Key Takeaways
The EU’s plan (coming into force on 4 July, 2024) to impose duties on Chinese Electric Vehicle (EV) exports triggered a negative response and potential retaliation from Beijing.
Overall, KSG assesses that the new tariffs represent a blow to Chinese EV manufacturers, whose products have been increasingly popular in the European market; however, the marked-up prices of Chinese EVs sold in Europe may enable Chinese manufacturers to absorb the increased costs.
Fearing Chinese retaliation that would affect European exports to China, European car manufacturers and German politicians are opposed to the measures.
In a trade war scenario, European sectors beyond the automobile industry could suffer more than China.
More protectionist policies will likely characterise the future landscape, and the size of Chinese retaliatory measures will be crucial for determining the full impact on business. KSG will continue monitoring this space and assess the implications of Chinese retaliatory measures in due course.
Background
On June 25th, Chinese Premier Li Qiang declared at the opening plenary of the World Economic Forum in Dalian that “China’s large market is open” and that “foreign companies compete, communicate and cooperate with domestic ones on a level playing field”. This remark comes amid an environment of heightened tension between Beijing and Brussels, where an EU plan to impose up to 38% duty on the import of Chinese electric Vehicles (EVs), which is expected to be implemented today, was revealed after an EU Commission investigation found that domestic EV producers enjoy unfair benefits from the Chinese government. The findings largely align with what Von Der Leyen had anticipated in September 2023, when she noted that “global markets are flooded with cheaper Chinese electric cars”.
While the White House-imposed 100% tariff on Chinese EV imports is much higher than the highest EU-proposed one of 38%, their relative weight on market shares shows a different picture. This is because Chinese EV exports are considerably larger in Europe than in the US. In particular, while the market value of Chinese EVs in Europe was about $13B in 2023, only $368 million worth of Chinese EVs were exported to the US in the same year.
Consequences for Chinese Companies
KSG assesses that the significance of this tariff package will be great. The new tariff regime is a blow for Chinese manufacturers, who will suffer significantly from Brussels’s recent decision due to the growing popularity of Chinese EVs among European consumers over the past few years. For example, the fully electric vehicle produced by the Chinese state-owned EV manufacturer SAIC Motor was one of Europe’s top-selling fully electric vehicles, with over 200,000 units sold in the region in 2023. However, there is an argument to be made that the effects of the new tariffs will not be as detrimental as expected for Chinese producers. This is because the price point at which Chinese electric cars are being sold in Europe is (for some brands) more than double that for which the same vehicles are sold in mainland China. This means that the markup on the vehicle price in Europe will significantly offset the effects of the tariffs.
Consequences for the EU
While Chinese manufacturers may have a margin of comfort to deal with the new tariff wall, European businesses risk ultimately losing out in a scenario of declining commercial relations with China. Major German politicians have spoken out against the EU measure. The chancellor Olaf Scholz condemned protectionism and sanctions at a speech given to the Opel 125 anniversary conference. The FDP German Minister Of Digital Affairs and Transport declared on a X (formerly Twitter) post that the “punitive tariffs are hitting German companies and their top products” and that open market (not protectionism) should be the driving forces in the EV market. The tariffs have also raised malcontent among German car manufacturers, who fear that potential Chinese retaliation could affect their sales in the Chinese market.
Political figures and industry leaders seem to agree in seeing the newly proposed sanctions as a significant limitation to European development and innovation in EV technology. This is because potential Chinese retaliation could include tariffs on Western imports to Beijing. In turn, lower profits for Western car manufacturers may negatively affect their ability to invest more in research & development around developing better and cheaper EVs. This is a worrying scenario given that Europe’s EV technology is falling behind its Chinese counterpart.
The effects of the sanctions are likely to hit many sectors beyond car manufacturing. In fact, the heavy reliance of a number of European industries on global supply chains with heavy Chinese involvement means that the prospect of a trade war could be painfully significant for a wide range of industries. Besides supply chain dependency, export-oriented businesses will also be exposed to retaliation measures. Considering that the latest EU data shows that after machinery & vehicles, the largest proportions of EU exports to China are concentrated by other manufactured goods (19%) and chemicals (18%), KSG expects that these two industries could also bee heavily impacted.
Potential Positive Outcomes
While this appears to be a looming scenario for the West, looking at the EU tariffs on EV vehicles from another perspective may reveal a positive outcome for European innovation in the field. Specifically, although Chinese retaliation could be painful for European car manufacturers, the tariff regime could incentivise Chinese EV firms to set up manufacturing plants in mainland Europe, which would not be subject to import tariffs. The establishment of Chinese firms’ production plants in Europe is already underway. Chinese firm BYD announced that they will begin production in Hungary, and Chery Auto will become a partner of the Spanish Ebro EV firm to open a joint production site in Spain. The transfer of production to mainland Europe triggered by the EU sanctions could provide EU manufacturers an opportunity to enjoy knowledge spill-overs that bear out of joint-ventures with Chinese firms, positive competition and supply chain cooperation.
Looking Forward
Considering the European commitment to banning the sales of new petrol and diesel cars from 2035, cooperation with Chinese firms could be one of the few available ways for European manufacturers to develop adequate EV technology to offset the effects of the ban. However, this will only happen if cooperation triumphs over geopolitical rivalries. Therefore, looking forward, the key question will be: will geopolitical competition or economic cooperation for innovation in green tech prevail? Based on the latest protectionist policies adopted by Washington and Brussels, geopolitical rivalries seem to have a primacy over cooperation with China. This means investors, insurers, and manufacturers will be hesitant to put resources into endeavours that concern China.
If the EU continues to curtail the ability of Chinese EV companies to sell into Europe, it will open further opportunities in the market for US, Korean, and Japanese companies. These opportunities may also extend to European companies, although, as discussed, a China-EU trade war might actually hinder European companies’ growth and ability to compete.
Considering that China’s reaction to the sanctions imposed by the Trump administration was significant and proportional, KSG believes it is reasonable to expect a Chinese retaliation to the European tariffs on Chinese EV exports. The magnitude of such retaliatory measures is difficult to predict. However, it is sensible to expect China to avoid imposing sanctions big enough to trigger a trade war with Europe, given that it has already partly lost its access to the US market with the new Biden duties on Chinese imports. However, negotiations and more amicable solutions are not yet off the table since diplomatic talks between Europe and Beijing began last week. Ultimately, the scale of the retaliation will determine its effects on Western and Chinese businesses and, crucially, on Europe’s ability to pursue its green targets; KSG will further assess the retaliation and its impact once there is greater clarity on the form it will take.
The difference of opinion on EU imposed tariffs on China will likely remain a continuous point of disagreement between EU member states in the coming years. With the economic rivalry between the US and China intensifying, KSG believes the EU is likely to impose further tariffs of this nature on China; this will significantly impact China’s economy, as well as the EU’s. The Chinese economy is particularly reliant on exporting its goods to the European market, having been unable to produce a strong domestic market for its own production to date.
Washington stands to benefit from this in several ways, given its major geopolitical rival is harmed, and the Chinese exodus from the European market will also leave an opening for US companies. National security concerns in the EU regarding China are likely to rise exponentially over the coming years, thus quickening a process of gradual decoupling for US companies to exploit. However, US manufacturers will have to compete with the considerable might of Korean and Japanese EV companies.
Overall, KSG assesses that this action by the EU signals a period of upcoming uncertainty and unpredictability in the EU EV market, that will likely span the next two years at least.
By Silvia Borin, Head of Geoeconomics Analysis