The European Union (EU) is expected to impose tariffs on Chinese electric cars this week due to concerns that China is selling them at artificially low prices. This move could significantly impact the global electric vehicle (EV) market, posing challenges and opportunities for both European and Chinese manufacturers. Let's dive into the details to understand why this is happening and what it means for the automotive industry.
The Rise of Chinese Electric Vehicles
The BYD Seagull: A Case in Point
The BYD Seagull is a tiny, affordable electric vehicle that epitomizes the new wave of Chinese EVs. It's a city car designed for urban commuting, priced at just 69,800 yuan (around $9,600 or £7,500) in China. Despite its low cost, it boasts neat styling and practical features, making it an attractive option for budget-conscious consumers.When the Seagull arrives in Europe, safety regulations will likely double its price, but even at that higher price point, it remains a bargain by European standards. This affordability poses a threat to European carmakers, who fear that such low-cost vehicles could dominate their markets.
China's Strategic Growth
China's domestic auto industry has grown rapidly over the past two decades, driven by the "Made in China 2025" strategy—a 10-year industrial policy launched by the Communist Party in Beijing in 2015. This policy aimed to transform China into a global powerhouse in high-tech industries, including electric vehicles and battery technology.As a result, companies like BYD have experienced breakneck development, positioning themselves as formidable competitors to global giants like Tesla. Established Chinese automakers such as SAIC (owner of the MG brand) and Geely (owner of Volvo) have also become significant players in the EV market.
Market Dominance
China's dominance in the EV sector is evident. In 2023, more than eight million electric vehicles were sold in China, accounting for about 60% of the global total, according to the International Energy Agency's annual Global EV Outlook. This massive volume underscores China's capacity to produce and sell electric cars at a scale unmatched by any other country.The Concerns in Europe and the US
Unfair Competition
For policymakers in Europe and the US, the rapid expansion of Chinese EVs into international markets is alarming. They worry that their own companies will struggle to compete with Chinese manufacturers, who benefit from significant government subsidies. These subsidies allow Chinese firms to keep prices low, creating what many perceive as an uneven playing field.A report by the Swiss bank UBS, published in September, highlighted this concern. It found that BYD and other Chinese carmakers could produce vehicles at approximately 25% lower costs than the best legacy global carmakers. The report indicated that Chinese companies are positioned to "dominate the global market with cutting-edge, budget-friendly EVs for the general public."
US Response
Previously this year, the Alliance for American Manufacturing cautioned that the surge of affordable Chinese automobiles might pose an "extinction-level event" for the US automotive sector. They called for a concerted effort to block these imports, arguing that there was "no time to lose."In response, the Biden administration took decisive action last month by raising tariffs on imports of Chinese battery-powered cars from 25% to 100%. Currently, sales of Chinese-made EVs in the US are negligible, and with the new tariffs, they are likely to remain so. This move is part of a broader strategy targeting Chinese imports, which Beijing has condemned as "naked protectionism." At the same time, the US is subsidizing its own car The government aims to support the local automotive sector by offering tax incentives, thereby reducing the cost of domestically manufactured vehicles for consumers.
The EU's Stance
Investigating Chinese Imports
While the US has taken a hardline approach, the EU appears to be pursuing a more moderate path, albeit with firm rhetoric. In her State of the Union address in September last year, European Commission President Ursula von der Leyen announced an investigation into Chinese imports.She noted, "The global market is currently inundated with more affordable Chinese electric vehicles, with their prices artificially suppressed by substantial state subsidies." This is distorting our market."The results of this investigation are imminent, and it is widely expected that the European Commission will provisionally raise duties on EVs imported from China, from the standard 10% for third-country imports to between 20 and 25%.
A Proportionate Response
Matthias Schmidt from Schmidt Automotive Research suggests that the EU's strategy appears more balanced in contrast to the US. "The imposition of a 100% tariff is fundamentally protectionist, regressive, and stifles innovation, ultimately impeding the competitiveness of the market for consumers," he explains. "With tariffs capped at 25%, the EU aims to create a fairer competition environment, countering the 30% cost advantage Chinese manufacturers currently hold."The Impact on European and Global Markets
Potential Consequences for European Companies
The introduction of tariffs could have mixed effects on European companies. On one hand, it would help protect European manufacturers from the influx of cheap Chinese cars. On the other hand, it could also hurt companies that have integrated Chinese production into their supply chains.
For instance, BMW’s iX3 electric SUV is built at a factory in Dadong, China, and exported to Europe. Similarly, BMW plans to import large quantities of Chinese-made electric Minis. Both models would be subject to the tariffs, forcing BMW to either absorb the extra costs or pass them on to consumers. Tesla, which builds cars in Shanghai for export to Europe, would face similar challenges.
Ola Källenius, chief executive of Mercedes-Benz, went a step further by calling for tariffs on Chinese EV imports to be lowered rather than raised, to encourage European companies to improve their competitiveness. He suggested that the industry should focus on innovation and efficiency instead of relying on protectionist measures.
Renault's chief executive Luca de Meo expressed a similar view, stating, "we are not in favor of protectionism, but competition must be fair." He called for a strong European industrial policy to promote the sector, drawing inspiration from the policies adopted by the US and China to enhance competitiveness.
Retaliation Risks
Another risk is retaliation from China. European automakers have invested heavily in production in China, often in partnership with local manufacturers. If China imposes its own tariffs in response, European exports to China could suffer. High-value models exported to China could be targeted, potentially disrupting a lucrative market for European brands.Industry Reactions
European carmakers have expressed mixed feelings about the EU's potential tariff measures. Volkswagen Group's chief executive Oliver Blume warned earlier this year that tariffs could be "potentially dangerous" due to the risk of retaliation. BMW boss Oliver Zipse echoed this sentiment, saying, "you could very quickly shoot yourself in the foot" by engaging in trade battles. He added, "we don’t think that our industry needs protection."Ola Källenius, chief executive of Mercedes-Benz, went a step further by calling for tariffs on Chinese EV imports to be lowered rather than raised, to encourage European companies to improve their competitiveness. He suggested that the industry should focus on innovation and efficiency instead of relying on protectionist measures.
Support from France
Support for the EU investigation has largely come from France, but even among French manufacturers, there is skepticism about whether tariffs are the right approach. Carlos Tavares, head of the Stellantis group (which includes Peugeot, Citroen, Vauxhall/Opel, and DS), described tariffs as "a major trap for countries that go down that path." He warned The assertion that European car manufacturers are engaged in a "Darwinian" battle with their Chinese counterparts suggests that significant social ramifications may ensue as companies resort to cost-cutting measures to stay competitive.Renault's chief executive Luca de Meo expressed a similar view, stating, "we are not in favor of protectionism, but competition must be fair." He called for a strong European industrial policy to promote the sector, drawing inspiration from the policies adopted by the US and China to enhance competitiveness.
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