EU punitive tariffs on Chinese electric cars: beginning of a risky spiral?

EU punitive tariffs on Chinese electric cars: beginning of a risky spiral?
EU punitive tariffs on Chinese electric cars: beginning of a risky spiral?

The EU sees the planned punitive tariffs on Chinese cars as a signal of strength to Beijing. But they may further weaken the struggling local industry.

This is original content from the Capital brand. This article will be available for ten days on stern.de. After that, you will find it exclusively on capital.de. Capital, like the star to RTL Germany.

When it comes to the European Union’s (EU) announced tariffs on Chinese electric cars, the Chinese government and the German car industry are striking a surprisingly similar tone these days. The measure is protectionism, said a spokesman for the Beijing Foreign Ministry on Wednesday: damaging to the market economy and trade rules. Mercedes boss Ola Källenius recently expressed himself in almost the same way. “Ultimately, this would harm the European Union’s own interests,” said the Beijing civil servant.

BMW boss Oliver Zipse summed it up similarly on Wednesday: “The EU Commission is damaging European companies and European interests.” And VW China board member Ralf Brandstätter stood in a hotel on the sidelines of the Beijing auto show a few weeks ago and politely fended off the question about China’s support for the local auto industry: he could not see any special subsidies in the country for Chinese car manufacturers. That is exactly how the Beijing government argues.

The question of subsidies is crucial for the tariffs that the EU Commission announced on Wednesday. Its position: China is unduly supporting domestic car manufacturers, so the EU has the right under international trade rules to increase its import tariffs for Chinese electric cars – from ten percent to between 27 and 48.1 percent. The EU wants to use this to protect the domestic car industry from dumping imports.

The Commission has set the Chinese a deadline of July 4 for negotiations. From then on, the tariffs can be provisionally imposed, and in the autumn a final decision will be made on the new import restrictions – initially for five years. It seems doubtful whether an agreement is still possible. The Chinese government has not cooperated to the best of its ability in the process, complained a diplomat in Brussels.

German carmakers reject punitive tariffs

What is astonishing, however, is that those whom the EU claims to protect are fighting tooth and nail against this protection. At least as far as the German car industry is concerned. VW, Mercedes, BMW & Co. fear that possible countermeasures from Beijing would harm them much more than the tariffs would help them. The Germans are afraid that the tariffs will start a mutual escalation with mutual trade restrictions. And not just in car manufacturing. BMW boss Zipse spoke of the “danger of setting a spiral in motion”. He predicted: “Tariffs lead to new tariffs, to isolation instead of cooperation.”

The Chinese government has already considered high tariffs for expensive cars from Europe. This would particularly harm Porsche and Mercedes, which do not manufacture their large cars in the country or only partially do so and already have sales and price problems in China.

The Berlin government is on the side of the German car manufacturers, but it did not prevail in Brussels. Even with allies such as Sweden and Hungary, and perhaps also the Czech Republic and Slovakia, it is unlikely to have any chance of overturning the Brussels vote. Tariff advocates, including the governments of France and Spain, accuse the Germans of premature obedience to the oncoming export machine from China, which will “flood Europe with cheap electric cars,” as Commission President Ursula von der Leyen said. Premature obedience out of dependence: Germany’s car manufacturers sold a third of their cars in China in 2023, and the Germans are even more dependent on the world’s largest car market for profits.

Electric cars from China hardly relevant in the EU

In fact, Chinese electric cars – contrary to von der Leyen’s statement – have so far played little role in the European market. Across Europe, the share of cars “Made in China” in the electric car market in 2023 was 19 percent, in Germany 15 percent. They were also predominantly high-priced cars. More than half also came from Western manufacturers such as Tesla, BMW or the Renault subsidiary Dacia, which manufacture cars for Europe in China.

So far, China’s car manufacturers have been making slower progress in exports than expected, the local industry association CPCA admitted at the beginning of the week. In May, for example, exports even fell compared to the previous year’s figures, according to the association’s data. “The export data did not meet our expectations,” said Secretary General Cui Dongshu. Industry experts believe that the big wave of exports will not start until 2026. The EU argues that it is necessary to prepare for this now. Tariff sceptics, on the other hand, fear that European manufacturers who are successful in China will have to pay dearly for the measure.

Depending on the manufacturer and willingness to cooperate in the EU process, different tariffs will now be due from July 4th, in addition to the ten percent that previously applied: The Chinese car market leader BYD will receive the cheapest rate of 17 percent. The manufacturer “cooperated very well” and, according to the EU investigation, received fewer subsidies than others. The Geely Group must pay 20 percent extra tariff. The Shanghai state-owned company SAIC, which has had some success in Europe with the MG brand, will be charged an additional 38.1 percent. SAIC has cooperated just as little as the government, the EU Commission said.

Tesla will also be subject to an additional 21 percent tariff, or a total of 31 percent. Tesla produces the Model 3 for Europe in its factory in Shanghai. However, the tariff rate for the US manufacturer could still fall; according to the EU Commission, Tesla is the only car manufacturer to have applied for an adjustment of its tariff rate.

Volvo is one of the western manufacturers affected by the tariffs. The Swedish carmaker has the EX30 compact SUV manufactured in China, a car that sells extremely well in Europe. From next year, Volvo wants to build the car in its Belgian plant in Ghent, but this was already planned before the current tariff discussion. There is no way to speed up the start of European production now, Volvo Vice President Björn Annwall told Capital: “You can’t do it overnight,” he regretted. Volvo has been part of the Chinese car conglomerate Geely since 2010 – the connection is probably one reason why the Swedish government is also against the tariffs. Volvo’s imports will now be subject to the 30 percent tariff rate applicable to Geely.

Punitive tariffs: harsh or moderate?

The EU has opted for rather harsh measures with the tariff rates. The industry had expected rather moderate tariffs of between 25 and 30 percent, but now they are significantly higher. Nevertheless, Commission representatives claim that this is a “moderate measure”. They point to the import tariffs of other large markets such as India, Brazil and Turkey, but of course especially the USA. A few weeks ago, US President Joe Biden announced tariffs of over 100 percent on Chinese cars. Unlike Biden, they are acting strictly in accordance with the rules of the World Trade Organization (WTO), according to EU representatives. Regarding the fear of countermeasures, they said: “Possible countermeasures played no role in our investigation.” From the EU’s point of view, they would be “completely unacceptable”.

Other goods from China are also affected by the US tariffs. There has been a discussion in the West for some time about how to deal with possible Chinese dumping imports. China has built up a powerful industry in many sectors – supported, for example, by cheap loans from state-owned banks – which is now increasingly leading to overcapacity. This is also because the domestic market is no longer growing at the same pace as in the years before and immediately after the corona pandemic. The alternative from the Chinese perspective is export – if America closes its doors, even more so to Europe. Many in Europe see this as a targeted attack on local industry. The argument from China, on the other hand, is that the mature Chinese industry is now taking advantage of its export opportunities, just as Western industry has been doing in China for decades.

Despite the harsh measures, there is a vague hope in the European industry and politics that the tariff dispute between the EU and China will be less serious than the emerging trade war between the USA and China. In recent weeks, those involved have speculated that Beijing could respond with limited countermeasures that could mainly target luxury goods from France and Italy. The resistance would then mainly affect the countries that had pushed hardest for the tariffs. The Chinese government has already invited talks, according to the EU Commission. But so far there have been no public signals from China that the signs are pointing towards de-escalation.

Source: Stern

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