The EU Chooses Engagement, Not Confrontation, in Its EV Dispute With China



Jacob Funk Kirkegaard | Peterson Institute for International Economics

The European Commission’s decision to impose new provisional tariffs on electric vehicles (EVs) imported from China came after nine months of investigation into China’s practice of subsidizing EV exports. Three Chinese producers were hit with three different anti-subsidy duties; BYD was hit with 17.1 percent; Geely, 20 percent; and SAIC, 38.1 percent. But the tariffs should be seen as the beginning of a process, not the end. A careful look at the European Union’s actions indicates its lack of desire to escalate trade tensions for political reasons and perhaps even willingness to find a negotiated settlement with China.

In addition to the three EV manufacturers mentioned, other EV producers in China that cooperated with the EU investigators received a weighted average duty of 21 percent. All other producers that did not cooperate were hit with the top 38.1 percent. These anti-subsidy duties come on top of the European Union’s regular 10 percent tariff on EV imports from China.

These new EU anti-subsidy tariffs are on par with those imposed following previous EU anti-subsidy investigations concerning imported goods from China. Rhodium Group estimates that collaborating Chinese firms in earlier investigations have faced new duties of an average of 19.7 percent. Meanwhile, in earlier EU anti-subsidy investigations, the exports of non-cooperating firms, such as coated organic steel products, received new duties of 44.7 percent, while Chinese exported truck and bus tires to the European Union in some cases were subjected to new duties of over 50 percent.

Imposing the lowest tariff on BYD, a leading firm that is opening a production facility inside the European Union, gives the company an advantage in the EU market. Its stock price has predictably benefitted. Similar circumstances pertain to Geely, which also has EU production facilities and enjoyed a relatively low additional tariff. By contrast, SAIC, which is the largest Chinese owned EV exporter to the European Union via its MG brand, has no current or planned EU production location. Its tariff will probably encourage it to locate EV production inside the European Union. As discussed in a previous blog, these circumstances add up to something functionally akin to Japan setting up auto production in the United States to avoid tariffs threatened in the 1980s.

Assuming that all EU-owned EV producers in China, as well as Tesla, cooperated with the EU investigation, they too face relatively low additional tariffs of 21 percent for EV exports to the European Union. And as researched by Rhodium, some China-based EV producers will suffer commercially from tariffs at this level. Rhodium estimated approximate differentials in profit rates for sales of EVs produced in China in both the Chinese and German EV markets, relying on available EV model manufacturer suggested retail prices. China-based EV producers like BMW, Tesla, and probably other foreign EV producers operating in China, as well as the Chinese company that makes the Nio, will face significant challenges for their future export profitability relative to their sales in China. The 21 percent tariff exceeds these firms’ estimated profit margin for sales in the German market, making exports from China unprofitable. However, these producers, of which most have EU-located production facilities, now instead have a commercial incentive to relocate EV production to Europe. It should here be noted, though, that the Commission in its announcement made clear that Tesla “may receive an individually calculated duty rate” later, and hence possibly face lower future commercial headwinds from these tariffs.

All told, the Commission has acted carefully after mounting a substantial anti-subsidy investigation, involving over 100 location visits and dozens of Commission staff, as discussed in an earlier blog post. New tariffs signal the political willingness—within World Trade Organization (WTO) rules—to confront Chinese EV trade practices while providing incentives for Chinese EV producers to locate production inside the European Union. And applying the lowest tariffs on BYD, the EV market leader in China and clearly the biggest commercial threat to EU car companies, points to the Commission following the facts of the case rather than being guided by crude protectionist instincts. This approach could set the stage for further cooperation in the future.

The Commission’s tariff announcement was for “provisional tariffs” on EV exports from China to the European Union, while “definitive tariffs” must now be set within four months. Definitive anti-subsidy tariffs, however, must be approved by a majority of the EU member states in the EU Council. Some member states may try to get the Commission to revoke or alter the proposed tariff levels to promote smoother trade relations with China in the auto sector. The final political review of the tariffs will also provide individual EV producers in China with the opportunity to seek their own (like Tesla) individually calculated (lower) definitive duty rate.

But the Commission’s cautious and fact-driven approach fostering more investment in Europe will make it harder for EU member states to challenge its decision. Perhaps the scope of the application of the top 38.1 percent tariff to non-cooperative firms can be negotiated at the margin, but it seems unlikely that the lower tariffs around the 20 percent level will be altered.

Will China respond to the European Union’s careful approach? Some retaliatory action against specifically targeted EU exports to China may be inevitable. These actions could affect EU agricultural imports as well as internal combustion engine (ICE) vehicles with large engines, or even aircraft, although given the global duopoly of Airbus and Boeing, the European Union is unlikely to punish the former to the benefit of the latter. China will also not want to antagonize German and other European car manufacturers that are among its allies in the fight against these new EV tariffs. Targeting the EU car industry for retaliation might be self-destructive. Various politically sensitive agricultural products hence seem a more likely trade outcome. China has now initiated an investigation into EU exports of pork and pork by-products to China.

Obviously, China has various other political and financial tools to retaliate. It could delay or redirect planned investments selectively to European countries backing the tariffs. Beijing is likely to take its time before responding to measure various countries’ reactions.

For China, the commercial bottom line is that the European market is important, especially because the US market has been closed off by the Biden administration’s tariffs, while Turkey (40 percent) and Brazil (35 percent by 2026) have recently introduced new EV tariffs that are even higher than EU levels. Beijing has every incentive to avoid an escalatory trade war with the European Union in the EV sector.

Finally, because the European Union followed WTO rules in its investigation of Chinese subsidies, it is signaling that it is not following the “rogue” path of the Biden administration justifying its EV tariff action on national security grounds. So perhaps Beijing will hold its fire also for political reasons.

The Chinese government might take this dispute in the EV sector to the WTO, perhaps as part of its Multi-Party Interim Appeal Arbitration Arrangement, to which both China and the European Union are parties. Such a move would help China to be seen as playing by the rules, unlike the United States, and it could even signal a potential settlement of the EU-China dispute on EVs.

To read the full blog piece as published by the Peterson Institute for International Economics, click here.