EU faces crucial decision on Chinese EV tariffs amid industry divide

By the end of October, the European Union will have reached a final decision on what some analysts call the largest EU trade dispute against China in more than a decade.

The dispute has sparked intense debate across Europe, with various stakeholders weighing in on the potential consequences of imposing tariffs on Chinese electric vehicles. The European Commission, led by President Ursula von der Leyen, initiated an anti-subsidy investigation in September 2023, citing concerns over China's alleged unfair trade practices in the electric vehicle sector. This move has been met with both support and criticism from different quarters within the EU.

However, automakers and governments are divided on whether to impose tariffs on Chinese electric vehicles, which have so far ranged up to 36.3%. According to a German automobile trade association, they would harm German automakers, who have a strong presence in China. Germany has a significant automotive trade surplus with the country. In contrast, Italian and French automakers have almost little presence there.

The potential tariffs have raised concerns about retaliatory measures from China, which could impact European companies operating in the Chinese market. Some experts argue that such a trade war could disrupt global supply chains and hinder the transition to electric mobility. On the other hand, proponents of the tariffs argue that they are necessary to protect European jobs and maintain a level playing field in the rapidly evolving electric vehicle industry.

China has been exporting vehicles to countries all over the world, and both tariff proponents and trade and industry observers see China's backing for home manufacturers as justification for imposing tariffs.

"We're dealing with an economy in China where credit money is allocated by the state rather than the market, and the state chooses which sectors to promote," said William Reinsch, senior advisor and Scholl Chair in International Business at the Center for Strategic and International Studies, a bipartisan think tank in Washington, D.C.

"In that kind of economy — if you do that — you always get overinvestment, you always get overcapacity, you always get overproduction, and then that overproduction gets dumped on the rest of the world."

The debate over Chinese electric vehicle imports has also highlighted the broader geopolitical tensions between China and the West. Some policymakers view the issue as part of a larger strategic competition, where control over key technologies and industries is seen as crucial for economic and national security. This perspective has led to calls for greater investment in European research and development, as well as efforts to strengthen domestic supply chains for critical components such as batteries and semiconductors.

According to Felipe Muñoz, a senior analyst at JATO Dynamics, Chinese automakers can produce a car for under $5,500, whereas European automakers need to spend around $20,000.

He believes that government subsidies contribute to the significant cost advantage.

Muñoz explained that increasing economies of scale also contribute to this phenomenon. "It's explained by lower labor costs and by the fact that when it's about electric cars, China, unlike the rest of the world, it has already secured the supply chain for the batteries."

As the EU deliberates on its decision, the outcome of this trade dispute is likely to have far-reaching implications not only for the automotive industry but also for the broader economic relationship between Europe and China. The resolution of this issue could set a precedent for how the EU addresses similar challenges in other sectors where Chinese competition is intensifying. Regardless of the final decision, it is clear that the global landscape of electric vehicle production and trade is undergoing a significant transformation, with potential ripple effects across multiple industries and economies.