The EU should exercise strategic autonomy by rethinking China tariffs

Next month’s EV tariff hike could end up working against Brussels’ own economic and environmental interests

Adriel Kasonta

Published: 8:30pm, 17 Jun 2024

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In a move that has sent shockwaves through the automotive industry and could have far-reaching economic repercussions, the European Commission has decided to impose hefty tariffs on electric vehicles (EVs) imported from China.

This decision follows an investigation initiated last October into whether Chinese EV manufacturers benefited from unfair government subsidies. The European Commission announced it will impose additional tariffs ranging from 17.4 per cent to 38.1 per cent, on top of the existing 10 per cent duty. These tariffs are set to come into effect in July unless China offers satisfactory remedies.

BYD, which competes with Tesla for EV sales, has the lowest additional duty at 17.4 per cent. Sweden’s Volvo owner Geely faces a 20 per cent duty, while SAIC faces 38.1 per cent. Other EV makers will pay a 21 per cent duty rate for cooperating with the European Union probe, while those that did not will be subject to a tariff of 38.1 per cent.

Due to its timing and approach, the investigation has raised questions. Unlike typical trade investigations, it started without a formal complaint from the EU’s automotive industry, making it seem politically motivated. The move appears to be part of European Commission President Ursula von der Leyen’s re-election campaign strategy and broader efforts to “de-risk” from China.

The decision was influenced by subtle but clear pressure from the United States. When US Treasury Secretary Janet Yellen visited Germany on May 21, she urged the EU to align with the US in addressing China’s alleged industrial overcapacity. The swift response from the European Commission with these tariffs seems to align more with US geopolitical strategy than with the interests of Europe’s automotive industry.

Contrary to the European Commission’s stance, major European automotive leaders have openly criticised the tariffs. Ola Kallenius, CEO of Mercedes-Benz, has argued for reducing tariffs and increased competition to produce better vehicles. BMW CEO Oliver Zipse has suggested tariffs will harm European competitiveness.

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Chinese-made electric vehicles face additional EU import tariffs of up to 38%

Their concerns are not without merit. Importers will bear additional costs, with an estimated US$1 billion expense for every 10 per cent tariff increase, based on 2023 trade data. This extra financial burden comes at a difficult time for a sector that is already grappling with declining demand.

The imposition of tariffs could also disrupt the EU’s ambitious environmental goals. Under the Green Deal, the EU aims to reduce greenhouse gas emissions by at least 55 per cent by the end of this decade, with the transport sector slated to play a significant role in this regard.

Reducing Chinese EV imports could undermine the bloc’s timeline to ban the sale of gasoline and diesel vehicles by 2035, given that European production alone may not be sufficient to meet the growing demand for EVs. With its more efficient and cost-effective production capabilities, China is crucial for the EU’s transition to greener transportation.

Notably, Europe is a leading destination for Chinese EV exports. According to Rhodium Group, the value of EU imports of EVs from China has surged from US$1.6 billion in 2020 to US$11.5 billion in 2023, accounting for 37 per cent of all EV imports in the bloc.

An advertisement for an electric vehicle produced by Chinese state-owned automaker SAIC is displayed at a car showroom in Santander, Spain on June 13. Photo: Reuters

Another critical concern is the potential for a retaliatory trade war with China. The China Chamber of Commerce to the EU has already hinted at a possible rise in tariffs on EU vehicle imports to 25 per cent from their current level of 15 per cent.

Moreover, China could target other sensitive European exports in the agricultural and aviation sectors, escalating economic tensions and further straining EU-China relations.

Considering that China passed a law in April to strengthen its ability to retaliate, the consequences of a full-blown trade war cannot be overstated. In an interconnected global economy, the repercussions of such conflicts extend beyond the immediate industries involved, potentially impacting broader economic stability.

The European Commission’s investigation will continue until late October. Definitive tariffs will take effect in November unless a qualified majority of EU states votes against the decision. This allows time for a potential agreement to be reached between Brussels and Beijing, which could be beneficial for both sides.

A more practical approach would involve Beijing not playing into Washington’s hands. This means not allowing the US to pit Europe against China by limiting justified yet reputationally damaging threats of retaliation. Meanwhile, Brussels would be wise to show strategic autonomy and avoid damaging a vital source of prosperity. On both sides, cooler heads need to prevail.

Adriel Kasonta is a London-based political risk consultant and lawyer