{"id":4545,"date":"2024-10-06T17:17:30","date_gmt":"2024-10-06T15:17:30","guid":{"rendered":"https:\/\/www.rivistaeco.com\/?p=4545"},"modified":"2024-10-06T17:17:30","modified_gmt":"2024-10-06T15:17:30","slug":"european-tariffs-on-chinese-cars-a-self-defeating-move","status":"publish","type":"post","link":"https:\/\/www.rivistaeco.com\/en\/2024\/10\/06\/european-tariffs-on-chinese-cars-a-self-defeating-move\/","title":{"rendered":"European Tariffs on Chinese Cars: A Self-Defeating Move"},"content":{"rendered":"

The proposed tariffs by the European Commission on imports of electric cars from China risk backfiring. The arrival of Chinese vehicles in the European market with still very low shares would have favoured competition and lowered selling prices to the advantage of European consumers: a crucial step for decarbonisation goals.<\/span><\/i><\/p>\n

Climate change is accelerating, as all indicators show. Summers are getting hotter and the weather more extreme, with tropical rains causing damage across Europe. The fight against climate change is becoming increasingly important. The EU wants to be at the forefront of the green transition and, as part of its efforts to reduce emissions, has launched a plan to significantly increase the market share of electric vehicles through a controversial law banning the sale of new CO2-emitting cars after 2035.<\/span><\/p>\n

Is the European Auto Industry Strong or Weak?<\/b><\/h3>\n

One reason this law has attracted so much criticism is that electric vehicles are currently much more expensive than traditional ones. Now suppose a supplier of affordable electric cars appears offering a price up to half of what is currently proposed in Europe. What should the European Union do? Common sense suggests that it should welcome cheaper electric vehicles. But Europe has no intention of following this common-sense approach and has decided to impose very high tariffs on imports of electric vehicles from China. By doing so, however, it will be harder to achieve green transition goals. The official line to justify the decision is that “the EU’s green transition cannot be based on unfair imports at the expense of the EU industry.” In other words, the Commission essentially says that protecting the European industry is more important than fighting climate change. The automotive sector is a pillar of the European economy with about 14 million direct and indirect jobs. The EU is also among the largest car exporters. The European automotive industry is therefore competitive globally but does not seem to be in the electric vehicle segment. Imports of electric cars from China have increased rapidly in recent years and now account for about 8% of the market. It was this increase that led the Commission to launch an investigation into state aid to Chinese manufacturers at the end of last year. However, focusing too much on the growth of Chinese electric car imports risks being misleading. In reality, the EU records a surplus in the trade of these vehicles because the deficit with China is more than offset by surpluses with the UK and the US (and other markets like Norway). European electric vehicle manufacturers are doing well. If sales have slightly slowed in the EU in the first months of 2024, it is because purchase incentives have been reduced in many countries, especially in Germany. But electric vehicles remain the future of the automobile since the EU still has decarbonisation targets to meet by 2030. The EU’s automotive sector starts from a position of strength but faces a new challenge. History suggests it should be able to overcome it: every twenty years, the European automotive sector faces a new challenge from Asia. Forty years ago, it was Japanese manufacturers, and twenty years ago, South Koreans appeared. In both cases, the EU industry adapted, and the newcomers ended up producing many of their cars here because Europe has a very strong industrial base. Now it is the turn of Chinese electric vehicle manufacturers who are quickly gaining ground in the Old Continent market. If the Japanese challenge was based on the “just in time” production method and South Korean companies had the advantage of low wages, today’s Chinese manufacturers combine low cost with a technological advantage: they have developed new technologies, especially in battery production, and reduced production costs by focusing on entirely new platforms based from the start on an electric motor with fewer components.<\/span><\/p>\n

The Cost to European Consumers<\/b><\/h3>\n

Battery electric car prices are much lower in China than in Europe, averaging about half. This is partly because the Chinese buy small vehicles with limited range for city use. But what is most surprising is that Western car manufacturers (European companies and American Tesla) offer the same car at a significantly lower price in China than in Europe. The most glaring example is Volkswagen’s popular European model ID.3, with a suggested retail price equivalent to about 20,000 euros in China and over 40,000 euros in Europe. However, European consumers do not benefit because Volkswagen refuses to sell its cars produced in China to European consumers at those prices. On the other hand, a similar price differential is also seen in models produced by Chinese groups: Chinese electric cars are sold at much higher prices in the EU than in China. Taking the BYD Seal model as an example, it is advertised in Italy with a starting price of about 43,000 euros (including VAT), while in China, the suggested price is only 189,800 yuan, about 24,000 euros. Therefore, the selling price is about 60% higher in Europe than in China, even considering differences in sales taxes. The price differences seen in online advertisements could naturally hide some significant details, such as engine power or warranty period (generally longer for Chinese cars). But the figures reported still give an idea of the order of magnitude of the price difference. In a free and competitive market, one would expect imports from China, including those from European manufacturers with plants there, to reduce prices in Europe: but this will not happen precisely because of the tariffs the EU plans to impose.<\/span><\/p>\n

How and Why Anti-Subsidy Tariffs Were Proposed<\/b><\/h3>\n

In June 2024, the EU decided to propose anti-subsidy tariffs ranging from 17% to 38%. These add to the 10% import tariffs already in place in the EU. The overall rate thus varies between 27% and 48%. These tariffs may seem moderate compared to the 100% tariffs introduced by the United States but still imply that the electric vehicle sector will become one of the most protected in the EU. In the discussion on the subject, it is usually overlooked that they will apply to all imports from China, including cars produced in the Asian country by European companies (like BMW and Renault\/Dacia) and Tesla. It seems that Elon Musk’s company, which alone represents a considerable share of all EU imports from China, will be given special treatment. The entire process represents a curious example of the “the Commission knows what is best” approach. Normally a trade defence instrument is activated to respond to damage to domestic industry. In this case, however, the reference industry\u2014the automotive sector\u2014had not complained about a “flood of Chinese imports.” Nor can it be said that the EU industry, which achieves near-record profits and has a trade surplus, suffers significant damage from Chinese imports. The late 2023 decision is thus the first case of an “own-initiative” investigation: the Commission acted without having received any complaint. The Commission stated that there was sufficient evidence of a future damage threat because the market share of Chinese electric car imports rose from almost zero to 8% in a few years: projecting this trend forward, Chinese imports could exceed half the EU market. So the Commission acted. Politically, the process was driven by the small number of European car manufacturers (mainly French) without operations in China, while German manufacturers opposed the tariffs because they feared retaliation from Beijing.<\/span><\/p>\n

The Weight of Subsidies in China<\/b><\/h3>\n

The EU is a champion of respecting global trade system rules and exports are vital for its economy. Therefore, it would be the first to suffer if it violated World Trade Organization (WTO) rules, which allow tariffs to be imposed only if it can prove that the other country has subsidised exports, giving its producers an unfair advantage over European ones. The tariff (anti-subsidy) amount cannot exceed the subsidy. The Union is therefore much more constrained than the United States, where the president can simply decide the politically most convenient tariff: in the case of electric cars, it is 100%. The Chinese government has certainly subsidised the electric vehicle sector in many ways. But according to WTO rules, not all public support is considered a subsidy. The Commission must now demonstrate how much Chinese electric car manufacturers have benefited from various forms of subsidies, including government subsidies at various administrative levels (national, provincial, municipal), preferential loans from state banks and public investment tools, and direct support for battery production. Brussels has compiled all its evidence in a document of over 200 densely packed pages with over 1200 paragraphs. China (and the world) can now examine them and prepare a response. If in the end it is proven that the Commission has correctly applied WTO rules, there will be no trade war because in this case WTO rules do not allow retaliation from Beijing. On the other hand, China, as the world’s largest exporter, also has an interest in WTO rules being respected. This might explain why it has not yet reacted to EU measures.<\/span><\/p>\n

Cars and the Green Transition<\/b><\/h3>\n

The European automotive sector is strong and remains competitive in Western markets even in the electric segment. But production costs and electric car prices are currently much lower in China than in Europe. The green transition will not succeed at European prices. The key issue for the EU should therefore not be how to protect European manufacturers through high tariffs but how to provide them with incentives to reduce costs and make battery electric cars affordable in Europe. The anti-subsidy tariffs proposed so far by the Commission are provisional. If confirmed within five months by member states, they will then be valid for five years. It would be better to foresee a shorter period or at least already plan a gradual reduction over time to force the EU industry to cut costs and encourage the adoption of the most innovative technologies. Building a “Fortress Europe” for electric vehicles would be self-defeating because the most interesting markets for European manufacturers are abroad.<\/span><\/p>\n

Bio<\/b><\/em><\/p>\n

Daniel Gros is the director of the Institute for European Policy at Bocconi University. He is currently an advisor to the European Parliament.<\/span><\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

The proposed tariffs by the European Commission on imports of electric cars from China risk backfiring. 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