Electric vehicle tariffs spark EU-China trade war fears

 

 

 

 

The European Union will impose new tariffs on Chinese-made electric vehicles (EVs) from the end of October at the latest if member states approve the measure, though for many EV makers the cost of the levies has been cut from provisional rates announced in June. The charges come on top of the 10% import duties that already apply.

A new draft decision on EU import duties published 20 August shows the bloc remains determined to use tariffs to protect local production from what it sees as unfairly subsidised Chinese imports and says the recalculation in rates is the result of more thorough investigations.

Politics may also have played a part, as German brands like Volkswagen and BMW and their joint venture partners in China will now pay an additional tariff of 21.3%, rather than the maximum rate of 36.3%. But US business Tesla will benefit most from the new calculation, which sees import duties on imported Tesla EVs fall from 20.8% to 9%.

Proposed rates on major Chinese EV makers have fallen slightly. BYD saw its rate reduced from 17.4% to 17%, Geely from 19.9% to 19.3% and SAIC from 37.6% to 36.3%. The differences in tariffs between companies reflect a number of factors, including their perceived level of cooperation during the EU probe.  

In contrast to the EU’s case-by-case approach, the US is imposing a 100% tariff on all Chinese-made EVs this month, a punishing increase on the previous rate of 25%. Donald Trump has hinted that he may double that figure again if he wins a second presidential term. 

Despite the EU’s more conciliatory stance, the tariffs highlight growing fears in the West over aggressive pricing on exports from the world’s second largest economy. EV manufacturing is not the only sector facing a flood of cheaper Chinese imports, and tariffs are seen as a way to protect struggling local industries during a period of fragile post-pandemic recovery.

However, tariffs are a blunt instrument with far-reaching and sometimes unforeseen consequences. With EV producers facing headwinds after a period of rapid growth, a tit-for-tat tariff war may be the last thing the sector needs. 

Explaining the Chinese export surge

At the root of the issue is a Chinese economy that is flooding foreign markets with significantly cheaper products than locally made equivalents. There are several reasons for this export surge:

• Chinese domestic demand is weak, forcing producers to turn to export markets. The Chinese government is likely to push for continued export growth to meet GDP targets, despite Western discomfort.

• The government is also likely to incentivise companies to keep production high and avoid the mass lay-offs which might trigger political tension. The goods have to be sold somewhere, even at vastly reduced margins.

• Green industries like EV manufacturing have been aggressively promoted in China and have enjoyed easy access to cheap credit. With a slump in domestic demand, the excess capacity is exported out and sold at a significant discount. 

• All this is combined with China’s innovation lead in the manufacture of EVs, which means Chinese factories already produce electric vehicles at lower cost than Western competitors. To press home this advantage, Chinese producers are spending heavily on overseas advertising and car-carrying ships.

Western producers are unprepared for the fight

In better times, a flood of cheaper Chinese car imports might spur Western competitors to greater innovation and efficiency, especially in a sector where European quality is still generally admired.

However, the war in Ukraine caused an inflationary surge in Europe that has only recently subsided. For car makers, input prices remain high and credit expensive. Interest rates may be edging downwards, but they are likely to stay high for the foreseeable future. 

This is clearly different from the situation in China,” says Bert Burger, Senior Economist at Atradius. “Weak domestic demand and a surplus supply of goods threaten China with deflation, and that means Western and Chinese price developments have been diverging for more than a year. The discounts we have seen recently only reinforce this trend. Prices have been particularly depressed for industrial and intermediate goods, and for durables such as automotives.”

Cheaper Chinese imports are entering markets that are looking for a bargain. Consumer and B2B purchasing power in Europe have yet to recover from recent shocks, and the same is true - to a slightly lesser degree - in the US. Buyers are price sensitive, and a perceived quality gap between Chinese and Western goods has narrowed in recent years.

The unpredictability of tariffs

Against this background, it’s perhaps unsurprising that Western governments are using tariffs as a way of propping up domestic car makers. But will tariff hikes have the desired effect, and could they actually prove counterproductive?

The most obvious point is that large Chinese EV makers make substantial profits on EU sales and will likely absorb most of the extra costs caused by the tariffs, at least in the short term. The BYD Seal EV model, for example, sells for around USD 24,000 in China and double that in Europe. Prices may increase after October, but not substantially. Chinese-made vehicles will remain cost-competitive against European equivalents.

The 100% rate applied by the US is more damaging and could rise again. But America is a far smaller market for Chinese EVs, accounting for 1% of total Chinese EV exports compared to Europe’s 40%. The worst outcome for Chinese producers, as far as the US is concerned, is that a largely untapped market remains.

Tariffs can create friendly fire

At the higher end, EU tariffs may slow the momentum of Chinese imports, giving European producers a window to launch a new generation of more competitive vehicles. But less favourable outcomes are equally likely.

For example, as Chinese producers look to sidestep tariffs, a glut of cheap EVs in non-EU export markets threatens the overseas sales of Western-made vehicles. In addition, any retaliatory tariffs on EU imports would hinder Western manufacturers targeting the lucrative Chinese premium segment.

At the moment, tit-for-tat tariffs on Western-made EVs are not on the cards, though much may depend on the outcome of ongoing negotiations. But China has launched investigations into some European food and beverage imports, raising the possibility of a wider trade war with the EU.

A more immediate issue is the possibility of friendly fire. Many European brands have Chinese manufacturing hubs and joint venture agreements, taking advantage of China’s well established EV supply chains and lower labour costs.

These businesses will also have to pay up and, with less profit per sale, price increases on China-made EVs from Western brands are likely. Some foreign manufacturers may resort to moving production out of China altogether if the current impasse continues indefinitely.  

In fact, tariffs would likely accelerate a wider trend towards increased EV production outside China, especially as the EU intends to impose the tariffs for a period of five years. According to Oxford Economics, China´s share of global EV production will decrease from 62% in 2022 to 55% in 2025. Large Chinese manufacturers were already considering localising EV production in or close to the EU to reduce transport costs and simplify supply chains. BYD has recently announced a USD1 billion investment in an EV plant in Turkey, while in April Chery signed a deal to make vehicles in Spain. The Italian government is currently negotiating with three Chinese EV manufacturers about locating a car factory in Italy.

An EV sector in flux

All of this adds a layer of uncertainty to a sector that was already facing headwinds. EVs remain out of reach for many Western consumers, and tariffs on cheaper Chinese imports are only likely to keep prices higher for longer, dampening the market (and undermining sustainability efforts). BloombergNEF recently cut its global EV sales projections by 6.7 million vehicles through 2026.

European manufacturers are against the tariffs, fearing a spiral of tit-for-tat measures. When the levies were first announced in June, BMW CEO Oliver Zipse called the EU’s decision “the wrong way to go”.

“Western car makers can’t afford a tariff war,” says Jens Stobbe, Manager, Atradius Risk Service Germany. “Instead, they need to improve competitiveness and protect pricing by enhancing value-added services, after-sales support and technical innovation, and investing in new product launches. Ultimately, they will have to offer more EVs in the low and medium price segments in the near future.”

Currently, the sector is facing a situation that could end up hurting everyone. Washington’s position seems baked in, but industry insiders on both sides will be hoping that Chinese and EU officials can agree to further compromise by the end of October. A spokesman confirmed that the EU “remains open” to negotiations with Beijing.