The European Union is considering imposing anti-dumping duties on electric cars imported from China, citing concerns that producers in China are benefiting from government subsidies. If this were the case, punitive tariffs would seem to be a reasonable countermeasure at first sight. However, the story of China’s EV industry is much more complex than the EU’s move suggests, and there are smarter tools to deal with the issues at hand.

In her State of the European Unions Speech, Ms. Von der Leyen announced “that the Commission is launching an anti-subsidy investigation into electric vehicles coming from China” to defend against unfair practices while remaining open for competition. The investigation could result in punitive tariffs against EVs imported to the EU from China.

The mere announcement of the investigation has already triggered an indignant reaction from Beijing, and it is almost certain that China will retaliate in kind – as often is the case with rounds of punitive tariffs and counter-tariffs, leading to a vicious circle and sometimes even to a full-fledged trade war.

Subsidies – what are their trade and investment effects?

Subsidies refer to financial benefits granted by the state to companies and private households without receiving anything in return. If a country exports subsidized products, this has consequences for the global economy.

On cross-border trade, they could have the following two key effects:

  • First, the subsidized product would be offered at a lower price (below the recipient country’s market price). Local consumers would profit from this to the disadvantage of local producers.
  • Second, the subsidized product reduces the competitiveness of other producers on the world market, leading them to lose market share not only in their home markets but in third-country markets, too, and as a result, production, employment, and incomes would fall in their home countries.

On local investment, subsidies could have the following effect:

Imported subsidized products reduce the sales expectations of local companies. As a result, the incentive to invest decreases. This may weaken production, employment, and the future growth potential of the recipient country.

China’s EV industry – the story is more complex than you think.

It is thus clear that subsidies can have a harmful effect on trade partners, their local economies, and their position in third markets. That is exactly the reason why the option to take countermeasures against this kind of dumping activity is compatible with WTO rules under certain circumstances.

It is also clear that due to China’s unique political and economic system, the Chinese government has substantial political leverage on the economy that goes far beyond what governments in market economies are able to achieve.

It is also a fact that China has resorted to subsidies in the past to achieve policy goals, causing distortions on international markets, such as was the case with the solar industry, which led to the EU imposing anti-dumping and anti-subsidy measures on Chinese solar cells and modules in 2013.

This nearly led to a trade war between the EU and China, while the measure did little to achieve the desired goal, namely to make the European solar industry more competitive again: In 2022, more than 90 percent of Europe’s solar panels were imported from China.

However, the case of China’s EV industry is much more complex, and its rise is not only due to subsidies. Already in 2001, the Chinese government included the promotion of battery systems, which are crucial for the evolution of EVs, into its five-year plan and corresponding policy measures.

From 2008 onwards, the promotion of EVs became a priority in China’s economic policy. It is worth noting that this occurred under then Minister of Science and Technology Wan Gang, a former manager of German car maker Audi. This was a risky endeavor that consumed a lot of money, while its outcome was far from clear at that time.

According to one estimate, subsidies and tax breaks for the EV industry in China amounted to over 200 billion RMB ($29 billion) between 2009 and 2022. In addition, public procurement favored the purchase of EVs for local public transportation, and incentives were given to consumers, such as EV waivers for car license plates, which are limited in many of China’s populous cities, and other purchase subsidies. The innovative power and entrepreneurial spirit of the private sector also should be accounted for in the rise of China’s EV industry.

These efforts have started to pay off by now, as China has turned into the world’s largest market for EV sales, with a share of 60 percent in 2022. China accounted for 35 percent of electric car exports in the same year. And it is not only Chinese car makers that have benefitted from this development: those foreign companies that had dared to venture into this new ground-breaking technology did, too. Forerunner Tesla is estimated to account for 49 percent of electric vehicle exports from China between January 2021 and March 2022.

chinese exports of electric cars
Source: MERICS

While these developments were happening, Europeans, especially German car makers, were happy selling their internal combustion engine (ICE) cars to China, knowing their comfortable technological edge would give Chinese competitors a hard time catching up.

The situation has reversed now. European companies are struggling to keep up with local car manufacturers in China: ICE engine star VW only has a 3.7 percent share in electric car sales in China (incl. hybrid). They also increasingly struggle on their home markets back in Europe, as more and more EVs are manufactured in China and exported to other markets. China’s share in the EU’s EV market accounted for 8 percent in 2022.

Fearing unfair competition for European companies on European markets powered by Chinese state subsidies, this development has led the European Commission, supported by France in particular, to the decision to launch the above-mentioned investigation. Germany was more hesitant about this measure, even though its Minister of Economic Affairs, Robert Habeck, backed the investigation once it was announced.

The Association of German Automobile Manufacturers (VDA), which speaks for the industry that is supposed to be protected against unfair competition from China by the envisioned measures, is highly critical of the investigation. They fear Beijing’s retaliation on the one hand. On the other hand, they are doubtful of the effectiveness of anti-dumping measures. Indeed, it is more than questionable whether a simple trade instrument like this – a possible outcome of the investigation – is the right solution to such a complex problem.

If the EU was flooded by subsidized EVs from China, would anti-dumping tariffs help?

Short answer: No. At first glance, anti-dumping duties appear to be a reasonable response to subsidized products from another country. However, their economic success is likely to be limited, as the lessons from the solar industry have taught us.

On the EU internal market, EU tariffs ensure the price competitiveness of European companies if they eliminate the competitive advantage caused by foreign state subsidies. However, this is paid for by EU consumers, who have to pay a higher price for Chinese EVs. Moreover, in the third-country markets both the EU and China export to European tariffs are not effective. So here, the price advantage of subsidized Chinese products remains.

Imposing tariffs on EVs imported from China, moreover, raises the question of how to deal with the EVs that US and European companies produce in China and export to the EU or plan to do so. They will be hit by the tariffs, too, which could backfire on their respective home economies.

In addition, it can be assumed that China will not leave EU anti-dumping duties unanswered. On the contrary, it is to be expected that China will respond with punitive tariffs against EU products. It is also unclear how the Chinese government will deal with existing direct investments by the EU in China – for example, production facilities owned by European car manufacturers in China.

All in all, anti-dumping duties have more disadvantages than advantages, which speaks against their use. Nevertheless, Chinese subsidies should not remain completely unanswered. Above all, the danger of declining investment in the EU calls for an economic policy response.

Beyond tariffs: Smarter policy measures could be a more effective response

First of all, a serious push to promote the EV industry in the European Union, which is clearly lagging behind, is necessary. Creating a more favorable production and R&D environment is key here, but these measures take time and cannot compensate quickly enough for the fact that European automotive suppliers did not focus on EVs in good times.

Hence, if the European Union really wants a thriving European EV industry with vibrant local production sites, a set of policy measures is necessary that, in size and scope, would be comparable to the European Chips Act. Tariffs just won’t do the job. To be realistic, however, even if the EU put a “European EV Act” into place, it would take 5-10 years for its effects to unfold.

In the meantime, more fast-acting measures are necessary to avoid Europe being swept off the EV playing field completely. One possible fast-acting measure is super write-offs for investments in the area of climate-friendly e-mobility. Looking at Germany, for example, this means that the depreciation period for climate-friendly investments could be reduced from the current ten years to four.

Companies could write off their investments more quickly, which increases their incentive to make investments. Accelerated depreciation is also advantageous in that it merely shifts government tax revenues backward but does not reduce them. However, tax incentives in the EU internal market must be in line with competition law. An EU-wide regulations would therefore be desirable, which would require adjustments to the EU’s competition law.

The EU could also check whether it is still possible to use public procurement combined with local content or anti-subsidies rules as a lever to promote EVs “made in Europe”, i.e. a systematic EU-wide role-out to electrify public transport or obligatory EVs as official cars for politicians. Again, these measures would have to be in line with internal EU regulations and WTO rules.

Even though they might prove trickier and much more complicated to implement than tariffs, it would be wise for the EU to take more creative policy measures to counter Chinese subsidies. This most likely would better help its automotive industry survive a technological transformation it did not take seriously enough for too long.

About the authors

Cora Jungbluth is a senior expert in the Europe’s Future Program at the Bertelsmann Stiftung. Her research focus is on China, foreign direct investment and international trade (especially the role of emerging economies).

Thieß Petersen is Senior Advisor at the Bertelsmann Stiftung, specializing in macro-economic studies and economics. His focus lies on the causes and effects of financial and economic crises as well as the chances and risks of globalization. Among others, he has recently worked on the effects of carbon pricing and the benefits of a potential global climate club.

Further Reading

Why Germany’s Newly Released China Strategy is More Than Just a China Strategy

Why the EU’s Visit Diplomacy with China Needs a Radical Change

Five Reasons Why the EU Needs a Strategic Trade Policy