi analysts have estimated that even with the planned tariffs, BYD’s European export operations could still achieve a more than 8 per cent net margin at current production scale — more profitable than its domestic business.

“Even if Chinese EV brands sell their cars in Europe at a price 50 per cent higher than [their domestic retail prices], they’re still very competitive,” said Yale Zhang, managing director of Shanghai-based consultancy Automotive Foresight.

How much state support has China’s EV industry received?

Xi has touted EVs alongside solar panels and batteries as pillars of Chinese high-tech manufacturing.

Cumulative Chinese state spending on the EV sector was more than $125bn between 2009 and 2021, according to estimates by the Center for Strategic and International Studies, a US think-tank. China’s industrial spending was by far the highest among the world’s top economies. The CSIS researchers said their figures were conservative and clouded by China’s lack of transparency.

State support has helped transform China into the world’s biggest producer of EVs, their batteries and almost all the key components and technology that underpins the cars.

Will Xi hit back?

Xi visited Europe last month on a trip Chinese officials said was aimed in large part to ease growing tensions over trade.

On Wednesday, China denounced the planned EU tariffs as “blatant protectionism” that lacked a “factual and legal basis”.

Beijing has not specified how it might retaliate. But it has said it will “take every necessary measure” to safeguard China’s interests.

Chinese experts and industry groups have suggested options that range from an investigation into European dairy products to higher tariffs on imports of larger and luxury vehicles, according to state media. In January, China launched an anti-dumping probe into French cognac imports, punishing Paris for championing the EV probe. 

Still, Beijing has yet to respond to the US tariffs, and some China trade experts have warned Xi that a tit-for-tat battle with Washington could damage the world’s second-largest economy. Beijing might also not want to fight trade wars with both the EU and the US simultaneously.

Cui Dongshu, secretary-general of the China Passenger Car Association, said the EU’s move would restrict European consumers’ access to Chinese-produced “high-quality, low price” goods. “This is an unfair treatment of [Chinese companies],” Cui said. “We believe China will come up with countermeasures against the EU.”

How much economic pain will the tariffs cause China?

China, the bloc’s largest trading partner, exported €10bn of electric cars to the EU in 2023, according to analysts at Rhodium Group. This compares with total Chinese exports of $3.4tn, with about $500bn each going to the EU and US.

South-east Asia has become China’s biggest export destination in recent years, slightly edging out both the EU and the US. Export data last week showed sharp increases in exports to both that region and Latin America, markets where Chinese EV makers have expanded their operations.

Hui Shan, chief China economist at Goldman Sachs, suggested the government was “strategically emphasising exports to EM countries, knowing the US and Europe may increase trade barriers”.

A Goldman report last month found that at the end of 2023, electric vehicles, solar cells and lithium-ion batteries together accounted for 4.5 per cent of total Chinese exports, up from 1 per cent in 2018. Europe was the biggest recipient, but the bank noted that most of the production was “for domestic consumption”. 

“The impact on specific sectors might be sizeable, but the macro implication would be limited,” Goldman analysts said.

Will Europe follow through on the tariffs?

Germany is leading a group of states opposing the tariffs for fear of retaliation by China. Chancellor Olaf Scholz has said such action “ultimately just makes everything more expensive, and everyone poorer”.

Several European carmakers have lobbied their governments against the move. Some companies see the tariffs announcement as an “opening salvo” in negotiations. China could potentially defuse the situation by agreeing to limit exports or opening its own market further.

Valdis Dombrovskis, EU trade commissioner, said on Wednesday he was open to discussing with Beijing “other possible ways to remedy this situation”.

Without a deal, opponents of the tariffs would need 15 member states to vote against them before they are made definitive on November 2.

EU officials are confident they can keep enough governments on their side. “If we can’t act now we never will,” said one.

Additional reporting by Arjun Neil Alim