EU expected to hit Chinese electric cars with tariffs

With China accused of selling electric cars at artificially low prices, the European Union is expected to impose tariffs on them this week.

The BYD Seagull is a small, inexpensive, neatly styled electric vehicle (EV). An urban runabout that won’t break any speed records, but won’t break the bank either.

In China, it has a starting price of 69,800 yuan ($9,600; £7,500). As for Europe, it is expected to cost at least twice that amount due to safety regulations. But that would still be very cheap by electric car standards.

This is a worrying prospect for European manufacturers. They fear the little seagull will become an invasive species, one of a number of Chinese-made models poised to colonize their own markets at the expense of indigenous vehicles.

China’s domestic auto industry has grown rapidly over the past two decades. Its development, along with that of the battery sector, was a major part of the “Made In China 2025” strategy, a 10-year industrial policy launched by the Communist Party in Beijing in 2015.

The result has been the breakneck development of companies like BYD, which now competes with Tesla for the title of the world’s largest manufacturer of electric vehicles. Established giants such as SAIC, owner of the MG brand, and Volvo owner Geely have also become big players in the EV market.

However, it is cause for concern for politicians in Europe and the US. As Chinese brands have a lot of excess capacity and are moving into international markets, they fear that their own companies will not be able to compete. They argue that massive domestic production subsidies allow Chinese firms to keep prices at a level that other firms struggle to match.

According to a report by Swiss bank UBS published in September, China’s advantage is real. It suggested that BYD could produce cars at around 25% lower costs than the best of the world’s legacy automakers.

It said BYD and other Chinese firms are “set to conquer the world market with high-end, low-cost EVs for the masses.”

Meanwhile, the Alliance for American Manufacturing warned earlier this year that the introduction of cheap Chinese cars could be an “extinction-level event” for the US auto industry. He called for a “determined and concerted effort to roll back these imports” and concluded that “there is no time to lose”.

Last month, the US took decisive action. The Biden administration raised its tariff on Chinese battery car imports from 25% to 100%. US sales of Chinese-made EVs are currently negligible; it will probably stay that way with the new tariffs.

The move was part of a wider package of measures targeting imports from China, which Beijing condemned as “naked protectionism”.

At the same time, the US subsidizes its own auto industry through tax incentives that make it cheaper to buy domestically produced vehicles.

The EU appears to be taking a more moderate approach, despite the tough rhetoric.

European Commission President Ursula von der Leyen announced an investigation into Chinese imports in her State of the Union address last September.

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

“Their price is kept artificially low by huge state subsidies. This distorts our market.”

The first results of this investigation are now available.

The Commission is widely expected to temporarily raise tariffs on electric vehicles imported from China from the standard level of 10% for imports from third countries to between 20 and 25%.

According to Matthias Schmidt of Schmidt Automotive Research, this would be a more appropriate response than the US move.

“A 100% tariff is just pure protectionism, regressive and suppresses innovation and prevents a competitive environment for consumers,” he says.

“If the EU imposes tariffs of no more than 25%, it will be more about leveling the playing field and offsetting the 30% cost advantage that Chinese manufacturers have.”

However, tariffs could both hurt and help European companies.

First, it would not only affect Chinese brands. For example, the BMW iX3 electric SUV is produced at the Dadong factory and exported to Europe. The company also intends to import a large number of Chinese-made electric Minis.

Both models would be subject to duty, so the manufacturer would have to absorb the additional cost or raise prices. The American manufacturer Tesla, which manufactures cars in Shanghai for export to Europe, would also be affected.

Second, although European brands have invested heavily in manufacturing in China in recent years, many of them still export high-value models to Chinese markets in cooperation with local manufacturers.

If China wanted to respond with high tariffs of its own, those shipments could be targeted.

It is therefore not surprising that managers of European car manufacturers are very lukewarm about the EU initiative.

Earlier this year, Volkswagen Group CEO Oliver Blume warned that imposing tariffs was “potentially dangerous” because of the risk of retaliation.

Last month, BMW boss Oliver Zipse told investors “you can shoot yourself in the foot very quickly” by getting involved in trade battles, adding “we don’t think our industry needs protection”.

Ola Källenius, CEO of Mercedes-Benz, went a step further, publicly calling for a reduction in tariffs on Chinese electric car imports, not an increase, to encourage European companies to do better.

Support for the EU investigation comes largely from France. Still, even among French manufacturers, there are doubts about whether tariffs are the right approach.

Carlos Tavares, head of the Stellantis group, which includes Peugeot, Citroen, Vauxhall/Opel and DS, described them as “a major trap for countries going this route”.

He warned that European carmakers are in a “Darwinian” battle with their Chinese rivals, which is likely to have social consequences as they cut costs to compete.

Meanwhile, Renault CEO Luca de Meo says “we are not in favor of protectionism, but competition must be fair”.

He called for a strong European industrial policy to support the sector, inspired by policies launched by the US and China – in a bid to compete with both.

The UK, meanwhile, is watching with interest. The head of the country’s trade watchdog, the Trade Redressal Authority, has previously made it clear he would be prepared to launch an investigation into Chinese electric cars if ministers or the industry so desired.

It is understood to date that no such application has been made. As a deeply political issue, it will ultimately be resolved by the next government after the elections.

Higher tariffs may give Europe more time for both automakers and policymakers to adjust to China’s challenge.

But many in the industry recognize that if Europe is to remain a major player in the global automotive sector, it will need to do much more than erect barricades at home.