The EU and China have been on a trade collision course for decades. Ever since China joined the World Trade Organization in 2001, the European Commission has imposed tariffs on a wide range of Chinese goods that it says are unfairly subsidised or ‘dumped’ – sold below market price – on the European market.
The tension burst into the open last October, when the Commission announced an anti-subsidy investigation into Chinese electric vehicles (EVs). In June, it concluded that unfair subsidies were indeed in place, and imposed hefty tariffs of up to 38.1 percent, to take effect on 5 July. The US has gone even further, imposing a 100 percent tariff on Chinese EVs in May.
Tariffs are intended to protect a market’s domestic industry, but they might come with two main downsides. First, they could increase prices for buyers.
Second, they might bring the risk of retaliatory measures from the target country – something that Germany’s car industry, which sells luxury models in the Chinese market, has been keen to avoid. Some German carmakers also produce vehicles in China, thereby benefiting from the very subsidies targeted by the EU tariffs.
And so on Saturday 22 June, less than two weeks before the tariffs kick in, the two sides began talks to try to find a solution.
“The EU side emphasised that any negotiated outcome to its investigation must be effective in addressing the injurious subsidisation,” says Olof Gill, Commission spokesperson for trade and agriculture, adding that the two sides will continue to engage at all levels in the coming weeks.
As it stands, Chinese EV maker BYD will face tariffs of 17.4 per cent, Geely 20 percent, and SAIC 38.1 percent. This comes on top of an existing general tariff of 10 per cent for imported EVs, meaning SAIC vehicles will be a total of 48.1 per cent more expensive to bring into the European market.
According to the Brussels-based NGO Transport & Environment (T&E), nearly 20 per cent of electric vehicles sold in Europe were produced in China in 2023. This year, the amount might be as high as 25 per cent.
Matthias Bauer is a director at the European Centre for International Political Economy (ECIPE), a trade-focused think tank. In an interview with The Parliament, he outlines what implications these tariffs will have for the European market – and weighs in on the prospect of a trade war between China and the West.
What can we expect from these talks?
It’s very hard to say since we don’t know much about the [Commission’s] allegation. We have an official press release that the EU is playing with the idea to impose ‘equalisation tariffs’ or ‘punitive tariffs’ on battery-based EV imports from China. But we don’t know much about the overall degree of the distortions of free and fair trade, of free and fair competition.
The reason is that the Chinese economy is a very state-interventionist economy, and at the same time the largest economy or close to the largest economy in the world by size of population, by manufacturing capacities.
The problem is that everything what’s happening there, where the government is involved, it’s extremely untransparent. We observe direct subsidisation and indirect subsidisation at many stages of the value chain, starting with the raw materials sector benefiting from direct state support or regulated prices for, let’s say, a tonne of a certain commodity being sold to a processing company in China.
From my own work, I know that it’s very, very difficult to first of all observe what is going on in terms of subsidisation and then to calculate the difference of a certain price of a final product like an EV car compared to the price we would have seen if subsidisation had not have taken effect. It’s extremely difficult.
My bottom line here is that [the EU tariffs are] overall politically motivated. The Vice Chancellor of Germany [and] minister of the Robert Habeck said during his visit in China that our response to China’s industrial policy measures would not have been as hard if the Chinese government is in a way supporting Russia when it comes to how to resolve the dispute with Ukraine.
German Chancellor Olaf Scholz said he hoped that the EU and China find a solution before 4 July. Do you think this is likely?
There might be formal statements that the EU and the government of China agree [to] scale down subsidisation in the future, agree to certain standards or internationally recognised standards, like those stipulated in several OECD [Organisation for Economic Co-operation and Development] or WTO [World Trade Organization] publications.
But I doubt that this will really address the issues, so it is practically impossible [for China] to pedal back. There are subsidisation regimes in place all over the economy, including the value chain of cars in general and EVs in particular.
We must not forget that there is a lot of subsidisation going on in the EU itself. And I can very well imagine that the Chinese government is also pointing the finger at subsidies and privileges being handed out to European companies.
So, it’s very hard to imagine at this point how an agreement could look. Everything is still happening behind closed doors. There are a lot of political sensitivities.
And what we also see with this threat of the EU, I think for the very first time, is not only hitting Chinese manufacturers and exporters, it is also hitting foreign manufacturers [that produce in China], like Tesla.
Who in the EU could lose from these tariffs?
It’s very difficult to say. Many cars are still being assembled in Germany and France and other countries, with major components arriving from all over Europe, especially Central European countries, such as Hungary, Slovakia, the Czech Republic, and Poland. It’s a very complicated industry with long and diverse supply chains. If the Chinese government were to retaliate, Europe’s car makers would suffer, and adverse impacts on suppliers of components across EU Member States.
Who could benefit from these tariffs in the EU’s single market?
I wouldn’t say that anyone is going to benefit. There are some companies in France, Stellantis and Renault, whose management is less concerned about these tariffs as they sell fewer vehicles in China than their German competitors. These companies may be less concerned about retaliatory measures taken by the Chinese government and may even view EV tariffs as a proper measure to limit competition from their German peers, including in the traditional combustion engine business.
With big US and now EU tariffs on Chinese EVs, do you think it’s legitimate to say that the West is in a trade war with China?
We can say there is a sort of trade war between the US and China, because in the US policymakers are more focused on addressing a fundamental issue, which is about the degree of state intervention in the Chinese economy and market-based competition as well as non-discriminatory market access for US companies that they wish to see in China.
The US has never encountered issues with excessive EV imports from China. The new tariffs rather reflect a broader political strategy to limit trade with China, particularly in sectors involving advanced technologies.
In the EU, it’s a more ‘realpolitik’, pragmatic approach considering the European industrial interest when it comes to trade and investment. So I wouldn’t call it a trade war. I would say it’s the initiation of a discussion that we need to have about a degree of state interventionism – leaving aside the question of democracy and human rights and so on, which is much more the focus of the US government.
This is probably not the motivation of the EU, but I would like to see a much more open and much more transparent discussion about the magnitude and also the effectiveness of subsidisation, or state interventionism, in the economy.
We must not forget that there is a lot of subsidisation going on in the EU itself. And I can very well imagine that the Chinese government is also pointing the finger at subsidies and privileges being handed out to European companies.
This interview has been edited for length and clarity.