EU Imposes 45% Tariffs On Chinese EVs, Risking Costly Retaliation From Beijing

The European Union (EU) voted on Friday to impose tariffs as high as 45% on electric vehicles (EVs) imported from China, a move set to exacerbate trade tensions between the EU and Beijing.

The decision comes after an EU investigation concluded that China unfairly subsidized its EV industry, allowing Chinese automakers to flood the European market with cheaper vehicles, which EU officials say undermines local manufacturers. The tariffs, if implemented, will last for five years, marking a significant shift in the EU’s approach to economic competition with China.

Of the 27 EU member states, ten voted in favor of the tariffs, while Germany and four other countries opposed them. Twelve countries, including Spain, chose to abstain from the vote. This divide underscores concerns among several member states about the potential economic repercussions of escalating trade tensions with China, which is one of the EU’s largest trading partners.

Implications for Chinese EV Makers

The tariffs will apply to electric vehicles manufactured in China, with rates as high as 35%, on top of the existing 10% duty. These duties will largely impact Chinese automakers like BYD, Geely, and Nio, whose exports to Europe have grown significantly in recent years. Chinese automakers have been making inroads into the European market, offering competitively priced EVs that have gained popularity among consumers.

However, Chinese automakers now face tough decisions. They must either absorb the increased costs or pass them on to consumers by raising prices, which could make their vehicles less attractive. This is happening at a time when domestic demand for EVs in China is slowing, further squeezing profit margins.

A recent report noted that Chinese car sales in Europe have already plunged by 48% in August, reaching an 18-month low, largely due to the anticipation of these new tariffs.

In response to the EU’s decision, Geely Holding Group Co., which owns Sweden’s Volvo and the UK’s Lotus Cars, issued a statement criticizing the move, saying it’s “not constructive and may potentially hinder EU-China economic and trade relations, ultimately harming European companies and consumer interests.”

The share of electric cars sold in the EU that were made in China has surged in recent years, growing from 3% to over 20% in just three years. Tesla and international automakers that export from China make up a significant portion of this share.

However, the tariffs are expected to largely favor Tesla, as key European automakers, such as Mercedes-Benz and Volkswagen, have not yet fully pivoted to electric vehicles and remain reliant on traditional combustion-engine cars for a substantial portion of their sales. Tesla’s Berlin Gigafactory has been central to EV production in Europe, making the American company EU’s leading EV manufacturer.

German Automakers Push Back

While the EU has sought to level the playing field for European manufacturers, the decision has been met with resistance from Germany’s automotive sector, which is heavily invested in China. The Asian country has the largest auto market in the world.

Volkswagen AG, which is Germany’s largest automaker, issued a statement calling the tariffs “the wrong approach” and arguing that they would not enhance European competitiveness.

“We appeal to the EU Commission and the Chinese government to constructively continue the ongoing negotiations for a political solution. The common goal must be to prevent any countervailing duties and thus a trade conflict,” the company said.

Other major German carmakers, including Mercedes-Benz Group AG and BMW AG, echoed these concerns. China accounted for about one-third of the car sales for these manufacturers in 2023, making it their most crucial market outside of Europe. German car companies lobbied the government to vote against the tariffs, warning that they could lead to retaliatory measures from China, further complicating business operations in the country.

Hildegard Müller, president of the German car lobby VDA, expressed approval of the German government’s decision to oppose the tariffs.

“It is the right signal from the German government, which — in the interests of the economy, prosperity, and growth — has backed the interests of the European and German automotive industry and its employees on such an important issue and voted no today in the EU decision,” he said.

The German industry lobby group BDI also urged caution, emphasizing the need for stable economic relations with China. While the group supports using trade defense measures when necessary, it noted that “the interests of European industry in stable economic relations with China must also be given balanced consideration.”

Concerns About Trade Retaliation

The potential retaliation from China is expected to impact not only the EU’s auto industry. Beijing has already threatened to impose duties on key European exports, including dairy products, brandy, and pork. These sectors, particularly agriculture, are highly dependent on the Chinese market, and any retaliation could disrupt Europe’s export economy.

Germany’s Economy Minister Robert Habeck warned earlier that imposing the duties could lead to a tariff war with China, an outcome that many in the German government are eager to avoid. Mario Draghi, the former president of the European Central Bank, has also recently warned of China’s “state-sponsored competition” being a growing threat to Europe. He stressed that without a strong response, the EU could remain vulnerable to economic coercion from China.

However, the EU and China are continuing negotiations to find an alternative to the duties. Both sides are exploring whether they can reach an agreement on a mechanism to control the prices and volumes of EV exports from China, which could offer a WTO-compatible solution to the issue of subsidization. The EU has said that any such agreement must be “monitorable and enforceable” to ensure that China’s subsidies do not continue to harm European industries.

While the tariffs have the potential to shake up the EV market in Europe, their immediate impact on Chinese automakers may be limited. Analysts believe that Europe only accounts for a small fraction of Chinese EV sales.

For instance, Daiwa Securities analyst Kevin Lau estimated that Europe contributed between just 1% to 3% of the overall sales for Chinese automakers BYD, Geely, and SAIC Motor Corp. in the first four months of 2023. This suggests that while the tariffs may slow the growth of Chinese EVs in Europe, they are unlikely to have a significant impact on these companies’ global sales.

With negotiations between the EU and China ongoing, it remains to be seen whether a compromise can be reached to avoid a full-blown trade war. For now, Europe’s efforts to protect its industries from subsidized Chinese competition could mark a new era of trade policy that may shape the future of the global EV market.