Eventually, the EU is going to have to confront the fact that forcing drivers to switch to EVs threatens disaster for its auto sector.
Sooner or later the EU was going to have to confront the reality that its rush to force drivers to switch to electric vehicles (EVs) threatens disaster for its auto sector (which still accounts for about 6 percent of its workforce) thanks to the opportunity it has given EV Chinese manufacturers to enter the European market. It may now be beginning to do so.
Last week, Brussels announced that it was going to add up to an extra 38 percentage points on the existing import levy (10 percent) that it charges on imported Chinese EVs.
Unless averted in talks beforehand, these higher tariffs will take effect on July 4. The rates are provisional and vary by manufacturer (depending on how much state subsidy the EU’s investigation reveals it has received). BYD, China’s market leader, will pay an additional 17.4 percentage points. Carmakers that did not cooperate with the investigation will pay the full 38 percentage points. EV makers that were not asked to participate in the investigation will pay an additional average duty of 21 percentage points. This includes European (and other) manufacturers based in China, too. That may well be aimed, at least in part, at Tesla (the EU rarely sees an American company it doesn’t want to hobble).
The extra tariffs (unlike those being levied by the U.S. on Chinese imports) will not include EV batteries and other components. The EU wants to keep the supply chains open for its EV makers. Given its dominant position in that area, Beijing, I suspect, might be tempted to impose an export tax on EV batteries sent to the EU.
On closer examination, however, it turns out that the tariffs might not do that much to halt the flow of Chinese EVs into the EU.
CSIS:
The preliminary EU tariffs are unlikely to significantly reduce the growing tide of Chinese EVs entering the European market. A 2023 Rhodium Group study estimated that EU tariffs would need to reach the 45 percent to 55 percent range to make the European market commercially unappealing for Chinese manufacturers based on existing margins. While the proposed combined 48 percent duties on SAIC (and automakers “which did not cooperate in the investigation”) fall into this range, the rates for Geely and BYD remain below it. Even with the tariffs, BYD would reportedly still generate higher EV profits in the European Union than it does in China and could even pass along tariffs to consumers and remain lower priced than competing European models.
If that’s right, it confirms suspicions that the EU’s trade is too deeply intertwined with China’s for Brussels to truly risk raising the drawbridge. As such, the EU will have simultaneously both irritated Beijing and sent it a signal of weakness. However feeble these tariffs turn out to be, Brussels has also sent a message that moving over to EVs is not as vital to saving the planet as it has been claiming. If it was, it would not matter where the EVs came from. Drivers should take note.
Predictably, China has taken its first steps to retaliate.
Writing in the Daily Telegraph, Matthew Lynn explains that China has already begun to push back by commencing an anti-dumping probe into EU pork exports into China, which amount to some €3 billion. But, unless the EU backs down, Lynn doubts that China will stop there:
Beijing has hinted that it could raise tariffs on “large engine” petrol vehicles, a tactic designed to punish EU manufacturers. It won’t stop there either, with China’s Commerce Ministry warning on Friday that the EU risked triggering a trade war.
We should not be surprised if there are soon levies on Airbus planes — especially as China has now started manufacturing its own passenger jets — on pharmaceuticals and on machine tools and chemicals. The list will be a long one.
In Lynn’s view, the EU is too economically weak and too divided on the issue of trade with China to hold out.
That has lessons for the U.S. in two areas. The first concerns its still dangerously deep trading relationship with China, which needs to be scaled back. China is not our friend. The second concerns the way that the U.S. has hitherto passively accepted EU protectionism against U.S. high-tech firms, lightly camouflaged as either antitrust or tax enforcement. That has to stop, and, despite the administration’s own attitudes to both tax and antitrust, now might be a good moment to tell Brussels that.