‘Grand theft auto’: Why has the EU declared war on Chinese EVs?

Two of the biggest global trading partners are beating the war drum over environment-friendly cars.

Accusing China of flooding the European market with electric vehicles (EVs) produced on heavy state subsidies, the European Union (EU) is all set to impose higher tariffs on Chinese automotive exports.

Never the one to take trade restrictions lightly, the world’s second-largest economy has warned the EU of retaliatory measures, like heavier duties on European exports of dairy products.

Analysts expect that a tit-for-tat will lead to idle production capacities and rising consumer prices, destabilising global trade and having disastrous consequences for everyone.

“There is a strong potential for this to turn into a full-blown trade war,” says Stephen Olson, Hong Kong-based analyst, who serves as a senior adjunct fellow at the Pacific Forum and non-resident fellow at Yeutter Institute.

“Green technologies and the automotive sector are absolutely critical for the EU. They will not remain idle if they feel these industries are being damaged by unfair trade practices. China will respond in kind. The likely end result will be damaging tariff or non-tariff barriers placed on both countries. There won’t be any winners, both sides will be worse off,” he tells TRT World.

China has taken the lead in both production and sales of EVs. The Global EV Outlook by the International Energy Agency (IEA) shows that more than eight million electric vehicles were sold in China last year, which is about 60 percent of the global market.

The European Commission, the executive arm of the EU, is expected to provisionally increase the rate of import duty on Chinese EVs from 10 percent to about 20-25 percent.

The hike will follow the EU’s probe into allegations that China doles out “unfair state subsidies” to its EV makers. As a result of those subsidies, Chinese EV makers allegedly enjoy a 30 percent cost advantage over their competitors.

“Their price is kept artificially low by huge state subsidies. This is distorting our market,” said European Commission president Ursula von der Leyen in her State of the Union address in September.

“Global markets are now flooded with cheaper Chinese electric cars," she said.

A BBC report stated that the starting price of BYD Seagull, a small Chinese EV, is roughly $9,600 within China. Its price “at least” doubles because of safety regulations once it’s exported to the EU. Yet the European user gets to purchase the EV at a “very cheap” rate compared to the going price for EU-made EVs.

The IEA estimates six of every 10 EVs sold in China in 2023 were cheaper than their average combustion-engine equivalent. However, EVs remain 10-50 percent more expensive than their combustion-engine equivalents in Europe and the United States, depending on the country and car segment.

“There is no question that China heavily subsidises its EV sector. The question will be the extent to which the EU can demonstrate these subsidies are unfair and are resulting in a commercially damaging surge in under-priced EV exports into the EU,” says Olson.

What does the EU want?

Unlike the US —which is waging an all-out war against the Chinese EVs in the shape of recently imposed tariffs of 25-100 percent—the EU is likely to adopt a “proportionate” response to the invasion of environment-friendly cars from the world’s manufacturing hub.

According to Matthias Schmidt of Schmidt Automotive Research, a 25 percent or less EU tariff on Chinese EVs would be tantamount to “levelling the playing field.” Such a tariff would even out the 30 percent cost advantage that Chinese manufacturers enjoy over their European counterparts.

However, the real problem is that politics seems to play a bigger role in the likely imposition of higher tariffs than the mere economic interest of European carmakers.

For example, Europe-based BMW produces EVs in a Chinese factory and then imports and sells the same in EU markets. Imposing a higher tariff on China-made EVs will put European automakers like BMW at a distinct disadvantage on their home turf.

Similarly, EVs by US automaker Tesla will also become pricier in the EU because the company runs a factory in China, which accounts for over half of its global deliveries and the bulk of its profits.

Moreover, many EU-based automakers sell their top-range models in China. China will likely counteract and impose higher duties on the import of high-value EU-made cars, hurting European automakers.

With far-right political groups winning support in the recently-concluded elections for the European Parliament, analysts expect the wave of protectionism to gain further momentum within the EU.

These groups are generally opposed to the Green Deal, a set of policy initiatives approved in 2020 by the European Commission with the overarching aim of making the EU climate neutral by 2050 by taking measures like the adoption of EVs.

“The dust is still settling, so it’s hard to gauge with precision. But I think it is safe to say that the (EU) election results will not produce a more accommodating stance on China trade issues and more likely the reverse,” says Olson.

China has threatened to take “all necessary measures” to protect the interests of Chinese businesses.

One study estimates that the imposition of additional tariffs on EVs by the EU may cost China up to $4 billion in trade. Beijing has been the largest external exporter of goods to the EU since 2005 when it overtook the US. Beijing is also the third largest destination for EU exports.

“Both sides need to show restraint. China, in particular, should recognise that it would be untenable for the EU to accept a surge in dumped EVs from China,” says Olson.