Beijing wants to retaliate against Europe’s investigation into Chinese EV subsidies. An aspiring friend would be the worst hit.
On May 21, the China Chamber of Commerce in the European Union announced that they have learned from well-informed sources about the Chinese government’s plans to impose a 25 percent tariff on the import of large automobiles from the European Union (EU) and elsewhere China apparently is considering this step in response to the European investigation into suspected illegal subsidies by the Chinese government to its automakers. According to European politicians, China’s electric vehicle (EV) manufacturers received billions of euros beyond what is permitted by the World Trade Organization’s rules.
This move is the latest salvo in the intensifying trade war between the EU and China that erupted last year. However, the threat contains a significant implication, which is perhaps not immediately visible. A Chinese tariff on the import of SUVs from the EU would be incredibly damaging for Slovakia, the EU’s second-largest exporter of such cars and one of China’s aspiring friends on the continent.
Until now, smaller European countries have mostly stood by as larger nations have taken the lead on economic security measures toward China. One notable exception is Hungary, which has actively – and successfully – courted Chinese investments in the electric vehicle industry. Now, due to its economic structure, Slovakia has been involuntarily entangled in the recent spat.
Slovakia’s high dependence on SUV exports
Known as the Detroit of Europe, Slovakia is the world’s largest producer of automobiles in per capita terms. However, the country’s outsized dependence on car manufacturing and exports makes its economy highly vulnerable to external developments.
The current threat from Beijing is a clear example of a potentially damaging exogenous shock. Slovakia’s exports to China are heavily concentrated in large-engine vehicles, particularly the Volkswagen Touareg, which are now being targeted by the potential tariffs.
The country has not only a high dependence on exports to China, but the exports are also incredibly concentrated in very few products. A brief look at the trade statistics shows a textbook example of an economy with an extremely skewed and unhealthy structure. Slovakia has the highest share of exports to China (2.7 percent in 2023) within the Visegrad Four countries (which comprises Poland, Hungary, and Czechia alongside Slovakia) and one of the highest in Europe. These exports are concentrated precisely in the shipments of SUV-type cars (78 percent of all exports). If that were not enough, the largest company in the country – Volkswagen Slovakia – generates a quarter of its revenue from the export of SUVs to China.
The statistics for European exports of cars with engines over 1.5 liters clearly show that since mid-2018, such cars have effectively been exported only from Germany and Slovakia. And although the Germans export much more than Slovakia, the eastern European country would feel any decline in Chinese demand for the cars it produces much more painfully, as SUV exports are more important to its economy in relative terms.
Dilemmas in Sino-Slovak Relations
Ironically, Slovakia’s current government, in power since end of October 2023, has been vocal about its ambitions to improve its relations with China. This is a part of the new government’s eastward turn, as Slovak diplomats are also working to enhance partnerships with South Korea, Japan, Vietnam, and Russia, whose Foreign Minister Sergey Lavrov recently met with his Slovak counterpart.
The government’s pivot toward China has led to the negotiation of a strategic partnership agreement, set to be signed in Beijing during the second half of June. After the unsuccessful assassination attempt on Slovakia’s Prime Minister Robert Fico in early May, it is unclear who from Slovakia (if anyone at all) will still travel to China as planned. The timing of the signing notwithstanding, it is clear that the Slovak government has been making concrete steps toward improving relations between the two countries.
Given the tension between the improvement in relations between the two countries and China’s potentially damaging action, it is necessary to consider the rationale behind the Chinese steps. It could be that the Chinese policymakers indeed want to inflict pain on Slovakia in order to press harder on the EU establishment. Alternatively, Beijing might be aware of the disruption it would cause to Slovakia but is willing to take this “collateral damage” as a price to pay for coercing the EU politicians into changing policies they do not like. A third possibility is that Chinese policymakers may simply not be aware of the consequences of these actions for Slovakia.
As a start, it needs to be understood that the informal nature of the information about China’s still-hypothetical tariffs implies that this is not a well-thought-out and planned legislative step. It is only a part of the Chinese side’s attempts to put pressure on the European Commission, which is yet to decide whether to impose increased tariffs on the import of Chinese cars and at what level. This would follow the recent step taken by the United States, which imposed tariffs of up to 100 percent on the import of Chinese electric vehicles. The Chinese government is naturally opposed to any change in tariffs and is hinting at how it would react if they were implemented.
China’s reaction makes it clear that they are primarily trying to pressure Germany. The current investigation of Chinese car manufacturers by the European Union was initiated by the French, while the Germans have been reluctant and are not inclined to support this step, precisely because their car manufacturers either export a lot to China or have high investments there. China is thus clearly putting pressure on the Germans to stop the new tariffs.
If Germany is the primary recipient of the Chinese message, then the consequences for Slovakia are, from China’s point of view, either collateral damage – if the Chinese government is aware of it – or unintended consequences, in case there’s no knowledge of the issue in Beijing.
China’s Approach Toward Structural Tensions
In broader terms, it will be interesting to observe how China navigates the tension between pursuing its economic objectives – which, among others, include maintaining export dominance for key industries – and managing its relations with friendly countries. A number of countries in Central and Eastern Europe are dependent on the automotive industry. There are also a growing number of populists in the region seeking to improve relations with China, most notably Slovakia’s Robert Fico.
However, if China’s aspiring friends in the region start experiencing an economic downturn caused by a slump in industrial production due to Chinese competition, they might be forced to embrace more protectionist measures. Countries like Slovakia have been very slow in adopting the de-risking framework adopted by the European Commission in 2023, yet they are aware of the precedents set by the solar industry, where Chinese companies completely pushed European competitors out of the market. Most European companies went bankrupt, and today only a small number of people are employed in this industry.
Given the exponential growth in Chinese car production, there are concerns the automotive industry could follow a similar trajectory to that of solar panels a decade ago. The difference, however, is that the automotive industry is crucial for many European countries. About one in every 14 employees in the EU works directly or indirectly in this industry.
The combination of the de-risking legislation on the EU level and the threat to the competitiveness of European car producers means that even China-friendly countries are currently on a structural trajectory toward a more conflictual relationship with the East Asian giant. As the Slovak example shows, the Chinese government does not appear to have a plan on how to manage such conflicts even with countries that are keen to maintain friendly relations.
Tha article was originally published by The Diplomat.
