EU expected to impose tariffs on Chinese electric cars

The European Union is widely expected to impose tariffs on China this week after the country is accused of selling electric vehicles at unfairly low prices.

The BYD Seagull is a small, inexpensive, sleek electric vehicle (EV). It might not break any speed records, but it’s a great little urban car for the wallet.

In China, the car has a starting price of 69,800 yuan ($9,600, £7,500) – we expect it to cost at least double that when it’s sold in Europe due to safety regulations, but it’s still very cheap by electric car standards.

It’s a worrying prospect for European manufacturers, who fear the little Seagull could become an invasive species, one of many Chinese vehicles trying to take over their markets at the expense of domestically produced cars.

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

As a result, companies such as BYD have made impressive strides and are now competing with Tesla for the title of world’s largest electric vehicle manufacturer. Incumbent giants such as SAIC, owner of the MG brand, and Geely, owner of Volvo, are also major players in the EV market.

But that worries policymakers in Europe and the United States, who worry that Chinese brands have enough spare capacity to penetrate international markets that their own companies won’t be able to compete. They argue that heavy subsidies for domestic production allow Chinese companies to keep prices at levels that others will struggle to match.

China’s advantage is real, according to a report published in September by Swiss bank UBS, which estimated that BYD could produce cars at a cost roughly 25% lower than the best traditional global automakers.

The company said BYD and other Chinese companies are “poised to conquer global markets with high-tech, low-cost EVs for the masses.”

Meanwhile, earlier this year the Federation of American Manufacturing warned that the introduction of cheap Chinese cars could be an “extinction-level event” for the U.S. auto industry. It called for a “dedicated and concerted effort to pull back on imports,” concluding that “there is no time to waste.”

Last month, the US took firm action: The Biden administration raised import tariffs on Chinese-made electric vehicles from 25% to 100%. Sales of Chinese-made electric vehicles in the US are currently negligible, but the new tariffs are likely to keep them that way.

The move is part of a wider package of measures targeting imports from China that the Chinese government has condemned as “blatant protectionism”.

At the same time, the United States subsidizes its own auto industry through tax incentives that make domestically produced cars cheaper to buy.

The EU, despite its harsh rhetoric, appears to be taking a more moderate approach.

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

“The global market is currently flooded with cheap Chinese-made electric cars,” she said.

“Prices are kept artificially low by massive government subsidies. This distorts our market.”

Initial results from that investigation are expected soon.

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

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

“100% tariffs are pure protectionism, regressive, stifle innovation and hinder a competitive environment for consumers,” he said.

“If the EU were to impose tariffs below 25 percent, it would rather aim to ensure a level playing field and balance the 30 percent cost advantage held by Chinese manufacturers.”

However, tariffs could hurt European companies as well as benefit them.

Firstly, it’s not just Chinese brands that will be affected: BMW’s electric SUV iX3, for example, is built in a factory in Datong and exported to Europe, and the company also plans to import a large number of Chinese-made electric Minis.

Both models will be subject to tariffs, forcing manufacturers to either absorb the extra costs or raise prices, including U.S.-made Tesla, which makes cars in Shanghai for export to Europe.

Second, although European manufacturers have invested heavily in production in China in recent years in partnership with local manufacturers, many still export high-value-added models to the Chinese market.

These shipments could be targeted if China wants to retaliate by imposing steep tariffs of its own.

It is not surprising then that executives at European automakers have adopted a decidedly cool attitude toward the EU effort.

Volkswagen Group CEO Oliver Blume warned earlier this year that imposing tariffs was “potentially dangerous” because of the risk of retaliatory measures.

Last month, BMW CEO Oliver Zipse told investors that getting caught up in a trade war “could very quickly shoot us in the foot,” adding: “I don’t think our industry needs protection.”

Mercedes-Benz CEO Ola Källenius went further, publicly calling for lower, not higher, tariffs on electric vehicle imports from China to encourage European companies to do better.

Support for the EU investigation has come mainly from France, but 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 big trap for countries going down that path”.

He warned that European car makers were engaged in a “Darwinian” struggle with Chinese rivals, likely to have social impacts as they cut costs to compete.

Meanwhile, Renault CEO Luca de Meo said: “We do not support protectionism, but competition must be fair.”

He calls for the adoption of a strong European industrial policy to promote the sector, modelled on those launched by the United States and China to counter them.

The UK, meanwhile, is watching with interest: the head of the UK’s trade watchdog, the Trade Remedies Agency, has previously said it was open to launching investigations into Chinese-made EVs if ministers and industry wanted it.

So far, no such request appears to have been made — after all, this is a highly political issue that will likely be addressed by the next administration after the elections.

What higher tariffs could gain for Europe is more time for both automakers and policymakers to adapt to the challenge from China.

But many in the industry acknowledge that if Europe is to remain a major player in the global auto industry, it must do more than barricade itself at home.