POLITICO — 2023-10-04
China reacted with anger on Wednesday to the European Union's announcement that it was going ahead with an investigation into its subsidies for electric vehicles, upping the stakes in a geopolitical spat that could well escalate into a wider trade war.
In a strongly worded statement, the Chinese Ministry of Commerce vowed to “steadfastly safeguard the legitimate interests of Chinese companies” and took exception to the tight timelines foreseen in the EU probe.
The response puts Beijing — and its global industrial ambitions — on a collision course with Ursula von der Leyen's increasingly assertive "geopolitical" Commission. Stirring in the hypernationalist political atmosphere in China and the fact that the probe was launched during the week-long National Day holidays makes for a combustible mix.
Beijing essentially accused the EU of failing to ensure due process. The EU probe, it said, is purely based on “so-called subsidy projects” and “subjective presumptions,” adding that the bloc — known for its sometimes stubborn inclination to emphasize the World Trade Organization rulebook — is “not in line with the relevant WTO rules.”
The European Commission hit back, stressing it “followed all procedural steps, correctly and in full, as per the legal requirements set out under EU and World Trade Organization rules,” said Commission Spokesperson Olof Gill.
Von der Leyen said “we will act decisively” wherever the EU finds evidence of market distortions and unfair competition. “This anti-subsidy investigation will be thorough, fair, and fact-based,” she said.
Beijing’s strong verbal reaction is not altogether unexpected, since it sees the EU’s move — prompted by French behind-the-scenes lobbying — as representing a direct hit at its ambition to dominate the world market for cheap electric vehicles.
In particular, the Chinese statement took aim at the short consultation period prior to Wednesday’s official announcement.
“The EU requested that China conduct consultations within an extremely short period of time, without providing valid material for such consultations,” the Chinese ministry statement reads. “This seriously jeopardizes China’s rights.”
Beijing has a point, said Arnoud Willems, an international trade partner at law firm Baker McKenzie. “The process is indeed very short, especially while it is a holiday period in China," Willems told POLITICO.
Now, the clock starts ticking.
All parties should respond to a questionnaire within a week. That includes China-based EV exporters and European companies. The Chinese government also has a role in the process, and will be asked to explain the nature of the subsidies.
The final deadline for triggering definitive tariffs is 13 months at the most.
Brussels will have to prove the existence of subsidies, estimate how big they are, and establish that some form of injury to European producers has resulted, said Philippe De Baere, managing partner at Van Bael & Bellis. It will also “need to prove that there's a causal link between the subsidized inputs and the injury to the European industry.”
That might be a challenge on two counts. First, China has established a lead in the battery technology needed to power clean cars through timely strategic investments — while European carmakers have clung to the internal combustion engine that governments want to phase out.
Second, the Commission's claim that China has inflicted injury to the European auto industry at a time when it is ramping up production implies that damage is being done to industrial capacity that doesn't yet exist.
“It’s true that car manufacturing in China is probably subsidized in a way that is unfair under international subsidy rules," said Niclas Poitiers, a research analyst at Bruegel think tank in Brussels.
"But let’s be honest, the reason why Chinese cars are coming to Europe is not just industrial policy or subsidies, it’s also that they really invested in the technologies that really matured where many European car manufacturers are just not there yet, especially at the cheap end of the technology.”
While Beijing is expected to make a lot of noise in the weeks and months ahead, the European Commission’s powerful trade department will focus on evidence gathering.
"We can't expect to have much visibility over the next few weeks or even months. After all, this is a year-long process. I doubt we'll have any news before the European elections,” said Elvire Fabry, a trade expert at the Jacques Delors Institute in Paris.
Elections to the European Parliament will be held next June, after which a new Commission will be appointed.
The stakes are especially high for the German car industry, which fears that once the EU imposes punitive measures against their Chinese counterparts, Beijing could retaliate against their massive business presence in China.
Jacob Gunter, a senior analyst at the Berlin-based Merics think tank and formerly a consultant in Beijing, questioned that assessment.
“I wouldn’t expect Beijing to materially retaliate against the announcement of an investigation,” Gunter said, adding that Beijing has historically reserved economic coercion to moments “when a company or a country crosses a political red line,” such as on issues like Xinjiang or Taiwan.
Still, China has exerted diplomatic pressure on the EU since von der Leyen announced the investigation in her annual address to the European Parliament last month.
In a meeting with EU trade commissioner Valdis Dombrovskis in Beijing last week, Vice-Premier He Lifeng expressed “strong concern and dissatisfaction,” urging the bloc to “exercise restraint.” Days later, Chinese Foreign Minister Wang Yi said the probe was “against the basic rules of international trade” and is likely to disrupt global automotive supply chains.
The last time the EU and China came close to a trade war — over heavily subsidized Chinese solar panels in 2013 — Brussels lost to Beijing, after it played divide and rule between EU countries. Eventually, Angela Merkel’s Germany led the call in lowering the temperature for fear of Beijing’s retaliation.
For some, that’s a mistake the EU cannot afford to repeat. “We’ll never be respected if we fear retaliation,” said a senior EU diplomat, who was granted anonymity because they were not authorized to speak on the record.