European Union duties on electric vehicles point to new era of EU-China relations
European Union duties on electric vehicles point to new era of EU-China relations
The European Commission’s plan to impose countervailing duties on electric vehicles (EVs) from China barely survived a Council of the European Union vote on 4 October. Five EU countries voted against the duties, including Germany, which moved from abstention in a previous vote. Spain was also expected to vote against after prime minister Pedro Sánchez called for reconsideration during a visit to Shanghai in September. But Spain ultimately abstained, probably because Sánchez realised there was insufficient support to block the tariffs.
China had pressurised key countries to vote against the tariffs. It started anti-subsidy/anti-dumping investigations into cognac, pork and dairy. China has also threatened to curtail its foreign direct investment in EV manufacturing in the EU. China’s response to the EU duties is more aggressive than its response to the United States' and Canada’s 100% tariffs on Chinese EVs (though China has started an antidumping investigation into Canadian rapeseed).
China’s response to the EU measure deserves attention. It seems clear that China has more leverage over the EU than other parts of the world, which contrasts with the EU’s large market size for Chinese EVs (55% of Chinese EV exports go to the EU). China’s leverage arises from two major European weaknesses. First, the EU is unable to speak with one voice, even on trade, its most centralised competence after monetary policy. Second, the EU depends on China much more than do the US or Canada.
The EU’s main dependence comes from imports, especially of critical components for the digital and energy transition. In addition, some large European companies depend on China’s market. The situation has not improved despite the EU plan to de-risk from China – meaning to manage the risks related to economic and technological dependence. On the contrary, EU dependence on China continues to rise, while the opposite is true for the US.
EU dependence on China also arises from years of European investment (mostly German) in China’s auto industry. European automakers now export EVs from China into Europe, exposing them to the EU countervailing duties. While it seems logical that any company – including those from Europe – that receive foreign subsidies to enter the EU market should be penalised to avoid unfair competition, the German government voted on 4 October to protect these automakers and not the single market.
That the largest EU country is ready to make such a move should sound the alarm about how much some major European companies operating in China are influencing EU trade strategy. This also makes EU de-risking from China all the more urgent if the EU wants to preserve its independence when conducting economic policy.
De-risking and economic security will, no doubt, come at a cost, but so will inaction. To reduce the cost, the EU must jump from relying on defensive measures, such as the countervailing duties on EVs, to aggressive action to increase competitiveness. The cost of producing an EV in China is still lower than elsewhere even if subsidies are not factored in, because of China’s impressive technological upgrade and because of massive economies of scale. Most analysts focus on the former as the main barrier for the EU in competing with China on green tech, but this might not be the case.
In fact, part of the technology embedded in Chinese green tech originated in the EU or the US but received no government support while still unprofitable. The US is clearly trying to change this situation with a massive industrial policy push, including through the CHIPS and Science Act and the Inflation Reduction Act. Whether this is a success is still unclear. The EU, by contrast, is still scrambling to build a credible industrial policy plan that will make its innovation commercially viable. This is particularly important for the EU because compared to the US it lacks the capital markets needed to scale-up innovation.
China’s huge economies of scale will be much harder to emulate in Europe unless a true single market is developed. Beyond strengthening the single market, the EU also needs to be much faster at building – and rebuilding – partnerships with other major economies, notably in the Global South. Partnerships are needed beyond markets and sourcing. They will also help reduce the cost of potential retaliation from China against defensive actions such as the current duties on EVs. The main tool for this is coordination of economic security measures, mainly with the G7 and other like-minded economies.
Overall, the Commission’s duties on Chinese EVs signal that the time in which China-EU relations were governed by engagement is over. China and the EU now compete with the same type of products on third markets. It is more important than ever that the rules of the game are fair.
* This is a reprint. This article has been published by Bruegel.