EU’s Chinese EV Tariff Signals Policy Shift, Possibly Counterproductive: Experts

As the European Union (EU) pushes ahead with tariffs on Chinese electric vehicles (EVs) to protect European production from international trade distortions, experts say Wednesday’s decision to slap extra import duties not only signifies a major policy shift but also could be somewhat unproductive.This move, unlike previous trade-defense measures that focused on smaller or less critical sectors, targets the automotive industry, which is crucial to both economies of the European Union and China. This marks a departure from the EU’s traditional approach of avoiding significant industries in its trade disputes.Moreover, introducing tariff barriers while the EU plans to scrap internal combustion engine (ICE) cars by 2035 could be counterproductive to this goal.As sales of electric vehicles from China, the bloc’s largest trading partner, increase in Europe, the tariffs—which are spearheaded by Spain and France—will generate billions of euros for the EU budget every year.“The EU Green Deal came with the promise of growth and jobs, and that’s not possible if our EVs are all imported. The tariffs are welcome, but Europe needs a strong industrial policy to speed up electrification and localize manufacturing,” said Julia Poliscanova in a statement for T&E. She is the senior director for vehicles and emobility supply chains added at Transport & Environment (T&E). The Brussels-based organization claims to be Europe’s leading advocates for clean transport and energy, in a statement on June 12.“Just introducing tariffs while scrapping the 2035 deadline for polluting cars would slow down the transition and be self-defeating,” said Ms. Poliscanova.Related StoriesIn October 2022, the EU agreed to restrict the sale of new gasoline and diesel vehicles and vans by 2035. Under the agreement, carmakers will be required to reduce emissions from new cars sold by 55 percent in 2030, compared to 2021 levels, before attaining a 100 percent reduction five years later.Extensive negotiations, particularly with Germany, which heavily relies on the automobile industry, led to the settlement. The decision provides for a transition phase during which e-fuels can help to retain some elements of ICE cars while also pushing the EU closer to its climate goals.The EU’s July 2021 European Green Deal, which aims to make the EU’s climate, energy, transportation, and taxation policies suitable for lowering net greenhouse gas emissions by at least 55 percent by 2030 compared with 1990 levels, also guided the negotiation of this agreement. This is part of a larger goal to make the European Union carbon neutral by 2050.Set the Right ToneHowever, according to T&E, with Chinese EVs now providing lower pricing and longer ranges, the bloc’s objective of reducing carbon emissions may suffer if there is a lack of supply or demand for greener vehicle options from domestic European manufacturers.Furthermore, it is critical to send the right signal for maintaining the EU’s carbon-emission targets for carmakers, including the 2035 zero-emission cars goal, says T&E. The EU industrial policy, therefore, should establish robust sustainability criteria to reward local, clean manufacturing.In addition, T&E says that an EU investment plan is required to support EV and battery manufacturing more effectively than the current patchwork of national state aid.Policy ShiftThe EU, though, asserts that massive state support allows Chinese car suppliers to undercut European competitors, hindering the EU’s transition from ICE to battery electric vehicles.According to the EU, China-made cars captured 25 percent of the EU market in 2023, up from 3.9 percent in 2021.The EU also argues that the intense price competition in China, which has driven down prices domestically, is now impacting Europe. China is effectively compelling EU manufacturers to lower their own prices, thereby hurting their profits and potential future investments.Still, experts note that the EU’s Chinese EV tariff represents a policy shift because it targets a crucial and strategic industry, adopts a more protectionist stance, addresses perceived unfair market practices, and risks escalating trade tensions with China, marking a departure from previous trade policies and approaches.“The decision marks a big change in EU trade policy because, although the EU has used trade defense measures regularly in recent years, including against China, it has not previously done so for such an important industry,” wrote Capital Economics in a rapid response note on Wednesday.“And Europe has been reluctant to engage in the kind of protectionism that the U.S. has deployed since Donald Trump’s presidency,” the London-based independent research firm added.The most recent example of a U.S. move was the Biden administration’s import tariff hike on Chinese EVs last month, which shot up to 102.5 percent from the previous 27.5 percent.Although Capital Economics adds that the EU is working within international rules by deploying WTO-com

EU’s Chinese EV Tariff Signals Policy Shift, Possibly Counterproductive: Experts

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As the European Union (EU) pushes ahead with tariffs on Chinese electric vehicles (EVs) to protect European production from international trade distortions, experts say Wednesday’s decision to slap extra import duties not only signifies a major policy shift but also could be somewhat unproductive.

This move, unlike previous trade-defense measures that focused on smaller or less critical sectors, targets the automotive industry, which is crucial to both economies of the European Union and China. This marks a departure from the EU’s traditional approach of avoiding significant industries in its trade disputes.

Moreover, introducing tariff barriers while the EU plans to scrap internal combustion engine (ICE) cars by 2035 could be counterproductive to this goal.

As sales of electric vehicles from China, the bloc’s largest trading partner, increase in Europe, the tariffs—which are spearheaded by Spain and France—will generate billions of euros for the EU budget every year.

“The EU Green Deal came with the promise of growth and jobs, and that’s not possible if our EVs are all imported. The tariffs are welcome, but Europe needs a strong industrial policy to speed up electrification and localize manufacturing,” said Julia Poliscanova in a statement for T&E. She is the senior director for vehicles and emobility supply chains added at Transport & Environment (T&E). The Brussels-based organization claims to be Europe’s leading advocates for clean transport and energy, in a statement on June 12.

“Just introducing tariffs while scrapping the 2035 deadline for polluting cars would slow down the transition and be self-defeating,” said Ms. Poliscanova.

In October 2022, the EU agreed to restrict the sale of new gasoline and diesel vehicles and vans by 2035. Under the agreement, carmakers will be required to reduce emissions from new cars sold by 55 percent in 2030, compared to 2021 levels, before attaining a 100 percent reduction five years later.

Extensive negotiations, particularly with Germany, which heavily relies on the automobile industry, led to the settlement. The decision provides for a transition phase during which e-fuels can help to retain some elements of ICE cars while also pushing the EU closer to its climate goals.

The EU’s July 2021 European Green Deal, which aims to make the EU’s climate, energy, transportation, and taxation policies suitable for lowering net greenhouse gas emissions by at least 55 percent by 2030 compared with 1990 levels, also guided the negotiation of this agreement. This is part of a larger goal to make the European Union carbon neutral by 2050.

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Set the Right Tone

However, according to T&E, with Chinese EVs now providing lower pricing and longer ranges, the bloc’s objective of reducing carbon emissions may suffer if there is a lack of supply or demand for greener vehicle options from domestic European manufacturers.

Furthermore, it is critical to send the right signal for maintaining the EU’s carbon-emission targets for carmakers, including the 2035 zero-emission cars goal, says T&E. The EU industrial policy, therefore, should establish robust sustainability criteria to reward local, clean manufacturing.

In addition, T&E says that an EU investment plan is required to support EV and battery manufacturing more effectively than the current patchwork of national state aid.

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Policy Shift

The EU, though, asserts that massive state support allows Chinese car suppliers to undercut European competitors, hindering the EU’s transition from ICE to battery electric vehicles.

According to the EU, China-made cars captured 25 percent of the EU market in 2023, up from 3.9 percent in 2021.

The EU also argues that the intense price competition in China, which has driven down prices domestically, is now impacting Europe. China is effectively compelling EU manufacturers to lower their own prices, thereby hurting their profits and potential future investments.

Still, experts note that the EU’s Chinese EV tariff represents a policy shift because it targets a crucial and strategic industry, adopts a more protectionist stance, addresses perceived unfair market practices, and risks escalating trade tensions with China, marking a departure from previous trade policies and approaches.

“The decision marks a big change in EU trade policy because, although the EU has used trade defense measures regularly in recent years, including against China, it has not previously done so for such an important industry,” wrote Capital Economics in a rapid response note on Wednesday.

“And Europe has been reluctant to engage in the kind of protectionism that the U.S. has deployed since Donald Trump’s presidency,” the London-based independent research firm added.

The most recent example of a U.S. move was the Biden administration’s import tariff hike on Chinese EVs last month, which shot up to 102.5 percent from the previous 27.5 percent.

Although Capital Economics adds that the EU is working within international rules by deploying WTO-compliant trade defense measures, and is not expected to suddenly increase the duties, the tariffs indicate a more protectionist stance from the EU, aiming to shield its domestic EV industry from Chinese competition.

By targeting EVs, the EU is also addressing a strategically important sector for its green transition and economic future.

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Real Impact

Analysts at Jefferies Group predict that China’s EV manufacturers won’t face any obstacles in entering the EU market.

According to the multinational investment bank, the prices of Chinese EVs in the EU market are generally 80–100 percent higher than those in the domestic market. Excluding freight costs, tariffs, and modification fees, the net profit margin of Chinese EVs typically ranged 15–25 percent before the tariff increases, Jeffries added.

Hence, citing China’s largest EV maker, Jeffries analysts wrote: “If BYD manages to raise prices by 17.4 percent to fully pass on the tariff [imposed on the car maker by the EU on Wednesday] to customers, the pricing of BYD’s products would still be lower than the competing models launched by European OEMs [original equipment makers].”

That aside, European OEMs somewhat depend on China’s battery value chain for their EV transition, according to Jeffries. Given their premium brands’ significant presence in the Chinese market, potential retaliation from China could exert downward pressure on the earnings of European OEMs.

A T&E analysis from March suggests that China could be the source of one in four EVs sold in Europe this year.

Since the EU will retain three-quarters of the revenue from the new tariffs effective July 5, “this money should be allocated to scaling up the battery supply chain via the EU Innovation Fund,” T&E said.

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