Who are the winners and losers of the EU’s duties on Chinese electric cars? The European Commission has announced countervailing duties on the import of electric vehicles from China. This measure will create winners and losers and ultimately lead to the opening of new electric vehicle factories in Europe.
Last week, the European Commission (EC) announced countervailing duties it will impose on automakers importing electric vehicles from China.
A year-long study by European analysts found that car manufacturers are receiving financial support from the government beyond the rules of the World Trade Organisation, which disadvantages European producers.
China will respond, that much is certain, but will it lead to an escalating trade war?
The EV brass tacks
The structure of the countervailing duties is rather surprising and ambitious. Two Chinese automakers have received tailor-made duties, as they cooperated with the Commission and transparently documented the level of state support they received.
China’s largest automaker, BYD, which plans to open an EV factory in Szeged, Hungary within the next three years, will receive a 17% duty. Another automaker, Geely, will receive a 20% duty.
Compare these figures to the state-owned Chinese automaker SAIC whose opaque practices will receive 38% duty since it refused to cooperate. Almost all other automakers will receive a 21% duty, which was calculated as the average rate of state support.
Countervailing duties of 38% are very rare and typically range in the area between 15% to 25%. On the other hand, they are still significantly lower than those imposed by the United States on Chinese automakers – a full 100%.
It’s important to note that the EC did not distinguish between Chinese and European manufacturers in its analysis.
For example, the automaker BMW, which manufactures vehicles in China and also supplies them to the European market, will receive a 21% duty (they cooperated), the same applies to the American Teslas manufactured in Shanghai (Tesla immediately applied for individual reevaluation). On the other hand, Volkswagen, which manufactures the Cupra Tavascan in China – a model specifically for the European market – will receive a 38% tariff, as it apparently did not cooperate.
The EC decided to impose duties on all car companies because it was found that state support is not only provided to specific automakers but the entire supply chain is subsidised. From lithium refining, through battery cell production, to transportation to Europe, Chinese producers receive state support at every step.
Every local automaker benefits from these subsidies.
How will this affect automakers
BYD, which received the lowest duties, will have cars priced below €20,000, positioning them favourably in the EU as their EVs will remain significantly cheaper than the European competition, even after duties are applied. This makes BYD an unambiguous winner, threatening the production of lower-priced electric vehicles by European producers.
Additionally, BYD is the first Chinese automaker to build a factory in Europe, exempting it from duties and likely consolidating its dominance. Similarly, Geely, which owns Volvo and faces lower duties, is well-positioned to continue exporting to Europe.
On the other hand, there is the SAIC, the second largest electric vehicle manufacturer in China, which will face the highest duties and currently has no plans to manufacture in Europe. SAIC is heavily dependent on exports to Europe, so the new duties will likely significantly damage its position and profits. This is why analysts are expecting a strong reaction from the Chinese government.
However, it is difficult to predict how the countervailing duties will impact European manufacturers. On the one hand, they should be able to better withstand price competition, but on the other, several of them are dependent on the Chinese market, which may partially close if Beijing chooses to retaliate.
Nevertheless, the duties alone may not suffice for European automakers if they do not invest significantly in research and development. Chinese automakers are surpassing them not only in the price and quality of batteries but also in the software and digital equipment of cars. European conglomerates not only incorrectly assumed that electromobility would not catch on, but Europe is also still lagging behind other regions in investment.
A different precedent is seen in the United States. General Motors received billions in tax breaks plus protection from Chinese competition in the aforementioned 100% import duties on Chinese cars.
Instead of using the situation to catch up with their Chinese rivals, however, the management decided that it was time to raise the company’s stock price and invest $6 billion in share buybacks.
Central and Eastern Europe to Benefit from Tariff Circumvention
Is it possible to circumvent tariffs in some way?
There certainly are a few options. Some companies will focus on importing hybrids, which are not subject to tariffs. Others will expand production in Europe, either independently like BYD, or through joint ventures with European partners, as seen in the case of the collaboration between Stellantis and the Chinese company Leapmotors in Poland.
A third approach could be licensing, where a European automaker manufactures electric vehicles for its Chinese partners, something Geely plans to do with the Polish state-owned automaker ElectroMobility.
Whether the Chinese producers opt to partner with European carmakers, license or build their own car factory, all three options have a common denominator: location.
More specifically, the vast majority of the newly announced ventures are concentrated in Central and Eastern Europe, namely in Hungary, Poland and Slovakia. Therefore, “circumventing” tariffs by localising production could counterintuitively have a positive impact, as it would create new jobs in the CEE region. Perhaps even more importantly, it would also bring the latest technologies and production processes from China to Europe.
This would paradoxically repeat the situation from the 1980s and 1990s when a technologically advanced automaker came to a less developed market and began using the latest technology in car production in cooperation with a local automaker. The domestic automaker is responsible for sales, marketing, communication with local authorities and after-sales service. The foreign automaker provides the know-how, engineers, processes and investments.
After four decades, the Europeans and the Chinese have reversed roles.
Central and Eastern Europe is poised to receive large amounts of FDIs, benefit from technology transfer and cement its role as a car manufacturing powerhouse. While the local politicians are enthusiastic about Chinese investment, it remains to be seen whether they will follow the Chinese example and seize the opportunity to upgrade their country’s position in the value chain.
The rapid extension of the Chinese EV value chains into the CEE region entails not only opportunities but also challenges. Deepening of the CEE’s automakers’ dependence on intermediate inputs supply from China will expose them to geopolitical vulnerabilities, ranging from transport disruptions to trade weaponisation by sovereign actors.
Three years ago, China weaponised the European automotive industry’s export dependence on its market to pressure Lithuania; the current buildup of Chinese EV production in the region increases import dependencies that can be exploited in a similar manner. Such action is not merely a theoretical possibility, rather, it is becoming a standard device in China’s economic statecraft toolkit, as evidenced in the recent curbs on exports of gallium and germanium.
The opportunities and especially challenges arising from the fast inroads of the Chinese EV producers into Europe should serve as a wake-up call for both European politicians as well as manufacturers to take investment in electric vehicle production, research and development seriously. Other European industries, from aircraft manufacturers to the chemical industry, should also observe carefully.
The article was originally published by Visegrad Insight.
