As the European Union pushes ahead with tariffs on Chinese electric vehicles (EVs) to protect European production from international trade distortions, experts say that last week’s decision to slap on extra import duties not only signifies a major policy shift but also could be somewhat unproductive.
The move, unlike previous trade-defense measures that focused on smaller or less critical sectors, targets the automotive industry, which is crucial to the economies of both the European Union and China. This marks a departure from the EU’s traditional approach of avoiding significant industries in its trade disputes.
Moreover, introducing tariff barriers while the EU plans to scrap internal combustion engine (ICE) cars by 2035 could be counterproductive to this goal.
As sales of electric vehicles from China, the bloc’s largest trading partner, increase in Europe, the tariffs—which are spearheaded by Spain and France—will generate billions of euros for the EU budget every year.
“The EU Green Deal came with the promise of growth and jobs, and that’s not possible if our EVs are all imported. The tariffs are welcome, but Europe needs a strong industrial policy to speed up electrification and localize manufacturing,” Julia Poliscanova, senior director for vehicles and emobility supply chains at Transport & Environment (T&E), said in a statement for T&E. The Brussels-based organization claims to be Europe’s leading advocate for clean transport and energy.
“Just introducing tariffs while scrapping the 2035 deadline for polluting cars would slow down the transition and be self-defeating,” Ms. Poliscanova said.
In October 2022, the EU agreed to restrict the sale of new gasoline and diesel vehicles and vans by 2035. Under the agreement, carmakers will be required to reduce emissions from new cars sold by 55 percent in 2030 from 2021 levels, before attaining a 100 percent reduction five years later.
Extensive negotiations, particularly with Germany, which relies heavily on the automobile industry, led to the settlement. The decision provides for a transition phase, during which e-fuels can help retain some elements of ICE cars while also pushing the EU closer to its climate goals.
Set the Right Tone
However, according to T&E, with Chinese EVs now providing lower pricing and longer ranges, the bloc’s objective of reducing carbon emissions may suffer if there is a lack of supply or demand for greener vehicle options from domestic European manufacturers.Furthermore, it’s critical to send the right signal for maintaining the EU’s carbon-emission targets for carmakers, including the 2035 zero-emission cars goal, T&E says. The EU industrial policy, therefore, should establish robust sustainability criteria to reward local, clean manufacturing.
Policy Shift
The EU, though, asserts that massive state support allows Chinese car suppliers to undercut European competitors, hindering the EU’s transition from ICE to battery EVs.According to the EU, China-made cars captured 25 percent of the EU market in 2023, up from 3.9 percent in 2021.
The EU also argues that the intense price competition in China, which has driven down prices domestically, is now affecting Europe. China is effectively compelling EU manufacturers to lower their prices, thereby hurting their profits and potential future investments.
Still, experts note that the EU’s Chinese EV tariff represents a policy shift because it targets a crucial and strategic industry, adopts a more protectionist stance, addresses perceived unfair market practices, and risks escalating trade tensions with China, marking a departure from previous trade policies and approaches.
“The decision marks a big change in EU trade policy because, although the EU has used trade defense measures regularly in recent years, including against China, it has not previously done so for such an important industry,” London-based independent research firm Capital Economics wrote in a rapid response note on June 12.
“Europe has been reluctant to engage in the kind of protectionism that the U.S. has deployed since Donald Trump’s presidency.”
The most recent example of a U.S. move was the Biden administration’s import tariff hike on Chinese EVs last month, which shot up to 102.5 percent from the previous 27.5 percent.
Although Capital Economics adds that the EU is working within international rules by deploying World Trade Organization-compliant trade defense measures and isn’t expected to suddenly increase the duties, the tariffs indicate a more protectionist stance from the EU, aiming to shield its domestic EV industry from Chinese competition.
Real Impact
Analysts at Jefferies Group predict that China’s EV manufacturers won’t face any obstacles in entering the EU market.According to the multinational investment bank, the prices of Chinese EVs in the EU market are generally 80 to 100 percent higher than those in the domestic market. Excluding freight costs, tariffs, and modification fees, the net profit margin of Chinese EVs typically ranged from 15 to 25 percent before the tariff increases, Jeffries added.
Hence, citing China’s largest EV maker, Jeffries analysts wrote, “If BYD manages to raise prices by 17.4 percent to fully pass on the tariff [imposed on the car maker by the EU] to customers, the pricing of BYD’s products would still be lower than the competing models launched by European OEMs [original equipment makers].”
That aside, European OEMs somewhat depend on China’s battery value chain for their EV transition, according to Jeffries. Given their premium brands’ significant presence in the Chinese market, potential retaliation from China could exert downward pressure on the earnings of European OEMs.
A T&E analysis from March suggests that China could be the source of one in four EVs sold in Europe this year.
Since the EU will retain three-quarters of the revenue from the new tariffs effective as of July 5, “this money should be allocated to scaling up the battery supply chain via the EU Innovation Fund,” T&E said.
