In 2001, China joined the World Trade Organization and has since become the “factory of the world”, with a strong focus on exports to drive economic growth. The majority of China’s export goods were simple labour-intensive products, especially the “three old ones 老三样” – furniture, clothes, consumer electronics – all of which are non-strategic, non-critical goods. Moreover, geopolitical, supply-chain and security-related risks were not major considerations in the 2000s and early 2010s.

In recent years, China has moved up global value chains and now focuses on more sophisticated technology-intensive products and innovation. The “three new ones 新三样“  –electric vehicles (EVs), lithium batteries, solar products – represent China’s new high-quality 高质量 focus for production and export. As these goods are vital for the EU’s green transition – and cheap imports from China would make them more affordable to EU consumers – this could be a win-win.

So what’s the problem?

  • State subsidies

Chinese clean tech manufacturers benefit from massive state subsidies, which are in the DNA of China’s state-capitalist system. They create market distortions and unfair competition in China and abroad, “un-levelling” the playing field.

In the case of EVs, subsidies heavily emphasise the supply side, as they tend to be paid out directly to manufacturers, as well as the “made in China” factor, as they are not eligible for imported EVs. The overemphasis of the supply side may lead to over-capacities beyond market-economy level, which, in turn, may result into increasing exports in search for other markets.

While subsidised export goods benefit local consumers who can take advantage of lower prices, they are harmful to local producers, whose competitiveness and market shares are reduced at home and in third countries. This may decrease production, employment and income in their home countries. Additionally, it decreases sales expectations of local companies, thus limiting the incentive to invest.

  • Import dependencies

Subsidised clean tech imports from China risk creating new strategic dependencies on China. In fact, this is already the case for solar panels, 96% of which the EU imports from China. The measures resulting from a 2012 EU anti-subsidy probe – a mix of quotas and tariffs – were not effective enough in safeguarding larger parts of Europe’s solar manufacturing industry and were finally abolished in 2018.

The European EV industry, which, contrary to the solar industry at that time, is still in its infancy, could experience a similar fate. This would result in another key industry for the green transition remaining heavily reliant on Chinese imports. In the past, trade dependencies were regarded as classic characteristics of globalisation and the resulting international labour division.

However, the recent shift towards a geopoliticisation of trade has changed this perception within the EU. As economic dependencies are increasingly weaponised to achieve political goals – even to the point of coercing other countries into compliance – the European Commission has started to follow a de-risking agenda in the context of its Economic Security Strategy, which was proposed in 2023.

  • Reactions by other countries

Recent developments in the EV sector, such as rapidly increasing exports from China, have already galvanised other countries into action. The US has imposed a tariff of 100% on EVs from China, up from 25%.

Turkey announced an additional 40% increase in tariffs and Brazil plans to gradually raise tariffs to 35% by 2026 on EV imports in general. Since 92% of EVs imported to the Brazilian market come from China, this measure will mainly hit Chinese automakers.

Such measures could have massive trade-diverting effects in the direction of the EU. EV imports from China could surge in consequence, as the options of foreign sales market to absorb domestic overcapacities shrink. This would increase pressure on markets and prices in the EU, as one of the remaining large markets with attractive purchasing power.

What has the EU done about this so far?

In October 2023, the European Commission launched an ex officio anti-subsidy investigation into the imports of battery electric vehicles (BEV) from China. First, the investigation will determine whether BEV value chains in China benefit from illegal subsidisation and whether this subsidisation causes – or threatens to cause – economic harm to EU BEV manufacturers.

On 12 June 2024, the Commission announced the results of its self-initiated investigation. This included provisional countervailing tariffs on EV imports from China with an average of 21%, but with rates for individual companies, such as privately owned BYD, ranging from 17.4% up to 38.1% for entities such as state-owned SAIC.

The different rates are based on the basis of the concrete subsidies companies achieved – and on the question if they cooperated. The tariffs will be added to the already existing 10% on EV imports. Only BEVs will be subject to the tariffs, with plug-in hybrid cars remaining exempt.

graph: Electric Vehicle Tariffs

What’s next?

The tariffs will only become effective from 4 July 2024 for a four-month period under a guarantee decided by each member state’s customs authorities. This means the tariffs will only be collected, after they have been definitively imposed. Member states will vote on the provisional tariffs, but to no binding effect. In EU jargon this is known as “advisory procedure under comitology rules”.

But the Commission has already signalled openness to Chinese authorities to negotiate another solution before the tariffs become effective. The final decision will be made on 4 November 2024 and requires confirmation by the member states through a binding vote, known in EU jargon as “examination procedure under comitology rules”.

A qualified majority –  15 member states representing 65% of the EU population – is required for the member states to oppose the definitive measure, but it can be approved when “the votes against do not reach a simple majority”  of at least 14 member states voting in favour. The tariffs could then be put in place for a period of five years.

Big BUT: Tariffs alone won’t do the job

If the EU imposes permanent tariffs on EVs imported from China, this instrument needs to be urgently flanked by measures to incentivise local manufacturers. Tariffs alone will not solve the problem of Chinese EVs being cheaper than their European counterparts. For example China’s BYD, is estimated to remain competitive even with the tariffs.

And tariffs alone will not build a more resilient European EV industry. If they are imposed, tariffs may buy this endeavour some time – maybe five years or so – but the incoming Commission together with the member states must make sure this time is used well. Investment in R&D and production capacities within the EU are essential.

Additional measures to support EV manufacturing in the EU could include:

  • Tax reliefs
  • Additional support for R&D activities
  • Shorter depreciation periods for investments
  • Local content requirements in public procurement, if a way to comply with existing rules or more flexible application is possible, such as the electrification of public transport
  • Environmental, social and governance (ESG) requirements for supply chains. For example, this could mean taking into account the amount of renewable energy used for EV production or human rights violations along supply chains
  • Tackle high cost of production, especially energy prices
  • Reduce single market fragmentation to make economies of scales possible, such as pushing the Capital Market Union

Don’t forget China’s reaction

China has already reacted – rhetorically, at least. The Ministry of Foreign Affairs has called the investigation and its results as “classical protectionist behaviour, ignoring objective facts and violating the rules of the WTO”. A quick note on this argumentation: Countervailing duties, which are the case here, are not protectionist and well within the WTO rules on reacting to dumping and subsidies.

However, China will most certainly revert to retaliatory measures in guise of punitive tariffs, if only to bolster its own rhetoric. China faces rising tensions with the US and serious challenges to its domestic economy, while being in dire need of the EU as export sales market and of certain EU imports for production.

These factors mean China’s overall reaction can be assumed to remain limited and poised to avoid another round of counter-measures, let alone starting a fully-fledged trade war with the EU.

Possible targets for retaliation include aviation, although this is less likely, and agricultural products, which is most likely, from member states in favour of the investigation, notably France and Spain. In fact, China already announced an anti-subsidies probe into pork imports from the EU on June 17, 2024.

EU car exports to China could be another target, which would be painful for Germany’s premium manufacturers, such as Mercedes-Benz, Audi and Porsche, with the latter only serving the Chinese markets through imports. From the start, the German government and big car manufacturers had their reasons for being opposed to tariffs.

If the EU and China cannot negotiate an alternative solution by 4 July 2024 and preliminary tariffs are imposed, Beijing’s retaliatory measures may lay the ground for a Chinese lobbying tour of member states this summer to prevent definitive tariffs being imposed in November. Berlin will most likely be on the list of stops.

About the author

Cora Jungbluth is Senior Expert in the Europe’s Future Programme at the Bertelsmann Stiftung. Her research focus is on China, foreign direct investment and international trade, especially the role of emerging economies.

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